IEX taps potential partner for regulated crypto exchange

Brad Katsuyama is hoping the second time’s the charm.

Katsuyama, the Chairman of the stock exchange IEX and his staff are now in talks with publicly traded cryptocurrency exchange Coinbase to create a federally approved digital asset marketplace, people with direct knowledge of the matter tell Fox Business.  

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As reported by Fox Business, Katsuyama, a veteran trader who was the protagonist in the book "Flash Boys," author Michael Lewis’s account of high-frequency trading on Wall Street, was previously meeting with officials from the Securities and Exchange Commission for a crypto exchange that would have been the first to receive an explicit blessing from Wall Street’s top cop, Gary Gensler.

His partner in the initial venture was Sam Bankman-Fried, the since-indicted founder of the now-defunct crypto exchange FTX, Fox Business reported. According to Gensler’s public calendar, both Bankman-Fried and Katsuyama held proposal meetings with commission officials and the chairman himself.

Those meetings took place nearly to the time FTX filed for bankruptcy in November in what regulators are calling one of the biggest frauds in crypto history.
Government officials are accusing Bankman-Fried and his associates with theft of FTX customer assets to finance their lavish lifestyle and trading losses from an affiliated hedge fund, Alameda Research. Bankman-Fried pleaded not guilty and remains under house arrest until his trial in October and faces up to 115 years in jail. Other FTX executives have reached plea deals with prosecutors from the US Attorney’s office in Manhattan and are expected to testify in court as government witnesses.  

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Katsuyama is said to have continued his negotiations with the SEC for an approved exchange even after the FTX debacle; his potential partnership with Coinbase has not been previously reported, and he declined to comment on the matter.

A IEX spokeswoman told Fox Business: "We continue to consider ways that we can help provide a regulatory path for digital asset securities, including conversations with regulators and other market participants, but have not finalized any specific proposal that includes any third parties."

A spokesperson for Coinbase did not return calls and emails for comment. After the close of trading on Tuesday, the exchange reported higher-than-expected fourth-quarter revenues of $605 million. Still, the company lost $557 million for the fourth quarter ending December 31, compared to earnings of $840 million in the same quarter in 2021.

Like many crypto businesses, Coinbase suffered through the so-called "crypto winter" of 2022 losing $2.625 billion. Higher interest rates plus increased regulatory pressure caused significant declines in digital assets, reducing the value of the global crypto industry by nearly $2 trillion. The FTX bankruptcy added to the woes of now $1 trillion crypto market.

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Various market participants have been eyeing a way to gain approval from the SEC for a crypto marketplace where digital coins could be traded without fear of a regulatory backlash. Gensler, a former Goldman Sachs banker and MIT professor who taught a course on blockchain technology, has publicly stated that the vast majority of crypto tokens are being traded illegally as unregistered securities. He has singled out Bitcoin as possibly the only digital asset that is likely being traded as a commodity.

In the past few weeks, Gensler has brought enforcement actions against various crypto businesses including exchanges Kraken and Gemini for alleged SEC rule violations. He has also brought cases against entities selling allegedly unregistered coins, and the SEC continues to litigate a case brought by Gensler's predecessor, Jay Clayton, against cross-border payments company Ripple.

The SEC alleges that Ripple executives violated securities laws by failing to register the XRP token before various sales were used to finance the build out of the platform.

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Ripple has mounted a vigorous defense; the high-profile case is expected to conclude this year and the outcome will likely dictate how much authority the SEC has over regulating crypto.