The recent charges brought by the U.S. Securities and Exchange Commission against Galois Capital, a crypto-focused advisory firm, highlight a crucial oversight in the firm’s operations. The SEC found that Galois failed to ensure that the crypto assets held by the private fund it was advising were secured with a qualified custodian. Instead, the firm entrusted these assets to unqualified crypto trading platforms, such as FTX. This failure to uphold basic custodial responsibilities exposed clients to significant risks and ultimately led to losses amounting to approximately half of the fund’s assets under management.
The collapse of FTX, a major crypto trading platform, resulted in the largest corporate crypto failure in history, causing customers to lose $8 billion and investors to lose $1.7 billion. The subsequent trial of FTX’s CEO, Sam Bankman Fried, revealed fraudulent activities on the part of the executives, including unauthorized trading and mismanagement of customer funds. This chain of events triggered a wave of contagion, leading to the bankruptcy of other firms that had placed their trust in FTX, such as BlockFi, Genesis, and Gemini Earn. While some companies, like Gemini, were able to recover the majority of assets for their users, FTX creditors are unlikely to regain their losses in full due to the collapse of the platform.
In addition to the custodial failures, the SEC also found that Galois misled investors by providing conflicting information about withdrawal procedures. Some investors were told that withdrawals required five business days’ notice before the end of the month, while others were allowed to redeem their investments on shorter notice. This inconsistency exposed investors to additional risks and undermined their trust in the firm’s operations. Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, underscored the importance of holding advisers accountable for violating core investor protection obligations.
As part of the settlement with the SEC, Galois Capital agreed to pay a civil penalty of $225,000 and to abide by an order prohibiting further violations of the Investment Advisers Act. While the firm did not admit to the allegations, it sought to put the matter behind it and emphasized its use of Fireblocks as a crypto custodian. Despite Fireblocks not being a qualified custodian, Galois defended its decision by claiming that it was the best solution for securing crypto assets at the time.
The charges brought against Galois Capital by the SEC shed light on the critical importance of upholding fiduciary responsibilities and protecting investor interests in the crypto industry. The firm’s failure to ensure proper custody of client assets and its misleading practices underscore the need for greater regulatory oversight and transparency in the sector. Moving forward, it is imperative for advisory firms to prioritize investor protection and compliance with regulatory requirements to maintain trust and credibility in the market.
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