The United States Commodity Futures Trading Commission (CFTC) has announced a record-breaking $17.1 billion in monetary relief for fiscal year 2024, largely down to enforcement actions involving digital assets.
“The resolution of digital asset cases that resulted in the agency’s largest recovery ever, this record amount included $2.6 billion in civil monetary penalties and $14.5 billion in disgorgement and restitution,” said the CFTC.
In FY 2024, the agency brought 58 new actions, including precedent-setting digital asset commodities cases, but one, in particular, was the primary reason for the record haul: the agency’s crackdown on defunct digital asset exchange FTX, which collapsed in November 2022.
FTX windfall
The FTX case accounted for $12.7 billion in CFTC restitution and disgorgement, becoming the “largest recovery for victims and sanctions in CFTC history.”
Formerly one of the world’s leading digital asset exchanges and spearheaded by the poster boy for effective altruism and crypto-advocacy Sam Bankman-Fried, in 2022, it was revealed that FTX had been secretly diverting customer funds to its sister company, Alameda Research, for risky trading. A leaked balance sheet exposed Alameda’s reliance on illiquid FTX-issued native tokens (FTT), sparking investor panic. Binance’s decision to sell its FTT holdings accelerated the crisis, leading to a run on withdrawals that FTX could not fulfill. Attempts to secure bailout funding failed, and FTX was forced to file for bankruptcy in the U.S. in November 2022.
This series of events kicked off the “crypto-winter” of 2022/23, as well as a number of civil and criminal cases.
The CFTC’s case involved fraud claims against the exchange, its sister firm Alameda Research, and several executives, including founder Bankman-Fried. The settlement ordered $8.7 billion in restitution and $4 billion in disgorgement, making it the largest recovery in the agency’s history.
‘Restitution’ is the repayment of money to victims, while ‘disgorgement’ is the return of ill-gotten gains obtained through unlawful conduct; the former being calculated based on the actual losses suffered by victims and aiming to compensate them for their specific harm, while the latter is violator-focused and designed to deprive the wrongdoer of the profits obtained through illegal activities.
Eventually, in November 2023, Bankman-Fried was also found guilty in criminal proceedings of seven counts of defrauding customers, lenders, and investors of FTX, and in March this year was sentenced to 25 years in prison.
The CFTC pointed out that its own FTX litigation is not finished yet, with cases still pending against other defendants, including FTX Co-Founder Gary Wang, former Alameda Co-CEO Caroline Ellison, and, in a separate action, former FTX co-owner Nishad Singh.
While its actions against FTX accounted for the most significant monetary relief, the CFTC also highlighted several other digital asset-related cases that added to its windfall.
Crime doesn’t pay unless you’re a regulator
Another digital asset-related settlement that netted the CFTC a significant amount was against the world’s largest digital asset exchange (by trading volume), Binance, its founder and former CEO Changpeng Zhao (CZ), and other executives.
On March 27, 2023, the CFTC charged Binance for operating an illegal digital asset derivatives exchange and “willfully evading or attempting to evade provisions of the Commodity Exchange Act and CFTC regulations.”
In December 2023, the regulator announced a settlement that recovered $150 million from CZ and required Binance to disgorge $1.35 billion of ill-gotten transaction fees and pay a $1.35 billion penalty to the CFTC.
Amongst other significant cases, the agency noted charging Stephen Ehrlich, former CEO of digital asset platform Voyager, with commodity pool fraud and registration failures.
“This year, the federal district court denied the former CEO’s motion to dismiss, holding in the CFTC’s favor on numerous significant legal questions,” said the regulator, adding that the litigation is ongoing.
In July, the regulator also won an order granting summary judgment on all counts against Seneca Ventures and several other defendants, who “fraudulently operated, in the manner of a Ponzi scheme, an illegal commodity pool that purportedly invested in digital assets, derivatives and other instruments.”
According to the CFTC, the defendants were ordered to pay more than $110.9 million in civil monetary penalties, $83.7 million in restitution and $36.9 million in disgorgement.
In addition, the CFTC charged a defendant with engaging in “romance scam tactics” to fraudulently misappropriate $2.3 million in customer funds intended for digital asset commodity trading.
“Misconduct in our jurisdictional markets is rarely confined, especially as these boundaries are continually being redefined by disruptive technology,” Chairman Rostin Behnam said. “I commend our Division of Enforcement for remaining thoughtful and agile in its response to evolving markets and a growing pool of participants.”
Meanwhile, CFTC Director of Enforcement Ian McGinley commented that “our actions in FY 2024 reflect our commitment to holding recidivist actors accountable, obtaining meaningful monetary relief and sanctions, and implementing robust remediation measures.”
The CFTC announcement comes a few short weeks after fellow U.S. finance sector regulator, the Securities and Exchange Commission (SEC), also recorded a record FY 2024 haul, likewise thanks to a particularly profitable digital asset case.
SEC makes bank off Terraform
In its November 22 annual report, the SEC announced that it had obtained orders for $8.2 billion in financial remedies for the year ending September 30, “the highest amount in SEC history.” The $8.2 billion consisted of $6.1 billion in disgorgement and prejudgment interest, also the highest amount on record, and $2.1 billion in civil penalties, the second-highest amount on record.
Over half of this impressive haul came from the SEC’s jury trial win against Terraform Labs and its disgraced former CEO, Do Kwon.
The Terraform ecosystem collapsed in May 2022, eventually resulting in an estimated $60 billion being wiped from the global digital asset space. In February 2023, the SEC charged Terraform and Kwon with securities fraud and offering and selling securities in unregistered transactions. In April 2024, a jury unanimously found the company and its founder liable for securities fraud, with Terraform and Kwon subsequently agreeing to pay a $4.47 billion settlement.
“The Division of Enforcement is a steadfast cop on the beat, following the facts and the law wherever they lead to hold wrongdoers accountable,” said SEC Chair Gary Gensler, revealing the agency’s record financial remedies in November. “As demonstrated by this year’s results, the Division helps promote the integrity of our capital markets to benefit investors and issuers alike.”
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