California Announces Investigation into ‘Apparent Wrongdoing’ of Crypto Exchange FTX

California’s Department of Financial Protection and Innovation (DFPI) is investigating the “apparent failure” of controversial crypto trading platform FTX.

DFPI is responsible for administering the state’s lending and banking laws, as well as the state’s Consumer Financial Protection Act and securities laws, which regulate broker-dealers, investment advisers and commodities.

“We expect any person offering securities, lender or other financial service provider operating in California to comply with our financial laws,” the agency said in a statement Thursday.

The FTX crisis began last week after Binance CEO Changpeng Zhao announced that the world’s largest cryptocurrency exchange would liquidate its holdings of FTT, FTX’s native exchange token. In the midst of the liquidation, users began to leave FTX en masse, causing the exchange to halt withdrawals.

Binance later said it would consider buying FTX, but pulled out of the deal on Wednesday, citing the results of the company’s due diligence and reports of misused customer funds.

Sam Bankman-Fried, the founder and CEO of FTX, later revealed that the firm is trying to raise funds to make customers whole after a Bloomberg the report indicated that the firm is missing as much as $8 billion.

The DFPI offered little insight into the details of the investigation, nor did it specify whether the probe was related to Bahamas-based FTX or FTX.US, the exchange’s US subsidiary.

Decrypt has contacted DPFI for further comments.

DFPI warns of risks for crypto-assets

The DFPI also emphasized that “consumers and investors must be aware that crypto-assets are high-risk investments and should not expect to be reimbursed for any losses.”

“The department warns consumers and investors in California that many cryptoasset providers may not have adequately disclosed risks customers face when depositing cryptoassets on these platforms,” ​​the statement said.

The DFPI added that crypto asset providers are not governed by the same rules and protections as banks and credit unions, which are required to have deposit insurance, and encouraged affected individuals to file a complaint.

It was another blow to FTX on Thursday when the Securities Commission of the Bahamas moved to freeze the exchange’s assets and related parties. FTX has its headquarters in Nassau.

The agency also suspended the firm’s operating registration and asked the Bahamas Supreme Court to appoint an interim liquidator.

In a separate development of events earlier this week, the US Securities and Exchange Commission (SEC) reportedly deepened its investigation into FTX, while the Commodity Futures Trading Commission (CFTC) and the Department of Justice (DOJ) launched their own investigations into the exchange.

Last month, the Texas Securities Board also began investigating FTX, FTX US and CEO Sam Bankman-Fried for alleged securities violations.