Tokens used internally by crypto firms are being scrutinized more closely.Table of Contents
Tokens used internally by crypto firms are being scrutinized more closely.
By CoinUnited.io Research Team
2 min read
The Wall Street Journal previously stated that FTX firms used their own token, FTT, as collateral to get loans totaling billions of dollars.
According to a report written by Shoba Pillay, the examiner assigned by the bankruptcy court to investigate Celsius's business activities, Celsius Network, a crypto lender, exploited its own token, CEL, to fund its own expansion.
Now, authorities are giving notice that they intend to crack down on the crypto sector with greater force.
Over the course of the past year, the Securities and Exchange Commission has pursued multiple enforcement proceedings against crypto businesses. On Thursday, the agency disclosed that it had reached a settlement with Kraken, a crypto exchange, regarding its so-called staking services.
Sen. Sherrod Brown (D., Ohio), chairman of the Senate Banking Committee, has also expressed interest in internal crypto tokens. He said in a letter in November that FTX's usage of its own token had "further encouraged reckless risk taking" and he urged banking authorities to exercise more control in the cryptocurrency market.
A token is commonly used as a proxy for investor sentiment toward the centralized crypto firm that issued it, however it is not precisely the same thing as a stock. Those who purchase tokens from an exchange frequently receive discounts or other incentives.
There is usually low volume trading in native tokens, making them more susceptible to price fluctuations.
According to Columbia Business School adjunct professor Austin Campbell: "If somebody has their own proprietary token, by definition, they have insider knowledge about the token, and then they are actively trading that token, it raises a lot of problems about insider trading."
Alameda Research, FTX's sibling trading organization, utilized FTT coins as collateral to get loans. The SEC claims that Alameda artificially inflated the value of its collateral by engaging in automatic purchases of FTT tokens on multiple platforms. The SEC claimed that this put the company's lenders, investors, and consumers at danger since it enabled it to borrow even more money.
SEC Chair Gary Gensler stated in a press release that FTX and Alameda "schemed to manipulate the price of FTT...to prop up the value of their house of cards."
In a separate investigation, the independent examiner found that the CEL token was instrumental in the downfall of Celsius.
According to the audit report, Celsius was able to raise $32 million in 2018 through the sale of CEL tokens.
According to the examiner report, the value of CEL increased by over 14,000% between March 2020 and June 2021 as a direct result of Celsius's at least $558 million investment in its own tokens on the open market.
According to the study, between the beginning of 2018 and the time Celsius filed for bankruptcy in July, founders Alex Mashinsky and Daniel Leon liquidated a portion of their CEL token holdings, making at least $68.7 million and at least $9.7 million, respectively.
No one from Celsius was available for comment despite repeated attempts. Both Mr. Leon's and Mr. Mashinsky's representatives declined to comment, and Mr. Mashinsky's agent did not reply to a request for comment.
Nexo, a cryptocurrency lending platform, was sued by eight state securities authorities in September on the grounds that its interest-bearing accounts were unregistered securities.
The Kentucky Department of Financial Institutions claims in its complaint that as of July 31, 2022, 95.9% of all NEXO tokens were held by Nexo.
The regulator stated that if Nexo Capital's net holding in NEXO tokens were removed, the company's liabilities would surpass its assets.
A representative for Nexo explained that the information they gave in response to the Kentucky regulator's request applies only to their individual operations.
She said that the company's net position in NEXO Tokens is less than 10% of total assets, and that these assets in turn outweigh the company's liabilities.
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