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U.S. regulators won’t be allowed to punish executives or advisers involved in the bankruptcy of Voyager Digital Ltd. for creating a new cryptocurrency that would help repay customers of the failed digital asset lender, a judge said yesterday, Bloomberg News reported. The comments by Bankruptcy Judge Michael Wiles reflect a growing conflict between efforts to rehabilitate troubled crypto companies and an increased regulatory push by the Securities and Exchange Commission. SEC lawyers have opposed a legal protection typically given to executives and restructuring advisers of a bankrupt company. The protection blocks lawsuits against those professionals for implementing a court-approved bankruptcy plan. The SEC’s position would “leave a sword hanging over the heads of anybody who’s going to do this transaction,” Judge Wiles said. “How can a bankruptcy case or any court proceeding function with that kind of suggestion?” Judge Wiles’s remarks came during the third day of debate over a plan by Voyager to issue a new cryptocoin and sell itself to Binance.US, the US arm of the world’s biggest crypto exchange. SEC lawyers argue that the proposals likely will violate federal law because, in their view, the new coin is an unregistered security and Binance.US is operating an unregulated securities exchange. SEC lawyer Therese A. Scheuer argued that the legal protections are so broad that Voyager employees and lawyers would have permission to violate securities laws. After several minutes of debate, Voyager lawyers agreed to change the plan to narrow the legal releases.

Alameda Research, the trading arm of the bankrupt digital-asset exchange FTX, has filed a lawsuit against Grayscale Investments alleging “exorbitant management fees” and accusing Grayscale of “improperly preventing redemptions” from the Bitcoin and Ether trusts it manages, Bloomberg News reported. “We will continue to use every tool we can to maximize recoveries for FTX customers and creditors,” John J. Ray III, chief executive officer and chief restructuring officer of the FTX Debtors, said in the statement. “Our goal is to unlock value that we believe is currently being suppressed by Grayscale’s self-dealing and improper redemption ban.” A spokesperson for Grayscale said the lawsuit was “misguided”: “Grayscale has been transparent in our efforts to obtain regulatory approval to convert GBTC into an ETF — an outcome that is undoubtedly the best long-term product structure for Grayscale’s investors. We remain confident in the common sense, compelling legal arguments that will be argued tomorrow before the D.C. Court of Appeals.” For two years, the $14.8 billion Grayscale Bitcoin Trust (ticker GBTC) has been trading at a steep discount to the cryptocurrency it holds. The group of FTX debtors said they are seeking injunctive relief to unlock $9 billion or more in value for shareholders of the two Grayscale trusts.

A long road lies ahead to repair confidence in crypto after unprecedented bankruptcies and hacks, including the major challenge of giving investors a way of insuring against such events, Bloomberg News reported. Stock brokerage accounts often come with some cover against outcomes like bankruptcy but digital-asset platforms provide few if any shields, a reality underlined by the November collapse of Sam Bankman-Fried’s FTX exchange. Investors seeking such policies face a tough task. Traditional insurers are wary and crypto-native solutions in decentralized finance — or DeFi — account for a fraction of the $1.1 trillion digital-asset sector. For instance, funds locked in DeFi insurance protocols amount to about $300 million, compared with more than $80 billion in DeFi services overall, according to data from DeFiLlama. “Last year highlighted the importance of insurance but it seems a very difficult problem for DeFi to solve,” said Riyad Carey, a research analyst at crypto data provider Kaiko. “To properly protect a protocol or position is challenging.” The largest DeFi insurance provider is Nexus Mutual, a member-based service accounting for about 70% of funds locked in crypto-native insurance protocols. Nexus Mutual has paid out roughly $5 million in claims from the bankruptcies of FTX and crypto lender BlockFi. It expects to pay another $2 million but those figures are dwarfed by the billions of dollars eviscerated by FTX alone.

New cryptocoins that Voyager Digital Ltd. plans to issue to pay creditors in bankruptcy are actually securities that should be regulated, a lawyer with the U.S. Securities and Exchange Commission said in court on Friday, Bloomberg News reported. The comments by William Uptegrove, reflecting the views of the SEC staff, may complicate the bankrupt crypto firm’s proposal to repay creditors by issuing the digital tokens, part of a plan that also includes selling itself Binance.US, the U.S. arm of the world’s biggest crypto exchange. Uptegrove was arguing against the proposal and responding to skeptical questions about the SEC staff’s views from the judge overseeing Voyager’s bankruptcy case. The commission itself has not taken a position, the lawyer said. Uptegrove also said SEC staff have concluded that Binance.US is operating an unregulated securities exchange. Earlier Friday, a Voyager restructuring adviser testified that Binance.US is facing an investigation by the SEC. The SEC lawyer’s comments were met with a call for clarity from Binance.US. “It is regrettable that an SEC staff member would make allegations, that Binance.US and platforms like ours are operating an unregistered exchange, without specifying the assets listed on our exchange that the SEC considers to be securities,” a spokesperson for the trading services provider said. Bankruptcy Judge Michael Wiles has held two days of hearings about the Binance.US sale and the related payout plan.

Prosecutors and attorneys for FTX founder Sam Bankman-Fried are requesting the disgraced cryptocurrency entrepreneur be allowed a flip-phone or another device that’s not a smartphone while on bail, the Associated Press reported. The proposal, submitted in a letter Friday, comes as the judge in the case is deciding how to toughen Bankman-Fried’s bail requirements amid concerns the former billionaire might be communicating on electronic devices in ways that can’t be traced. Prosecutors alleged last month Bankman-Fried used a virtual private network that blocks third parties from seeing online activity, known as VPN, to access the internet twice. They also said he sent an encrypted message over the Signal texting app in January to the general counsel of FTX US, a move they argued might indicate witness tampering. Bankman-Fried has pleaded not guilty to charges that he cheated investors and looted customer deposits at FTX, his cryptocurrency platform.

FTX says it has identified a deficit of $8.9 billion in customer funds that it can’t account for, the first time the bankrupt cryptocurrency exchange has pinned down how much money has gone missing, WSJ Pro Bankruptcy reported. In a public presentation released yesterday, FTX said that it had identified around $2.7 billion of customer assets, compared with $11.6 billion of balances outstanding on customer accounts. The estimated value of FTX’s assets and liabilities are based on crypto prices on the day of the company’s bankruptcy filing in early November. New managers at FTX, led by restructuring veteran John J. Ray III, have been working to locate and protect billions of dollars in missing customer funds since the company filed for bankruptcy. FTX sought chapter 11 protection after allegations emerged that Alameda Research, a hedge fund started by FTX co-founder Sam Bankman-Fried, was taking customers’ funds from FTX accounts without authorization. Ray said on yesterday that it isn’t yet possible to predict how much customers will be able to recover. “[The exchange’s] books and records are incomplete and, in many cases, totally absent,” Ray said. “For these reasons, it is important to emphasize that this information is still preliminary and subject to change.” It isn’t clear whether customers will be able to recover the entirety of the $2.7 billion in assets that FTX has found. About $1.5 billion of that total included illiquid crypto assets like FTX’s token, FTT, whose value has fallen since the firm’s collapse. Around $880 million in found customer assets are considered “liquid currencies” like dollars, stablecoins, bitcoin or ether, FTX said. Around $400 million are in other receivables, the presentation shows. A great deal of the total $8.9 billion shortfall at FTX can be attributed to Alameda Research, which had borrowed $9.3 billion from customers’ accounts before the exchange went bankrupt, the presentation shows.

U.S. Senators representing both Democrats and Republicans are demanding that Binance and Binance.US provide a detailed accounting of their finances and efforts to maintain regulatory compliance, according to a letter signed by Senators Elizabeth Warren, Chris Van Hollen and Roger Marshall, Bloomberg News reported. “[What] little information about Binance’s finances is available to the public suggests that the exchange is a hotbed of illegal financial activity that has facilitated over $10 billion in payments to criminals and sanctions evaders,” the senators wrote in the letter, which was dated March 1. The letter, addressed to Binance.US President Brian Shroder and Binance Chief Executive Officer Changpeng “CZ” Zhao, cited recent Reuters reporting that cast doubt on the extent to which the two entities were really independent of each other. This line of questioning echoes a recent court filing from Texas officials related to the proposed Binance.US acquisition of the bankrupt crypto broker Voyager Digital. Binance and Binance.US have the same majority owner in Zhao, according to the details laid out in the Texas filing. The global entity had secret access to a bank account belonging to the US exchange, according the Reuters report.

The Biden administration on Thursday said military personnel should be allowed to pursue class actions accusing Citigroup Inc. and American Express Co. of overcharging them on loans, and not be forced to arbitrate their claims individually, Reuters reported. In "statements of interest" filed with a federal court in North Carolina, the Department of Justice said federal law gives service members an "unwaivable right" to pursue class-action claims even if they had agreed to arbitrate. The Justice Department weighed in on private lawsuits accusing Citibank and American Express National Bank of wrongly charging military personnel more than 6% interest on some loans. Citibank allegedly overcharged four named plaintiffs on credit cards, with Army Sergeant Jeremy Bell seeing his rate increase to 25.99%, while Amex overcharged Army National Guard veteran Nicholas Padao, who served in Iraq. According to the Justice Department, such charges violated the federal Servicemembers Civil Relief Act, whose roots date to the Civil War, and can be challenged in court via class actions. "The law's explicit purpose is to allow servicemembers to devote their entire energy to the defense needs of the nation, (and) must be read with an eye friendly to those who dropped their affairs to answer their country's call," the department said in both filings.

Nishad Singh followed Sam Bankman-Fried into the high-stakes world of cryptocurrency trading. Now he could help put the former FTX chief executive in prison, according to a Wall Street Journal analysis. Singh, the 27-year-old former director of engineering at FTX, pleaded guilty this week to six criminal counts, including wire fraud. He agreed to cooperate with the government’s investigation of FTX’s collapse. The deal means Mr. Singh could end up testifying against a colleague and friend whom he has known since childhood. Just a few months ago, he and Mr. Bankman-Fried were housemates in the Bahamas, living in a luxury penthouse with other executives at FTX and its sister trading firm, Alameda Research. “I’m unbelievably sorry for my role in all of this and the harm that it has caused,” Singh said in a court hearing in Manhattan on Tuesday. Singh attended the same elite Silicon Valley prep school as Bankman-Fried and was close friends with his younger brother, Gabriel Bankman-Fried. Like the Bankman-Fried brothers and several other top FTX executives, Singh was a proponent of effective altruism, a movement that urges adherents to make big bucks so they can give their fortune to charity.

As a third member of Sam Bankman-Fried’s inner circle became a prosecution witness, lawyers for the FTX co-founder were preparing for a more immediate fight: his use of the internet and mobile apps while out on bail, Bloomberg News reported. Bankman-Fried now faces the culmination of a tense standoff with the judge in his criminal fraud case over his communications. Free on a $250 million bond but confined to his parents’ house with a monitoring device around his ankle, he has already angered U.S. District Judge Lewis Kaplan by using encrypted-messaging apps and a virtual private network, or VPN, which hides a computer’s identity. “Why am I being asked to set him loose in this garden of electronic devices?” Judge Kaplan demanded at the most recent bail hearing in lower Manhattan, on Feb. 16. For now he has barred Bankman-Fried from using either of those tools and from contacting former or current FTX employees. Late Wednesday, in response to a court order, the two sides jointly proposed a pair of technology consultants to advise the skeptical judge on a raft of restrictions that balances the defendant’s rights and needs with the integrity of the judicial process. Kaplan has threatened to revoke the bail package altogether and send Bankman-Fried to jail ahead of his October trial if he isn’t satisfied with the constraints.