U.S. regulator probes FTX over handling of client funds - source

FTX logo is seen in this illustration taken, November 8, 2022. REUTERS/Dado Ruvic/Illustration

WASHINGTON, Nov 9 (Reuters) - The U.S. securities regulator is investigating crypto exchange FTX.com's handling of customer funds amid a liquidity crunch, as well its crypto-lending activities, a source with knowledge of the inquiry said on Wednesday.

The Securities and Exchange Commission (SEC) is examining whether the platform is following securities laws related to segregation of customer assets and trading against customers, the source said. The probe began a number of months ago.

The Commodity Futures Trading Commission (CFTC) is also probing the issue, Bloomberg reported earlier on Wednesday.

Bloomberg also reported that the Department of Justice (DOJ) is looking into the turmoil and officials are working with SEC.

A DOJ spokesperson declined to comment on the Bloomberg report.

FTX.com did not immediately respond to Reuters' requests for comment.

The crypto industry has been in tumult as speculation about FTX's financial health snowballed into $6 billion of withdrawals in the 72 hours before Tuesday morning. Crypto giant Binance later on Tuesday said it signed a non-binding agreement to buy FTX's non-U.S. unit to help cover a "liquidity crunch" at the rival exchange.

The SEC is also scrutinizing the firm's relationship with its U.S. counterpart FTX US and Chief Executive Officer Sam Bankman-Fried's proprietary trading firm, the source said.

An SEC spokesperson declined to comment, saying: "The SEC does not comment on the existence or nonexistence of a possible investigation."

A CFTC spokesperson also declined to comment.

The SEC has ratcheted up scrutiny of the crypto industry under Democratic leadership. Chair Gary Gensler has previously raised concerns about whether crypto platforms are properly segregating assets and whether they are trading against their customers with their market-making activities.

Earlier this year, a subsidiary of crypto firm BlockFi Inc agreed to pay a record penalty to settle charges related to its retail lending product. Other companies like FTX allow users to "stake" certain crypto tokens in exchange for a yield.

Reporting by Chris Prentice in Washington and Niket Nishant in Bengaluru; Editing by Maju Samuel, Anna Driver and Sherry Jacob-Phillips

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