Australian regulator had FTX under surveillance at time of collapse, documents reveal

Exclusive: Asic had concerns about crypto platform six months before spectacular failure

Australian regulators were concerned about failed cryptocurrency platform FTX’s local operations six months before the company’s spectacular collapse, and were actively surveilling the company, documents obtained by Guardian Australia reveal.

FTX put its Australian companies into voluntary administration in November following its bankruptcy filing in the US. Around 30,000 Australian customers were owed money or cryptocurrency from the exchange, in amounts ranging up to $1m.

While cryptocurrency is not currently regulated in Australia, FTX was operating in the country with an Australian financial services licence (AFSL) the company obtained by acquiring a company that already held one. The licence was suspended by the Australian Securities and Investments Commission (Asic) when FTX went into administration.

Experts Guardian Australia has spoken to suggested holding such a licence could have led customers to believe the company was more regulated in Australia than it was.

A trove of Asic emails obtained by Guardian Australia under freedom of information laws reveals officers of the regulator shared concerns about how FTX would be operating in Australia.

Discussion within the regulator was spurred by an Australian Financial Review article published in March 2022 in which the FTX chief executive, Sam Bankman-Fried, talked up the company’s local launch in Australia. Investor protection and licensing staff expressed concern over a claim in the article that FTX would allow traders to buy crypto assets with margin loans up to 20 times their investment.

“I’d like to know who is advising them,” one analyst wrote at the time.

A manager in the market conduct division sought to review the business proofs FTX provided to Asic as part of the licence application, but staff later realised that such documents were not available given FTX had secured the licence via a takeover.

The regulator then organised to issue what is known as an s912C notice, which requires businesses to provide information to allow Asic to assess whether the business is fit and proper to hold the AFSL.

“Given the concerns I think the best course of action at this stage is a s912C Notice,” an investor protection officer said.

“I think we ask them all of the normal questions when there has been a change in control.”

On 30 March, Asic held a phone meeting with FTX. According to meeting minutes, FTX put particular focus on the regulation the business had undertaken globally – including having 31 financial services licences and being “well known for efforts with positive talks with regulators”. FTX also promised to warn clients about crypto scams, and work with the Australian federal police on crypto crime.

Asic issued the s912C notice. In April, an internal market note said it was examining documents to “further understand whether offerings comply with the licence conditions and client money obligations”.

During the months between the initial concern and FTX going into administration in November, Asic issued three notices to FTX. The notices were not included in the FOI response, and Asic refused to release FTX’s responses to the notices on the grounds it “could reasonably be expected to prejudice Asic’s law enforcement activities concerning market misconduct matters”.

The document schedule also reveals the regulator continued to have concerns about FTX as late as October, with two emails labelled “FTX Australia Pty Ltd – summary of current concerns”.

A briefing document dated 11 November 2022 – the eve of FTX’s collapse – confirms the regulator had had FTX under “surveillance activity” since March. The majority of the detail of this activity is redacted from the document on the grounds it contains information “forming part of Asic investigations of suspected contraventions of the corporations legislation”.

“These investigations are ongoing.”

According to the briefing document, FTX was telling Asic at the time that it remained “compliant with its financial requirements”.

When Guardian Australia previously asked Asic about its actions on FTX prior to its collapse, the regulator said it could not assess the company at the time of the takeover of an AFSL, but if it was provided information that suggested the fit and proper test was not met the licence could be suspended or cancelled.

Guardian Australia provided a list of questions to Asic about the notices issued to FTX, as well as the status of the investigation into the company last week.

In response, an Asic spokesperson said investigations were ongoing.

“Since March 2022, Asic had made enquiries with FTX Australia about the financial products offered by FTX Australia. The issues raised included pricing, FTX Australia’s compliance with Asic’s [contract for differences] product intervention order and its on-boarding of clients,” the spokesperson said.

“Asic’s review of these matters was on-going as at the time that external administrators were appointed to the Australian FTX entities.”

Legislation to safeguard cryptocurrency and regulate exchanges will be introduced into federal parliament in this year, the Albanese government has said.

FTX’s local administrator, KordaMentha, said last year it was working to return funds to creditors but some Australian-based customers could be forced to deal with US administrators.

Bankman-Fried has pleaded not guilty to criminal charges that he defrauded investors and is currently located at his parents’ home in California on $250m bail.


Josh Taylor

The GuardianTramp

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