Ledger vulnerability put entire DApp ecosystem at risk: Finance Redefined

December 15, 2023 Coin Telegraph

LedgerX highlights CFTC regulatory gap in customer asset rules

November 4, 2023 Coin Telegraph

CFTC

The new CFTC proposal enhances rules for FCMs and DCOs, mandating high liquidity in customer fund investments.

The U.S. Commodity Futures Trading Commission (CFTC) has focused its attention on how companies handle customer assets. Nevertheless, this fresh regulation does not fully encompass the innovative model of the crypto platform LedgerX, leaving key operational aspects subject to regulatory oversight.

Regarding regulations, the recent CFTC proposal seeks to enhance the rules for futures commission merchants (FCMs) and derivative clearing organizations (DCOs). These companies are now required to invest customer funds in highly liquid assets. Nonetheless, this revision does not account for LedgerX’s unique operational model.

LedgerX operates as a DCO, establishing direct connections with clients and deviating from the conventional role of FCMs as intermediaries. This questions how the rule should adapt to encompass such groundbreaking entities.

*Screenshot of CFTC's proposed rule. Source: CFTC*

Commissioner Kristin Johnson has raised concerns, highlighting that the regulatory framework lags behind the industry’s rapid evolution. LedgerX, which was previously affiliated with FTX and is currently a part of Miami International Holdings, Inc. (MIH), operates in a unique sector by providing direct client access, deviating from established industry conventions.

Furthermore, LedgerX has garnered attention for its efforts to directly settle cryptocurrency transactions for clients, diverging from the conventional practice of involving intermediaries. The company has successfully obtained several CFTC registrations, reinforcing its operations with enhanced consumer safeguards, such as asset segregation.

Importantly, Commissioner Johnson advocates for a revised regulatory framework that would provide uniform protection for retail clients, regardless of whether they trade through intermediaries or directly with non-intermediated DCOs such as LedgerX.

This appeal for action coincides with the public being granted a 75-day window to offer feedback on the proposal. This period of contemplation and dialogue has the potential to guide the CFTC in addressing the regulatory deficiencies pointed out by Commissioner Johnson.

Hence, it becomes the responsibility of the CFTC to guarantee that regulatory measures remain aligned with the constantly changing derivatives market. This commitment is essential to protect the interests of retail customers and maintain a level and fair environment in this swiftly transforming digital financial arena.

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MIAX completes acquisition of FTX subsidiary LedgerX

May 19, 2023 Coin Telegraph

Bankruptcy

The deal was announced in April and approved by the bankruptcy judge on May 4.

The Miami International Securities Exchange (MIAX), owned by Miami International Holdings (MIH), has completed the acquisition of LedgerX, which was one of the FTX assets court-approved for sale in January. LedgerX is an exchange and clearinghouse regulated by the United States Commodity Futures Trading Commission.

The acquisition of LedgerX was “an important part of our growth strategy, expanding our ability to offer new and innovative products to the swaps and futures industry," CEO of MIH Thomas Gallagher said in a statement. MIAX is one of a suite of financial companies owned by MIH.

Leslie Lamb — the CEO of Open Exchange (OPNX), the cryptocurrency exchange founded by Three Arrows Capital founders Kyle Davies and Su Zhu and CoinFlex — claimed MIAX was an investor in OPNX as well in an April 21 tweet.

The parties entered into a purchase agreement for MIAX’s acquisition of LedgerX in April, pending court approval. FTX said at the time that proceeds from the sale should reach around $50 million. Judge John Dorsey of the U.S. Bankruptcy Court for the District of Delaware approved the deal on May 4.

LedgerX was approved for sale in January by the Delaware court, along with stock-trading platform Embed, FTX Japan and FTX Europe. About 117 prospective buyers expressed interest in the assets, with 56 of them looking at LedgerX in particular. A spokesman for OKC USA, another bidder for LedgerX, said that the company might seek “appropriate relief” for “not true” statements in a declaration filed in relation to the sale, but it did not object to the sale.

MIAX Completes Acquisition of LedgerX from FTX Debtors: https://t.co/uGbqyoX8c0
— Zach Dexter (@zachdex) May 19, 2023

FTX filed a suit against former CEO Sam Bankman-Fried, co-founder Gary Wang and former engineering director Nishad Singh on May 17 for failing to perform due diligence when acquiring Embed. FTX paid $220 million for the company when the deal closed in September. The highest bid received for it after the FTX bankruptcy was $1 million. FTX filed suit to claw back more than $240 million from former Embed CEO Michael Giles and others on the same day.

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FTX bankruptcy judge approves sale of LedgerX

May 4, 2023 Coin Telegraph

Bankruptcy

The judge said he read all the papers and declarations related to the FTX debtors’ motion for the sale of LedgerX and was “satisfied” with the proceedings.

The judge presiding over crypto exchange FTX’s bankruptcy case has given the green light to a motion allowing the sale of LedgerX.

In a May 4 hearing in the United States Bankruptcy Court for the District of Delaware, Judge John Dorsey approved a motion the FTX debtors filed in April to sell LedgerX to M7 Holdings, an affiliate of Miami International Holdings. FTX said at the time of the purchase agreement that the total proceeds of the transaction would total roughly $50 million.

According to lawyers speaking at the hearing, there were no objections to the sale of LedgerX. A representative who spoke on behalf of OKC USA Holding — one of the other bidders for LedgerX — largely did not object to the proceedings but said the firm “reserve[s] all of their rights to seek appropriate relief” relating to a declaration filed by Bruce Mendelsohn, a partner for the FTX debtors’ investment banker. The lawyer claimed Mendelsohn made “not true” statements in regard to OKC’s regulatory obligations to the Commodity Futures Trading Commission (CFTC) and the U.S. government.

“Well, that was easy,” said Dorsey, in reference to the brief hearing. The judge said he had read all the papers and declarations related to the motion and was “satisfied” with the proceedings.

The court ruling represented a step forward in FTX’s bankruptcy case and the potential for investors to be made whole following the firm filing for Chapter 11 in November 2022. The bankruptcy court approved the sale of certain FTX entities in January as part of the proceedings.

FTX.US purchased LedgerX in August 2021. During a congressional hearing exploring the collapse of the crypto exchange, CFTC Chairman Rostin Behnam said that LedgerX was “healthy,” “solvent,” and “operational” compared to other FTX entities.

The bankruptcy court has yet to make a ruling on a motion from several media outlets requesting it release the identities of certain FTX customers. Opponents of the motion have suggested that not allowing certain personal information to be redacted could make individuals the targets of scammers and bad actors.

In criminal court, former FTX CEO Sam Bankman-Fried, or “SBF," awaits his October trial. He faces charges including allegedly moving FTX customer funds through Alameda Research and violations of campaign finance laws. As of March, SBF was barred from using online messaging apps as part of his bail conditions. At the time of publication, he was largely confined to his parents’ California home.

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FTX sells LedgerX for $50M to affiliate of Miami-based exchange holding company

April 25, 2023 Coin Telegraph

FTX sells LedgerX for M to affiliate of Miami-based exchange holding company

Coin Telegraph

The futures and options exchange was purchased by FTX.US in 2021 to expand its spot trading services. Three other FTX assets remain up for sale.

FTX announced that it has entered into a purchase agreement with an affiliate of Miami International Holdings to sell its futures and options exchange and clearinghouse LedgerX.

FTX said in a statement that the total proceeds of the transaction would total about $50 million. The deal still requires the approval of the United States Bankruptcy Court for the District of Delaware. A hearing on the deal is set for May 4.

FTX stated it reached a deal with M7 Holding, a family private equity investment firm based in Akron, Ohio. That firm is an affiliate of Miami International Holdings, which operates several exchanges in the United States and abroad, including the Minneapolis Grain Exchange and the Bermuda Stock Exchange.

MIAX announces that it entered into a purchase agreement to acquire LedgerX.

Mark Wetjen, former CFTC Commissioner and later head of policy + regulatory strategy at FTX US, has been sitting on the board of LedgerX since 2015.

Wetjen was CEO of MIAX Futures for almost 2 years. pic.twitter.com/zFZtqSou8I
— Wave (@waveninja1) April 25, 2023

The bankruptcy court okayed the sale of LedgerX and other FTX assets in January after overcoming a challenge by the U.S. trustee and an ad hoc committee of 18 non-U.S. customers. The assets heading to auction were Embed, LedgerX, FTX Japan and FTX Europe. At the time, 117 parties had expressed interest in those assets.

FTX CEO and chief restructuring officer John Ray III called the sale “an example of our continuing efforts to monetize assets to deliver recoveries to stakeholders."

FTX.US bought LedgerX in August 2021, enabling it to expand its spot trading services. LedgerX is regulated by the U.S. Commodity Futures Trading Commission (CFTC). CFTC chair Rostin Behnam commented in December:

“The limitations of our authority stopped at [LedgerX]. For those same reasons that we were walled off from going past the regulated entity, the other FTX entities were not able to pierce through LedgerX and potentially take customer money, which obviously, as a regulator, is the priority.”

FTX declared bankruptcy in November.

Magazine: Can you trust crypto exchanges after the collapse of FTX?

Coinbase Severs Ties With Silvergate Bank Amidst JPMorgan Downgrade and Delayed SEC Filing

March 2, 2023 Bitcoin.com

CFTC’s Johnson urges Congress to expand commission’s crypto oversight powers

January 27, 2023 Coin Telegraph

Anti-trust

Commodity Futures Trading Commission Kristin Johnson wants to protect customers in a way that reduces the risk of future crises.

Commodity Futures Trading Commission (CFTC) Commissioner Kristin Johnson has urged Congress to adopt legislation that "closes the current gap in the oversight of crypto spot markets."

During a speech at a digital assets conference at Duke University on Jan. 21, Johnson propose d a number of amendments that would enable the CFTC to conduct “effective due diligence” on businesses, including crypto firms, that want to acquire CFTC-regulated entities.

The commissioner also wants expanded powers for the commodities regulator to enhance customer protection, prevent liquidity crises and mitigate conflicts of interest.

*CFTC Commissioner Kristin Johnson. Source: YouTube*

One of these potential changes would be to give the commodities regulator new powers to investigate any business that wants to purchase 10% or more of a CFTC-registered exchange or clearinghouse.

Johnson highlighted the example of derivatives exchange LedgerX, which became a subsidiary of FTX on Aug. 31, 2021 and is now wrapped up in the crypto exchange’s collapse.

The commissioner notes that the regulator currently has no ability to conduct due diligence on whichever firm buys the business and is merely a passenger as the exchange goes through the sales process.

Johnson also addressed co-mingling of customer funds, which was one of the more egregious accusations levied at FTX following its collapse — calling for regulation that formalizes the obligation of crypto firms to segregate customer funds.

Another gap pointed out by Johnson was in risk management procedures, pointing to the contagion that has continued to spread after major crypto company collapses, such as FTX:

“Interconnectedness among crypto-firms amplified by fragile or non-existent risk management, corporate governance failures, and conflicts of interests at individual firms fuels the likelihood of crises.”

The commissioner suggested that current “frameworks such as anti-trust law and regulation may prove too limited in scope” in increasingly diverse markets and is advocating for “tailored and effective governance, and risk management controls.”

FTX units on auction block draws 117 interested buyers: Court filing

January 10, 2023 Coin Telegraph

Bankruptcy

Four businesses up for sale as part of bankruptcy proceedings include Embed, LedgerX, FTX Japan and FTX Europe.

As many as 117 parties have expressed interest in buying up one or more of FTX’s independently operated subsidiaries including FTX Japan, FTX Europe, LedgerX and Embed.

In a Jan. 8 court filing made by Kevin Cofsky, a partner at Perella Weinberg, the investment bank representing FTX US and affiliated firms. Cofsky stated:

“Approximately 117 parties, including various financial and strategic counterparties globally, have expressed interest to the Debtors in a potential purchase of one or more of the Businesses.”

He added that the debtors have entered into 59 confidentiality agreements with potential counterparties who have expressed interest in any one or more of the companies.

While no firm agreements have been made, they can access information to facilitate due diligence, such as details regarding the business unit’s operations, finances, and technology.

Four businesses up for sale include Embed, LedgerX, FTX Japan, and FTX Europe, according to lawyers representing FTX debtors.

Around 50 parties were interested in Embed, 56 were looking at LedgerX, 41 expressed interest in FTX Japan, and 40 were for FTX Europe, according to the filing.

Embed is a clearing firm that FTX acquired in June 2022 to enhance its stock and equities offerings. LedgerX is Commodity Futures Trading Commission (CFTC) regulated digital currency futures and options exchange and clearinghouse acquired by FTX in August 2021.

FTX Japan and FTX Europe are independent subsidiaries of FTX global but were subject to license and business suspensions in December.

In December, FTX sought permission from a U.S. bankruptcy court to sell off the firm's Japanese and European branches, in addition to the two clearing companies.

The deadline for submitting initial bids for the four firms is set to expire between Jan. 18 and Feb. 1.

Rostin Behnam points to CFTC-regulated LedgerX as success story amid FTX collapse

December 1, 2022 Coin Telegraph

CFTC

"The customer property at LedgerX — the CFTC regulated entity — has remained exactly where it should be, segregated and secure," said Rostin Behnam in a hearing on FTX's failures.

Commodity Futures Trading Commission, or CFTC, chair Rostin Behnam has cited LedgerX, the crypto derivatives and clearing platform based in the United States which was not part of FTX Group’s Chapter 11 filing, as an example of how regulating crypto firms could benefit U.S. consumers.

In a Dec. 1 hearing of the Senate Agriculture Committee exploring the collapse of FTX, Behnam said LedgerX had essentially been “walled off” from many of the companies within FTX Group — including those that filed for bankruptcy — that provided a regulatory window for the CFTC. The CFTC chair said LedgerX was “healthy”, “solvent”, and “operational” compared to other FTX entities.

“The limitations of our authority stopped at [LedgerX],” said Behnam. “For those same reasons that we were walled off from going past the regulated entity, the other FTX entities were not able to pierce through LedgerX and potentially take customer money, which obviously, as a regulator, is the priority.”

In his written testimony for the hearing, the CFTC chair said:

“Many public reports indicate that segregation and customer security failures at the bankrupt FTX entities resulted in huge amounts of FTX customer funds being misappropriated by Alameda for its proprietary trading. But the customer property at LedgerX – the CFTC regulated entity – has remained exactly where it should be, segregated and secure. This is regulation working.”

*CFTC chair Rostin Behnam addressing Senate Agriculture Committee on Dec. 1*

Behnan added that FTX had reported LedgerX held “more cash than all the other FTX debtor entities combined” in its bankruptcy filings. The CFTC chair, committee chair Michigan Senator Debbie Stabenow and ranking member Arkansas Senator John Boozman pointed to the Digital Commodities Consumer Protection Act, or DCCPA, as a potential solution to the events leading up to FTX’s insolvency, which left many U.S. consumers in the lurch.

“The crypto industry lacks the customer protections that Americans expect and deserve,” said Stabenow. “When trading in U.S. markets, when exchanges accept customer funds for trading they must not be allowed to gamble with those funds [...] FTX did all of those things, emboldened by a lack of federal oversight.”

Since filing for bankruptcy under Chapter 11 in the District of Delaware, FTX has been the target of global regulators and lawmakers investigating the exchange, including Turkey’s Financial Crimes Investigation Agency, authorities in the Bahamas and U.S. state and federal authorities. The U.S. House Financial Services Committee scheduled a hearing to investigate the events around the collapse of the crypto exchange on Dec. 13, and the next court hearing in the bankruptcy case has been scheduled for Dec. 16.

Troubled Crypto Exchange FTX Files for Chapter 11 Bankruptcy Protection, CEO Steps Down

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LedgerX

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