The U.S. Securities and Exchange Commission has recently imposed charges against Galois Capital, a crypto-focused advisory firm that was found to have custodied client assets at FTX, a cryptocurrency exchange platform. Galois has agreed to pay a civil penalty of $225,000, which will be distributed to investors who were harmed by the fund’s actions.
Charged for Inadequate Custody Practices
According to the SEC’s press release on Tuesday, the agency discovered that Galois failed to ensure that the cryptocurrency held by the private fund it was advising was kept with a qualified custodian. Instead, the firm stored these assets with unqualified crypto trading platforms, including FTX. This oversight led to significant losses for investors, as approximately half of the fund’s assets under management from early to mid-November 2022 were lost in connection with the collapse of FTX.
FTX’s Collapse and Subsequent Fallout
The downfall of FTX was a major event in the crypto industry, resulting in the loss of $8 billion for customers and $1.7 billion for investors. During the subsequent trial of FTX’s CEO, Sam Bankman Fried, it was revealed that he and other executives had engaged in fraudulent activities, including trading and losing customer funds with FTX’s sister trading desk, Alameda Research. This scandal triggered a chain reaction of bankruptcies among firms that had trusted FTX, such as BlockFi, Genesis, and Gemini Earn.
While some companies, like Gemini, were able to recover most of their assets for users, FTX creditors are unlikely to fully reclaim their assets in crypto terms. The SEC also noted that Galois misled investors by providing false information regarding withdrawal processes and redemption timelines, exposing them to risks of asset loss, misuse, or misappropriation.
Response from Galois Capital
In response to the SEC charges, Galois Capital took to Twitter to express relief that the matter was resolved, asserting that they had used Fireblocks as their crypto custodian. Despite Fireblocks not being a qualified custodian, Galois believed it was the best option for securing crypto assets for their investors at the time. Fireblocks is a prominent player in the crypto infrastructure space and had former SEC chair Jay Clayton on its advisory board in 2021.
Moving Forward
By agreeing to pay the civil penalty and adhering to an order preventing further violations of the Investment Advisers Act, Galois Capital aims to move past this regulatory issue. The firm’s experience serves as a cautionary tale for other advisory firms in the crypto space, highlighting the importance of proper custody practices and transparency with investors.
Subheadings:
SEC Charges Against Galois Capital Fallout from FTX’s Collapse Lessons Learned and Moving Forward
Lessons Learned and Moving Forward
As the crypto industry continues to evolve, regulatory scrutiny will only increase, emphasizing the need for firms to prioritize investor protection and compliance with industry standards. Galois Capital’s case underscores the importance of due diligence in selecting custodians and ensuring transparency in all dealings with clients. By learning from these mistakes and implementing robust risk management practices, firms can navigate the complex regulatory landscape and build trust with their investors.