Could Exchange Tokens Be Next for Regulator Scrutiny?

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  • Exchange tokens are drawing regulatory scrutiny after the charges against former Celsius and FTX executives
  • Alex Mashinsky and his Chief Revenue Officer are accused of secretly buying CEL tokens to sustain the company and then selling them for an artificially inflated profit.
  • Similarly, Caroline Ellison, former CEO of Alameda Research, allegedly manipulated the price of FTT under the direction of ex-FTX CEO Sam Bankman-Fried.

Exchange tokens could be next in the spotlight for regulators after revelations in the charges against former Celsius CEO Alex Mashinksy. According to the charges brought by the Department of Justice last week, Mashinsky publicly claimed to have held onto his share of CEL tokens when in fact he was profiting by selling them at inflated prices. Mashinsky, along with the former Chief Revenue Officer, Roni Cohen-Pavon, is accused of manipulating the price of CEL by secretly buying tokens to keep the company afloat and using customer deposits to prop up the price. With FTX execs accused of the same thing, are exchange tokens going to be regulators’ next target?

Exchange Tokens Have Gone Under the Radar

The purpose of exchange tokens should be to facilitate the user experience on the site, for example, by offering reduced trading fees and other perks. However, rogue exchange operators have been using them to line their own pockets, with Mashinsky allegedly making around $42 million from selling tokens, while Cohen-Pavon earned $3.6 million. Masinsky’s use of CEL tokens makes up some of the wire fraud and securities fraud charges that could see him going to prison for up to 65 years if convicted.

Mashinsky isn’t alone, either. The Securities and Exchange Commission (SEC) has accused Caroline Ellison, former CEO of Alameda Research, the trading arm of FTX, of price manipulation involving FTT, the native coin of the now-bankrupt crypto exchange. Ellison, under the direction of ex-FTX CEO Sam Bankman-Fried, allegedly made substantial purchases of FTT on the open market to artificially maintain its price.

FTX relied on FTT as collateral for customer fund loans provided to Alameda Research, and the inflated value of FTT misrepresented the company’s risk exposure, as per the SEC’s allegations.

Regulators Will be Taking a Closer Look

The incentive for these rogue operators is clear: with some marketing hype, they can drive the price of the token up and then dump it for a huge profit, all from thin air. People like Ellison, Bankman-Fried and Mashinky may have thought they were breaking no rules with their activities but clearly, they thought wrong.

Fortunately for others considering doing the same thing, they now have very clear evidence that they are breaking US financial laws by carrying out this activity, and they are about to find out the repercussions of doing so.

Given these two notable cases of exchange operators earning fortunes thanks to the manipulation of their own tokens, it will be no surprise to see regulators taking a closer look at the dynamics of such usage, and we may see other equally unscrupulous execs suffering the same fate as Mashinsky and co. in the months ahead.