FTX Fallout Ongoing as SEC Charges Galois Capital for Custody Failures

• Galois Capital settled with the SEC without admitting or denying charges.
• The $225,000 penalty fine will be distributed to Galois Capital investors.
• FTX repayments may be delayed due to a recent SEC intervention.

The FTX downfall dominos continue to drop as the U.S. Securities and Exchange Commission (SEC) settles charges against Galois Capital for misleading investors and custody failures due to its ties with defunct exchange, FTX.

Galois Capital Settles

As per the Sep. 3 press release  from the SEC, Galois Capital has been charged with failure to comply with asset safeguarding requirements, misleading investors, as well as “offering and selling” cryptocurrencies as securities.

Without admission or denial of these charges, Gallois has agreed  to pay a $225,00 civil penalty, which it claims will go directly to its investors.

The SEC highlights that Galois leveraged several unqualified custodians, including FTX, which exposed investors to a significant risk. To be more specific, Galois explains that it leveraged Fireblocks, an FTX-integrated “enterprise-grade” digital asset platform as its custodian.

Around this time, Fireblocks was offering secure storage and transfer tools for exchanges, banks, hedge funds, custodians, and other entities. The firm’s tech was integrated with FTX, which exposed Fireblock clients to great risk when FTX eventually crashed.

In November 2022, FTX’s collapse resulted in almost half of the firm’s assets being burned. Co-Chief of the SEC’s Enforcement Division’s Asset Management Unit, Corey Schuster, stated

“By failing to comply with Custody Rule provisions, Galois Capital exposed investors to risks that fund assets, including crypto assets, could be lost, misused, or misappropriated,”

The SEC reports that it also found that Galois further misled “certain” investors by offering a 5-business day redemption period, while on the other hand offering other investors “fewer days’ notice”.

Galois Bites Back

In a lengthy post, Galois Capital took to X to celebrate the end of the battle and give their side of the story.

It admits that it did use unqualified custodian Fireblocks, which it disclosed to the SEC. But, Galois says it believed the firm was the “best solution” for its needs. In addition, it describes Fireblocks as the safest means to store investors’ crypto “at the time.”

With regards to the redemption period discrepancies, Galois oddly explains  that there was a five-business-day redemption policy before the end of the month. However, it thought “it would be a nice thing” to allow investors to exit the fund if they desired without the five-day wait.

FTX Repayments

The news arrives as the FTX collapse continues to cast a thick shadow over the crypto landscape. Most recently, an SEC court filing raised concerns that could majorly disrupt the creditor repayment plan.

The SEC’s major contention is that there is little clarity on who would distribute stablecoin repayments to creditors. The regulator has urged the court to deny any confirmation of the repayment plan until certain changes are made.

“Unless the Plan provides that the Debtors shall not receive a discharge and removes any discharge injunction, the Court should deny confirmation,”

FTX’s bankruptcy is a historic moment for the work of crypto and finance overall. It was the perfect storm, and it continues to rage on to this day.

About the Author

Eddie Mitchell

Eddie has been writing news and content primarily for crypto news and industry players over the past seven years. With an eye for the bigger picture, Eddie prefers to investigate the broader implications of a story, as well as explore the weird and wonderful world of crypto. He believes blockchain has already changed the world, but observes the space overall with a skeptical and adoring eye.

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