The legislation is an attempt to prevent people from suffering the same fate as customers who invested in the crypto trading platform FTX.
In December, the U.S. Securities and Exchange Commission (SEC) charged Samuel Bankman-Fried with orchestrating a scheme to defraud investors in his crypto trading platform FTX Trading Ltd.
According to the SEC, the Bahamas-based FTX raised more than $1.8 billion from investors, including $1.1 billion from about 90 investors in the U.S. Bankman-Fried told investors FTX was a safe and responsible crypto asset trading platform and touted the company’s supposedly sophisticated, automated risk measures to protect customer assets.
In reality, the 30-year-old crypto magnate was diverting FTX customer funds to his privately held crypto hedge fund Alameda Research and hiding it from investors, authorities say. Alameda Research also got special treatment from FTX, such as a virtually unlimited line of credit funded by FTX customers. FTX also used commingled customer funds at Alameda to make undisclosed venture investments, purchase real estate and make big political donations, according to the SEC. On top of it all, FTX didn’t have adequate reserves to start paying customers when they came asking for their money.
According to news site CoinDesk, Bankman-Fried has been under investigation by the Texas State Securities Board since October and is being called to a hearing in the state in February. His brokerage firm FTX Capital Markets LLC is registered as a dealer with the Texas board. As a result, “Texans were able to buy and sell publicly traded stock through the firm,” the Texas State Securities Board wrote in a notice for the hearing in November. The board wants a cease-and-desist order against FTX to halt securities fraud in Texas, the return of money to affected investors and fines levied against Bankman-Fried.
“We are confident that this industry will continue to grow, and we want to make sure that it does so in a properly regulated way." – Lee Bratcher, Texas Blockchain Counciltweet this
The business practices of companies like FTX have severely damaged the industry, according to Lee Bratcher, president of the Texas Blockchain Council. That’s why the council is behind Capriglione’s HB 1666. “We are confident that this industry will continue to grow, and we want to make sure that it does so in a properly regulated way,” Bratcher said.
In a press release, Capriglione said his office has been working on the bill for months with groups like the Texas Blockchain Council.
"Over 8.5 million Texans have invested in cryptocurrencies and other digital assets, the vast majority of which are held by third party custodial account holders which facilitate the trade," Capriglione said in the press release. "Recently, multiple companies have betrayed the trust of their consumers by commingling investor funds with corporate assets, leading consumers to lose billions in their investments."
Capriglione said he hopes his bill will help restore trust in the industry.
If approved, HB 1666 would apply to trading firms that serve more than 500 customers or hold at least $10 million in customer funds. These companies wouldn’t be allowed to mix customer funds with their own money or digital assets. The bill also calls for more transparency for customers.
Each company would be required to create a plan to allow customers to see a quarterly accounting of its assets and proof that it has enough funds on reserve. An auditor must also be able to view all of this information.
No later than the 90th day into the new fiscal year, companies will need to report to the Texas Department of Banking with an accounting of customer assets verified by an auditor. If passed and signed by the governor, the law would take effect Sept. 1.