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SBF's actions could be criminally 'negligent', FTX allegedly misappropriated customer funds - Joseph Borg

Kitco News

The collapse of FTX, once the world's third largest crypto exchange, could raise criminal issues, said Joseph Borg, a lawyer and Partner at WH Partners. The Bahamas-based company FTX and its CEO, Sam Bankman-Fried, have been accused of misappropriating customer funds to conduct highly leveraged trades.

"Ultimately, proper regulation would not have allowed an exchange to actually use customer funds," he said. "If Bahamian regulations allowed the operator to make use of those funds, then technically they have not committed a breach."

Nevertheless, Borg suggested that there could still be "criminal" implications for Bankman-Fried and his associates.

"Allegedly, what he did is definitely negligent and ultimately negligence is a criminal offense," he stated. "In most jurisdictions, being negligent with the funds of others can easily raise criminal issues."

Borg spoke with David Lin, Anchor and Producer at Kitco News, at the AIBC Summit in Malta.

Sam Bankman-Fried's Tweets

Bankman-Fried, also known as SBF, took to Twitter last week to address the allegations against him and his company, FTX. On November 15th, he tweeted that he would be attempting to raise more capital to "restart" his business and "make customers whole."

Borg said that such a strategy is unwise.

"At the moment you realize that there is a problem with the viability of your company, you should stop trading rather than continue increasing your debts," said Borg.

He added that SBF's tweets could put him into further legal trouble.

"He is putting his situation in a worse position," said Borg. "If I were his lawyer, I would probably tell him to stop tweeting for now… [and] assess the situation slowly, and then maybe create some form of coordinated statement."

FTX was running like a "fractional reserve" bank; its collapse is "the craziest thing" in crypto history - Crypto Megan

A move towards regulation?

Claiming that crypto regulation is "definitely required" in the wake of the FTX collapse, Borg qualified that new regulations should avoid replicating traditional financial strictures.

"I believe that when we're regulating [the crypto] industry, we have to make sure that what we're unhappy with in the current banking scenario is not repeated here," he said. "The biggest problem is that banks do not hold enough money to pay all their customers the moment customers claim their funds."

Borg mentioned that in the fractional reserve banking model, a bank is only required to keep a small percentage of client funds in cash, and can lend the rest of those funds out.

The European Parliament recently approved a preliminary draft of MiCA, a bill that would regulate crypto assets across the E.U. Among the proposals in MiCA is that exchanges would be liable for losing their clients' crypto assets.

Borg said that MiCA is "a very good effort" at pan-European crypto legislation, and can incentivize crypto exchanges to be better custodians of client funds.

"[Crypto exchanges] have a responsibility to monitor what's going on with the exchange," he said. "They should be able to notice when there may be manipulation… there are a number of service providers that were created in this industry, and MiCA regulates all types of crypto asset service."

To find out Borg's views on content moderation online, watch the video above

Follow David Lin on Twitter: @davidlin_TV

Follow Kitco News on Twitter: @KitcoNewsNOW

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