The U.S. Securities and Exchange Commission recently imposed additional charges against Galois Capital, a crypto-focused advisory firm that held client assets at FTX. Galois has agreed to pay a civil penalty of $225,000 as a result of these actions. The SEC found that Galois failed to ensure that the crypto held by the private fund it advised was stored with a qualified custodian, instead opting for unqualified crypto trading platforms like FTX. This decision resulted in approximately half of the fund’s assets under management from early to mid-November 2022 being lost due to the collapse of FTX.
The collapse of FTX was a significant event in the crypto industry, leading to substantial losses for both customers and investors. The collapse resulted in $8 billion in losses for customers and $1.7 billion in losses for investors. During the subsequent trial of FTX’s CEO, Sam Bankman Fried, it was determined that he and other executives had engaged in massive fraud by trading customer funds with FTX’s sister trading desk, Alameda Research. This collapse had far-reaching consequences, causing contagion that led to the bankruptcy of other firms that had trusted FTX, including BlockFi, Genesis, and Gemini Earn.
In response to the SEC’s allegations, Galois Capital admitted no wrongdoing but agreed to pay the civil penalty imposed. The firm also agreed to an order that prohibits it from committing further violations of the Investment Advisers Act. The SEC accused Galois of misleading investors by providing inconsistent information about withdrawal processes, leading to unnecessary risk exposure for investors’ assets, including crypto assets. Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, emphasized the importance of holding advisers accountable when they fail to fulfill their investor protection duties.
Following the settlement with the SEC, Galois Capital took to Twitter to express relief at putting the matter behind them. The firm clarified that it had used Fireblocks as its crypto custodian, despite Fireblocks not being a qualified custodian. Galois defended its decision by stating that it believed Fireblocks was the best solution for securing crypto assets for its investors at the time. It is worth noting that Fireblocks is a prominent infrastructure provider in the crypto space, with former SEC chair Jay Clayton serving on its advisory board in 2021.
The charges brought against Galois Capital by the SEC serve as a reminder of the importance of due diligence and regulatory compliance in the crypto industry. The fallout from the collapse of FTX highlights the significant risks associated with entrusting assets to unqualified custodians. Moving forward, it is essential for firms operating in the crypto space to prioritize investor protection and adhere to industry best practices to avoid similar pitfalls in the future.
