SEC Sues Galois Capital Over Custodian Violations, Settles for $225K Amid FTX Controversy

• The SEC has reached a settlement with the now-defunct crypto hedge fund Galois Capital, which has drawn attention due to its regulatory implications.
• Galois Capital was accused of using unqualified custodians, namely crypto exchanges like FTX, for asset management, thereby putting investors’ funds at risk.
• Kevin Zhou, co-founder of Galois, emphasized the challenges of operating in a rapidly evolving regulatory landscape and noted that the settlement, while not an admission of guilt, allows them to move forward.

In a significant outcome for the cryptocurrency sector, the SEC settles a lawsuit with Galois Capital, revealing regulatory lapses and shaping future compliance for crypto fund managers.

Galois Capital’s Alleged Regulatory Violations

The Securities and Exchange Commission (SEC) has taken a stern stance against Galois Capital, a crypto hedge fund that failed to adhere to established regulatory frameworks. The agency accused Galois of not employing qualified custodians to safeguard its digital assets, instead relying on platforms such as FTX, which are not recognized custodians under U.S. law. The implications of this decision are significant, as they raise questions about asset protection within the rapidly evolving cryptocurrency market.

Settlement Details and Financial Repercussions

Following a lengthy two-year investigation, Galois Capital has settled the charges with the SEC for $225,000, designated for the benefit of affected investors. While Galois did not admit to any wrongdoing, the settlement underlines the necessity for compliance within the crypto finance realm. This case is emblematic of larger trends in regulation as agencies pivot to enforce stricter guidelines for asset management in digital currencies.

Operational Decisions and Investor Communication

In addition to custodianship concerns, Galois faced scrutiny over its investor communication practices. The SEC suggested that Galois misled investors regarding the redemption process for their funds, initially indicating a five-day notice period, yet some clients were granted exits with shorter notifications. Zhou defended this practice, explaining it was intended to better serve investors’ needs, albeit it raises questions about transparency and consistency in financial reporting practices.

The Impact of Market Events on Galois

Historically, Galois Capital gained notoriety in the crypto space by shorting Terra’s LUNA token just before its catastrophic fall, which had a profound impact on the market. However, the firm subsequently experienced significant losses, particularly following the FTX collapse, which led to a dramatic downturn in their assets. Ultimately, Galois shut down operations in February 2023, highlighting the inherent volatility and risk that permeate the cryptocurrency landscape.

Conclusion

The settlement between the SEC and Galois Capital not only underscores the need for compliance but also serves as a cautionary tale for other crypto firms striving to navigate the complexities of regulation. As the industry adapts to evolving legal frameworks, this case may influence the operational strategies of future hedge funds and digital asset managers, emphasizing the importance of transparency and qualified custody in protecting investor interests.