said they were outraged. In 2020, Illuminate signed a strict data agreement with the district requiring the company to safeguard student data and promptly notify district officials in the event of a data breach.

kept student data on the Amazon Web Services online storage system. Cybersecurity experts said many companies had inadvertently made their A.W.S. storage buckets easy for hackers to find — by naming databases after company platforms or products.

a spate of cyberattacks on both ed tech companies and public schools, education officials said it was time for Washington to intervene to protect students.

“Changes at the federal level are overdue and could have an immediate and nationwide impact,” said Mr. Styer, the New York City schools spokesman. Congress, for instance, could amend federal education privacy rules to impose data security requirements on school vendors, he said. That would enable federal agencies to levy fines on companies that failed to comply.

One agency has already cracked down — but not on behalf of students.

Last year, the Securities and Exchange Commission charged Pearson, a major provider of assessment software for schools, with misleading investors about a cyberattack in which the birth dates and email addresses of millions of students were stolen. Pearson agreed to pay $1 million to settle the charges.

Mr. Balderas, the attorney general, said he was infuriated that financial regulators had acted to protect investors in the Pearson case — even as privacy regulators failed to step up for schoolchildren who were victims of cybercrime.

“My concern is there will be bad actors who will exploit a public school setting, especially when they think that the technology protocols are not very robust,” Mr. Balderas said. “And I don’t know why Congress isn’t terrified yet.”

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F.T.C. Sues to Block Meta’s Virtual Reality Deal as It Confronts Big Tech

WASHINGTON — The Federal Trade Commission on Wednesday filed for an injunction to block Meta, the company formerly known as Facebook, from buying a virtual reality company called Within, potentially limiting the company’s push into the so-called metaverse and signaling a shift in how the agency is approaching tech deals.

The antitrust lawsuit is the first under Lina Khan, the commission’s chair and a leading progressive critic of corporate concentration, against one of the tech giants. Ms. Khan has argued that regulators must stop competition and consumer protection violations when it comes to the bleeding edge of technology, including virtual and augmented reality, and not just in areas where the companies have already become behemoths.

The F.T.C.’s request for an injunction puts Ms. Khan on a collision course with Mark Zuckerberg, Meta’s chief executive, who is also named as a defendant in the request. He has poured billions of dollars into building products for virtual and augmented reality, betting that the immersive world of the metaverse is the next technology frontier. The lawsuit could crimp those ambitions.

in its lawsuit, which was filed in the U.S. District Court for the Northern District of California. “Instead, it chose to buy” a top company in what the government called a “vitally important” category.

attack on innovation and that the agency was “sending a chilling message to anyone who wishes to innovate in V.R.”

Meta had said it would acquire Within, which produces the highly popular fitness app called Supernatural, last year for an undisclosed sum. The company has promoted its virtual reality headsets for fitness and health purposes.

The F.T.C.’s lawsuit is highly unusual and pushes the boundaries of antitrust law. Regulators mostly focus on deals between large companies in large markets, rather than their acquisitions of small start-ups in nascent tech areas. Courts have also been skeptical applying antitrust law to block mergers based on the hypothetical that the two companies involved would later become competitors if the deal was blocked.

Instagram, the photo-sharing app that has since grown to more than one billion regular users. Instagram has helped Meta dominate the market on social photo sharing, though other start-ups have sprung up since.

lawsuit against Facebook that argued the company shut down nascent competition through acquisitions. The Justice Department has also sued Google over whether the company abused a monopoly over online search.

More cases could be coming. The F.T.C. is investigating whether Amazon has violated antitrust laws, and the Justice Department has inquiries into Google’s dominance over advertising technology and into Apple’s App Store policies.

For Mr. Zuckerberg, the F.T.C. lawsuit is a setback. He has been pushing Meta away from its roots in social networking as its apps, like Facebook and Instagram, face more competition amid stumbles in privacy and content moderation. Instead, he has bet on the metaverse.

Mr. Zuckerberg has reassigned employees and put a top lieutenant in charge of metaverse efforts. He has also authorized executives to pursue some of the most popular games in the V.R. space. In 2019, Facebook purchased Beat Games, makers of the hit title Beat Saber, one of the top V.R. games on the Oculus platform. He has also authorized the purchase of roughly half a dozen other virtual reality or gaming studios over the past three years.

The F.T.C. filed suit on Wednesday hours before Meta reported its first decline in quarterly revenue since it went public in 2012. The company has recently trimmed employee perks and reined in spending amid uncertain economic conditions. John Newman, the deputy director of the F.T.C.’s Bureau of Competition, said the agency acted on the Within deal because Meta was “trying to buy its way to the top.” The company already owned a best-selling virtual reality fitness app, he said, but then chose to acquire Within’s Supernatural app “to buy market position.” He said the deal was “an illegal acquisition, and we will pursue all appropriate relief.”

The F.T.C.’s vote to authorize the filing was split 3 to 2. Christine Wilson, a Republican commissioner at the agency, said she was one of the two votes against the lawsuit. She declined to comment on her reasoning.

The F.T.C. said in its request that asking for an injunction was sometimes a prelude to filing a complaint against a merger, which could embroil Meta and the agency in a lengthy trial and appeals process. A F.T.C. spokeswoman said the agency had not filed such a complaint and declined to comment further on the agency’s strategy.

Ms. Khan, 33, who was appointed by President Biden last year to acclaim from the left, has tried to make good on expansive promises to rein in corporate power. She became prominent after she wrote an article in law school in 2017 criticizing Amazon. As F.T.C. chair, she has called for regulators to vigorously enforce antitrust laws and has said she may craft sweeping online privacy rules that would implicate Silicon Valley companies.

The lawsuit drew praise from Ms. Khan’s allies. Sandeep Vaheesan, the legal director of the Open Markets Institute, a liberal think tank, said in a statement that the lawsuit was a “step toward making building, not buying, the norm for Facebook.”

But tech industry allies assailed Ms. Khan’s actions. Adam Kovacevich, the chief executive of Chamber of Progress, an industry group funded partly by Meta, said that with the new lawsuit, “the agency is more focused on getting headlines than results.” He said Meta “isn’t any closer than pickleball or synchronized swimming are to locking up the fitness market.”

Meta said in a blog post that the F.T.C. would fail to prove that the Within deal would “substantially lessen competition,” which is the bar that is typically set to block a deal under federal antitrust law.

In its lawsuit, the F.T.C. said that if Meta bought Within’s Supernatural, it would no longer have an incentive to improve Beat Saber, the virtual reality fitness game it already owns. But Nikhil Shanbhag, an associate general counsel for Meta, said in the blog post that the games weren’t competitors.

“Beat Saber is a game people play to have fun and it has many competitors,” he said. “Supernatural couldn’t be more different.”

Seamus Hughes contributed research.

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China Fines Didi $1.2 Billion as Tech Sector Pressures Persist

For Didi, once hailed as an innovator and disrupter in China’s staid transportation sector, it has been a fast fall from grace. The company was considered the pride of China’s spunky, and valuable, start-up scene in 2016 when it beat its American rival, Uber, and bought the firm’s Chinese operations. At the time, its executives vowed that the data it collected would be used to unsnarl traffic jams and eventually help develop driverless cars.

As Beijing has asserted greater control over internet firms like Didi, it has sought to shape a private sector more in line with the Communist Party’s focus on political security and meeting its policy goals. Popular attitudes about China’s tech sector, once an emblem of future achievement, appear to have shifted, too.

After the punishment was announced, a number of professors and tech commentators took to Weibo to call for even harsher punishments.

Jin Canrong, a professor of international relations at Renmin University, called the revelations of Didi’s violations “really shocking!” Didi “disregarded national security, disregarded national laws and disregarded citizens’ privacy,” he added. Others went further, wondering whether a company that jeopardized national security should be allowed to exist at all.

In the short term, the government will probably relent on Didi, allowing it to restore its apps in stores. But the company will still have to show that it has addressed the regulator’s concerns over data security and other issues, said Linghao Bao, an analyst at Trivium China, a China-focused policy research team.

“Big tech platforms are getting a break as the economy is not doing so well. Regulators are shifting from a campaign-style crackdown toward a more rules-based governance,” he said. “But tech regulation is here to stay over the long term.”

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Chinese Banking Scandal Tests Faith in Communist Party’s Leadership

BEIJING — The saving opportunity with the rural bank in central China looked, to Sun Song, a 26-year-old-businessman, like a great find. It would be linked to his existing account at a large, reputable state-owned bank. The rural bank was also offering high interest rates, making it seem like an ideal place to park his roughly $600,000 in savings.

Then the bank abruptly froze his account this year, and officials said they were investigating potential fraud. “I owe money on my credit card and have to repay my car loan,” he said. “I have two sons. They’re all waiting.”

The financial scandal ensnaring Mr. Sun and thousands of others across the country could pose a serious test to the ruling Communist Party, which prizes stability and its ability to control any threats to it. While the amount of money at risk is small relative to China’s economy, it strikes at the core promise of the party that it will provide a better future for the people.

slowest rate of growth since the beginning of the coronavirus pandemic.

physically attacked by a mob of men while police officers stood by. Many protesters have since reported being harassed by the police.

“The government takes our taxpayer money and then beats us,” Mr. Sun said in a phone interview before the authorities warned depositors against speaking to the media. “My worldview has been destroyed.”

tested by the economic slowdown, born in part of the government’s draconian campaign against the coronavirus and a regulatory crackdown on the once-booming real estate industry. This banking scandal has exposed more systemic issues in China’s financial system, including potential corruption and weak regulatory oversight at rural banks.

Zhiwu Chen, a professor of finance at the University of Hong Kong. “The extent of this anxiety shared by people is increasing very fast. It’s not good for social stability.”

surveillance apparatus, it is facing growing unease about the lack of safeguards to prevent the theft or misuse of personal data. Beijing’s move to censor news about one of the largest known breaches of a Chinese government computer system showed keen awareness of how security lapses can harm its credibility.

Immediately, officials tried to silence them. Censors shut down protesters’ messaging groups. The local authorities manipulated depositors’ mobile health codes — digital indicators that China uses to track coronavirus infections — to bar them from entering public spaces. But after the manipulation attracted widespread condemnation, local officials retreated, and protesters continued to gather, including on July 10.

Many of the demonstrators presented their demands as appeals, rather than challenges, to the Communist Party’s authority. Some waved Chinese flags. Others invoked Mr. Xi’s slogan of the “Chinese Dream” or carried a portrait of Mao Zedong. They were met with ferocity all the same. Men in plainclothes began hitting and kicking the protesters.

promised last week to repay the depositors — but only those who had put in less than 50,000 yuan, about $7,500, with details for the rest to be announced later. They also said they would not repay anyone who had used “additional channels” to obtain higher interest payments or those suspected of dealing with “illegal funds.”

Those stipulations were seemingly a nod to the police’s announcement about the suspected criminal gang. According to the police, the gang’s scheme included setting up illegal online platforms to solicit new customers.

Huang Lei, a lawyer in the eastern city of Hangzhou who has worked on fraud cases, said people who had unknowingly participated in an illegal scheme should still be entitled to repayment. But he acknowledged that, in reality, they might have little recourse.

“The other party is eager to characterize it as illegal — they’ve described it four or five different ways — because they don’t want to take responsibility,” he said of the authorities. Even if the depositors sued for repayment and won, he added, the bank might not have adequate assets to make them whole, and it was unclear if the state would make up the difference.

Indeed, the scandal has raised broader questions about who is accountable for the lost money, besides the suspected criminals.

the deteriorating economy has put more pressure on those same institutions. As a result, Professor Chen said, “I expect to see more rural banks having to face the same kind of problems as the Henan rural banks.”

There are most likely hidden debts spread across China’s financial sphere. The country’s seemingly unstoppable growth over the past few decades had encouraged speculative borrowing and lending behavior by everyone from online lenders to major real estate companies.

The government has sought to downplay concerns about a broader problem. China’s central bank said last week that 99 percent of China’s banking assets were “within the safe boundary.”

Still, it will now be up to the government to decide how to address the losses both in Henan and those yet to be revealed, said Michael Pettis, a professor of finance at Peking University. Officials could allow institutions to default, hurting lenders; they could squeeze workers; they could print more money, leading to inflation. In the end, Professor Pettis said, “somebody’s got to absorb the loss.”

For the Henan depositors, the fear is that it will be them.

Wang Xiaoping, a 39-year-old software industry employee from Hangzhou, said she had put about $95,000 into one of the rural banks. But all she had to show for it was an injured chin, from being attacked by a man wearing black at the Zhengzhou protest. She tried to report the assault to the police, but they told her to go to another district, she said.

“I told the police, I’m willing to die here,” she said in an interview on July 10. “This is my entire net worth, this is all of my paychecks put together, and it’s gone just like that.”

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Word of Trump Media Deal Is Said to Have Leaked Months in Advance

Months before former President Donald J. Trump’s social media company unveiled an agreement to raise hundreds of millions of dollars last fall, word of the deal leaked to an obscure Miami investment firm, whose executives began plotting ways to make money off the imminent transaction, according to people familiar with the discussions.

The deal — in which a so-called special purpose acquisition company, or SPAC, would merge with Mr. Trump’s fledgling media business — was announced in October. It sent shares of the SPAC soaring.

Employees at the Miami investment firm, Rocket One Capital, had learned of the pending deal over the summer, long before it was announced, according to three people familiar with the firm’s internal discussions. Two of the people said that Rocket One officials at the time talked about ways to profit off the soon-to-be-announced transaction with Trump Media & Technology Group by investing in the SPAC, Digital World Acquisition Corporation.

a surge in trading in a type of security known as warrants, which entitled investors to buy shares of Digital World at a preset price in the future.

Federal prosecutors and regulators are now investigating the merger between Digital World and Trump Media, including the frenzied trading in the SPAC’s warrants, according to people familiar with the investigation and public disclosures. Digital World said in a recent regulatory filing that a federal grand jury in Manhattan had issued subpoenas seeking information about Rocket One, among other things.

The exact scope of the federal investigations remains unclear. Authorities have not accused anyone of wrongdoing, and representatives of Mr. Garelick and others denied doing anything improper.

A lawyer for Rocket One and its founder, Michael Shvartsman, denied that they had any advance knowledge of the merger between Digital World and Trump Media. He added that “any assertion otherwise is untrue.”

a recent news release that neither Mr. Trump nor Devin Nunes, the former California congressman who is the company’s chief executive, received grand jury subpoenas. (The release identified the men only by their job titles.)

The investigation into unusual trading in Digital World securities is the latest blow to Mr. Trump’s social media venture, which has struggled with technological problems and slow user growth.

Federal authorities are also investigating whether Digital World’s disclosures about the merger talks with Trump Media violated rules governing SPACs. And the Securities and Exchange Commission is considering whether to block the merger, according to regulatory filings by Digital World. If the deal doesn’t go through, it would deprive Trump Media of $1.3 billion.

There is scant public information about Rocket One, which has fewer than 10 employees and has made about 20 early-stage investments over the past decade, according to a review of archived web pages and an analysis by PitchBook, a data company. Rocket One disabled its website soon after its name appeared in a Digital World regulatory filing.

Two of the people familiar with Rocket One’s internal discussions said Mr. Garelick, a former Boston hedge fund manager who is now Rocket One’s chief strategy officer, mentioned the possible deal with Trump Media to some employees last summer. Around that time, a Rocket One employee was told to conduct a financial analysis of Digital World, including its warrants, one of the people said.

investigate whether the leaders of Digital World and Trump Media started negotiating a potential merger before Digital World sold shares through an initial public offering in September. At the time of Digital World’s initial public offering, the company said in public filings that it had not yet identified a merger target. But The New York Times previously reported that talks between Mr. Orlando and Trump Media officials were already underway.

previously reported that they were involved in some of the early talks with Mr. Orlando.

Mr. Moss and Mr. Litinsky, who at one time were senior executives with Trump Media, didn’t respond to requests for comment. Mr. Litinsky no longer works for Trump Media; Mr. Moss’s job status is unclear.

Securities regulators also have asked for information from Digital World about the role played by the SPAC’s financial adviser, Shanghai-based ARC Group, according to regulatory filings. Federal regulators previously have reprimanded ARC. In 2017, the S.E.C. stopped ARC’s executives from listing shares of three companies, citing “material misstatements” in their securities filings and a lack of cooperation from the executives.

Ben Protess contributed reporting. Susan C. Beachy contributed research.

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ISS urges Spirit shareholders to vote for Frontier offer

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June 25 (Reuters) – Proxy advisory firm Institutional Shareholder Services Inc (ISS) has urged shareholders of Spirit Airlines Inc (SAVE.N) to vote for a proposed merger with Frontier Group Holdings Inc (ULCC.O).

“On balance, support for the merger with Frontier on the revised terms is warranted,” the proxy advisory firm said in a report published late Friday and made public on Saturday.

Spirit is the subject of a bidding war between Frontier and JetBlue Airways Corp (JBLU.O).

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The proxy advisory firm last month asked Spirit shareholders to reject Frontier’s offer, saying JetBlue’s competing offer of $30 a share is superior from a financial standpoint. read more

Earlier this month, New York-based JetBlue sweetened its offer for Spirit by $2 to $33.50 per share in cash. read more

Spirit Airlines on Friday said that Frontier raised its cash offer by $2 per share to buy the airline and urged its shareholders to back a merger deal with Frontier at a meeting next week. read more

Spirit shareholders are due to vote on the merger deal with Frontier on June 30.

ISS also said the current offer from Frontier appears preferable as it matches the $2.00 increase in JetBlue’s offer price and also provides a higher prepayment of $2.22 per share compared to $1.50 per share from JetBlue.

Denver-based Frontier also increased its reverse termination fee to Spirit by $100 million to $350 million.

Florida-based Spirit has repeatedly rejected JetBlue’s offer, saying it has a low likelihood of winning approval from U.S. regulators.

However, JetBlue has been persistent and said it continued to believe its proposal was superior to Frontier’s adding that it will “more thoroughly” review and assess the revised terms of Frontier’s proposal.

(This story corrects story link in paragraph 5)

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Reporting by Mrinmay Dey in Bengaluru
Editing by Alistair Bell

Our Standards: The Thomson Reuters Trust Principles.

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Russian gas flows to Europe fall, hindering bid to refill stores

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  • Nord Stream 1 pipeline capacity down to 40%
  • Europe’s gas price jumps up to 30% after disruption news
  • Gazprom blames cuts on equipment delays from Canada
  • Freeport LNG terminal in U.S. offline until September

LONDON, June 16 (Reuters) – Russian gas supply to Europe via the Nord Stream 1 pipeline fell further on Thursday and Moscow said more delays in repairs could lead to suspending all flows, putting a brake on Europe’s race to refill its gas inventories.

The faltering flows came as the leaders of Germany, Italy and France visited Ukraine, which is pressing for swifter weapons deliveries to battle invading Russian forces and wants support for Kyiv’s bid to join the European Union. read more

Russia’s state-controlled Gazprom said it was reducing gas supply for a second time in as many days via Nord Stream 1, which runs under the Baltic to Germany. The latest move cuts supply to just 40% of the pipeline’s capacity.

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Kremlin spokesperson Dmitry Peskov said reductions in supply were not premeditated and related to maintenance issues, a reference to earlier comments saying Russia was unable to secure the return of equipment sent to Canada for repairs. read more

Germany said Russia’s excuse was technically “unfounded” and was instead aimed at driving up gas prices. Italy said Moscow might be use the issue to exert political pressure. read more

Dutch wholesale gas prices , the European benchmark, jumped around 30% on Thursday afternoon.

Russia’s ambassador to the European Union told state news agency RIA Novosti flows via the pipeline could be completely suspended because of problems in repairing turbines in Canada.

Alexey Miller, the chief executive of Gazprom, the state-controlled company with a monopoly on Russian gas exports by pipeline, said Western sanctions made it impossible to secure the return of equipment from Canada for the pipeline’s Portovaya compressor station. read more

EUROPE RACES TO REFILL STORAGE

Nord Stream 1 has capacity to pump about 55 billion cubic metres (bcm) a year to the European Union, which last year imported about 140 bcm of gas from Russia via pipelines.

Germany, like other European countries, is racing to refill its gas storage facilities so they are 80% full by October and 90% by November before winter arrives. Stores are 52% full now.

Cutting flows through Nord Stream 1 would make that job harder, the head of the Germany energy regulator said.

“We could perhaps get through the summer as the heating season is over. But it is imperative that we fill the storage facilities to get through the winter,” Klaus Mueller told Thursday’s edition of Rheinische Post daily.

Uniper (UN01.DE), Germany’s biggest importer of Russian gas, said supplies were down a quarter on agreed volumes but it could fill missing volumes from other sources. Power producer RWE (RWEG.DE) said it had seen restrictions in the past two days.

Slovakia’s state-owned gas importer SPP said it expected Thursday’s Russian gas deliveries to be reduced by about 30%, while Czech power utility CEZ (CEZP.PR) said it had seen a similar fall but was filling the gap from other sources.

The European Union aims to ensure gas storage facilities across the 27-nation bloc are 80% full by November. read more

The latest reduction in supply could mean northwest European storage only 88% full by the end of October – 1 bcm less than planned – instead of 90%, analysts at Goldman Sachs said.

DRAWING UP CONTINGENCY PLANS

Germany is not alone in facing falling supplies.

Austria’s OMV (OMVV.VI) said Gazprom informed it of reduced deliveries, France’s Engie (ENGIE.PA) said flows had down but clients were not affected, while Italy’s Eni (ENI.MI) said it would receive 65% of the volumes it had requested from Gazprom.

The Italian government said all possible measures were in place to deal with the situation if gas supply cuts from Russia continued in coming days. Other European countries have also drawn up contingency plans.

Adding to the challenge, Nord Stream 1 will shut completely during the pipeline’s annual maintenance on July 11-21.

Norway, Europe’s second biggest exporter behind Russia, has been pushing up production to help the European Union towards it target of ending reliance on Russian fossil fuels by 2027.

Britain’s Centrica (CNA.L) signed a deal with Norway’s Equinor (EQNR.OL) for extra gas supplies to the United Kingdom for the next three winters. Britain does not rely on Russian gas and can also export to Europe via pipelines.

European states have also boosted liquefied natural gas (LNG) imports but Europe has limited LNG import capacity and the already tight LNG market has faced additional challenges with disruptions to U.S. LNG production. read more

A fire last week at a U.S. LNG export plant in Texas, operated by Freeport LNG, means the plant will be offline until September and will operate only partially from then until the end of 2022.

The facility, which accounts for about 20% of U.S. LNG exports, has been a major supplier to European buyers.

“There is risk of further delay, in our view,” analysts at investment bank Jefferies said, adding that regulators need to approve the restart while two investigations were ongoing into the cause of the LNG leak at the plant.

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Reporting by Reuters, Giuseppe Fonte in Rome, Alexandra Schwarz-Goerlich in Vienna, Jan Lopatka in Prague, Madelaine Chambers in Berlin, Nina Chestney in London; Writing by Nina Chestney; Editing by Jason Neely and Edmund Blair

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Analysis: Crypto-lending firms likely to see greater regulation after Celsius troubles

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WASHINGTON, June 16 (Reuters) – Liquidity troubles at crypto lending platform Celsius Network, which have left its 1.7 million customers unable to redeem their assets, will increase U.S. regulatory pressure on the sector, which was already on the defensive amid other crises this year.

The industry has been battling scrutiny over concerns that digital assets are being used to evade sanctions on Russia and the May collapse of cryptocurrency TerraUSD, which sent the market plunging and raised systemic risk worries. read more

New Jersey-based Celsius’s move this week to freeze withdrawals, citing “extreme” market conditions, has spotlighted other problems with the crypto sector: weak investor safeguards.

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Securities regulators in Alabama, Kentucky, New Jersey, Texas and Washington have opened an investigation into the Celsius decision, the director of enforcement for the Texas State Securities Board told Reuters on Thursday. read more

Crypto executives say recent problems show U.S. regulators have been too slow to provide the clarity necessary to protect everyday Americans, but they expect that to change fast.

“We are now seeing the consequences of regulators failing to provide clarity,” said Perianne Boring, founder and CEO of the Chamber of Digital Commerce. “I am hopeful that recent events will accelerate efforts to deliver clearer policies to the industry and certainty to those who invest in digital assets.”

Recent turmoil in the cryptocurrency market underscores the “urgent need” for regulatory frameworks that reduce digital asset risks, a U.S. Treasury official said on Thursday.

Crypto lenders gather crypto deposits from retail customers and re-invest them. Sometimes touting double-digit returns, such products have attracted tens of billions of dollars in assets. As its investments soured amid the crypto market slump, however, Celsius was unable to meet redemptions. read more

Unlike traditional financial firms, crypto lenders operate in a regulatory grey area which means their deposits are not insured by the government, a risk Celsius discloses on its website. Like many peers, Celsius has not registered with the Securities and Exchange Commission (SEC), meaning it was subject to few risk management, capital and disclosure rules.

As a result, its customers had little visibility over how it was investing their assets, and it’s unclear if they will get them back.

“At bare minimum, depositors/investors need to understand the risks they are taking,” said Todd Phillips, director of financial regulation at the Center for American Progress, a Washington think tank.

Celsius CEO Alex Mashinsky tweeted on Wednesday that the company was focused on customer concerns.

While bank regulators believe they need Congress to give them oversight of crypto companies, securities regulators had begun cracking down on lending products over the past year or so.

To be sure, Celsius has been on their radar. In September, regulators in Kentucky, New Jersey and Texas hit Celsius with a cease and desist order, arguing its interest bearing products should be registered as a security.

The SEC meanwhile last year blocked a Coinbase Global Inc plan to launch a lending product and sued lending platform BitConnect for fraud.

In February, the SEC and state regulators fined BlockFi $100 million for failing to register its crypto lending product. The SEC said the deal should provide a roadmap for other crypto lenders to register their products, although its unclear how many companies are poised to follow. read more

The SEC and regulators in Kentucky, New Jersey, and Texas did not immediately respond to request for comment on Thursday. On Tuesday, SEC chair Gary Gensler warned that some crypto product returns my be “too good to be true.”

Registering crypto lending products would not eliminate all risks to investors, but would increase transparency around such products and ensure some risk management controls, said experts.

Many companies, though, want to avoid that burden, putting the onus on regulators to bring enforcement actions, which take years to build. Still, lawyers said the SEC would likely increase such efforts. read more

“Given the SEC’s general aggressiveness under Gensler…the agency is likely combing through the statutes to find claims that can be brought regarding crypto lending,” said Howard Fischer, a partner at law firm Moses & Singer.

Some industry executives welcome more regulation, which would see the best companies rise to the top. In February, rating agency Fitch said increased disclosures and requirements would be “credit positive” for the lending sector.

“Investors wants to know that their assets are secure,” said Mike Belshe, CEO of BitGo, a digital asset trust company. “We’re going to see a shakeout of healthy companies that manage risk well.”

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Writing by Michelle Price; Additional reporting by Andrea Shalal in Washington;
Editing by Nick Zieminski

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EXCLUSIVE Texas securities regulator is probing Celsius account freeze – official

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WASHINGTON, June 16 (Reuters) – State securities regulators in Alabama, Kentucky, New Jersey, Texas and Washington are investigating crypto lender Celsius Network’s decision this week to suspend customer redemptions, Joseph Rotunda, enforcement director at the Texas State Securities Board told Reuters on Thursday.

Officials met and began investigating the matter first thing Monday morning, Rotunda said, adding he considered the probe to be a “priority.”

Celsius said that due to extreme market conditions, it was pausing withdrawals, swaps and transfers between accounts. The company said that doing so would put it “in a better position to honor, over time, its withdrawal obligations.” read more

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“I am very concerned that clients – including many retail investors – may need to immediately access their assets yet are unable to withdraw from their accounts. The inability to access their investment may result in significant financial consequences,” he said.

Alabama Securities Commission Director Joseph Borg also told Reuters that Alabama, Texas, New Jersey and Kentucky securities regulators were probing the matter. Celsius has been responsive to questions from the regulators, but that the investigation is in the initial stages, he said.

Borg added that U.S. Securities and Exchange Commission has also been in communication with Celsius.

The SEC declined to comment. The New Jersey and Washington state securities regulators did not immediately respond to requests for comment. A spokesperson for the Kentucky Department of Financial Institutions said it was their policy to not comment on ongoing enforcement actions and investigations.

Celsius and CEO Alex Mashinsky did not immediately respond to a request for comment.

Rotunda said he and his team learned of the move by New Jersey-based Celsius to freeze user withdrawals from the company’s blog post and announcement on Twitter on Sunday night, which said the company needed to take action to “stabilize liquidity.”

In September, regulators in Kentucky, New Jersey and Texas hit Celsius with a cease and desist order, arguing its interest-bearing products should be registered as a security. In February, the SEC and those same state regulators fined BlockFi $100 million for failing to register its crypto lending product.

Similar to a bank, Celsius gathers crypto deposits from retail customers and invests them in the equivalent of the wholesale crypto market, including “decentralized finance,” or DeFi, sites that use blockchain technology to offer services from loans to insurance outside the traditional financial sector. read more

Celsius promises retail customers huge returns, sometimes as much as 18.6% annually. The lure of big profits has led individual investors to pour assets into Celsius and platforms like it.

Mashinsky said in October Celsius had $25 billion in assets. That figure had fallen to around $11.8 billion as of last month, the Celsius website showed.

Celsius appears to have stumbled on some of its wholesale crypto investments, according to public blockchain information and analysts who track such data. As those investments soured, the company was unable to meet redemptions from customers fleeing amid the broader crypto market slump, analysts said. read more

Cryptocurrencies have lost more than $400 billion since TerraUSD, a major stablecoin pegged to the U.S. dollar, collapsed in May. Bitcoin sank to an 18-month low on Wednesday to $20,079.72. It has slumped about 70% from its record high of $69,000 in November. read more

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Reporting by Hannah Lang; Editing by Richard Chang, Nick Zieminski, Michelle Price and Diane Craft

Our Standards: The Thomson Reuters Trust Principles.

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Crypto Firms Quake as Prices Fall

SAN FRANCISCO — No one wanted to miss out on the cryptocurrency mania.

Over the last two years, as the prices of Bitcoin and other virtual currencies surged, crypto start-ups proliferated. Companies that market digital coins to investors flooded the airwaves with TV commercials, newfangled lending operations offered sky-high interest rates on crypto deposits and exchanges like Coinbase that allow investors to trade digital assets went on hiring sprees.

A global industry worth hundreds of billions of dollars rose up practically overnight. Now it is crashing down.

After weeks of plummeting cryptocurrency prices, Coinbase said on Tuesday that it was cutting 18 percent of its employees, after layoffs at other crypto companies like Gemini, BlockFi and Crypto.com. High-profile start-ups like Terraform Labs have imploded, wiping away years of investments. On Sunday, an experimental crypto bank, Celsius, abruptly halted withdrawals.

dropped by about 65 percent since autumn, and analysts predict the sell-off will continue. Stock prices of crypto companies have cratered, retail traders are fleeing and industry executives are predicting a prolonged slump that could put more companies in jeopardy.

stocks crashing, interest rates soaring and inflation high, cryptocurrency prices are also collapsing, showing they have become tied to the overall market. And as people pull back from crypto investments, the outflow is exposing the unstable foundations of many of the industry’s most popular companies.

OpenSea, the largest marketplace for the unique digital images known as nonfungible tokens, reached a staggering $13 billion valuation. And Wall Street banks such as JPMorgan Chase, which previously shunned crypto assets, and Fortune 500 companies like PayPal rolled out crypto offerings.

confidence evaporated in the early 2000s, many of the dot-coms went bust, leaving just the biggest — such as eBay, Amazon and Yahoo — standing.

This time, investors predict there will be more survivors. “You certainly have some overhyped companies that don’t have the fundamentals,” said Mike Jones, an investor at the venture firm Science Inc. “But you also have some really strong companies that are trading way below where they should.”

There have been warning signs that some crypto companies were not sustainable. Skeptics have pointed out that many of the most popular firms offered products underpinned by risky financial engineering.

Terraform Labs, for example, offered TerraUSD, a so-called stablecoin with a fixed value linked to the U.S. dollar. The coin was hyped by its founder, Do Kwon, who raised more than $200 million from major investment firms such as Lightspeed Venture Partners and Galaxy Digital, even as critics warned that the project was unstable.

The coin’s price was algorithmically linked to a sister cryptocurrency, Luna. When the price of Luna plummeted in May, TerraUSD fell in tandem — a “death spiral” that destabilized the broader market and plunged some investors into financial ruin.

drew scrutiny from several state regulators. In the end, a drop in crypto prices appeared to put the company under more pressure than it could withstand.

With the price of Bitcoin tumbling, Celsius announced on Sunday that it was freezing withdrawals “due to extreme market conditions.” The company did not respond to a request for comment.

The market instability has also triggered a crisis at Coinbase, the largest U.S. crypto exchange. Between the end of 2021 and late March, Coinbase lost 2.2 million active customers, or 19 percent of its total, as crypto prices dropped. The company’s net revenue in the first three months of the year shrank 27 percent from a year earlier, to $1.2 billion. Its stock price has plunged 84 percent since it went public last year.

This month, Coinbase said it would rescind job offers and extend a hiring freeze to battle the economic downturn. On Tuesday, it said it would cut about 1,100 workers.

Brian Armstrong, Coinbase’s chief executive, informed employees of the layoffs in a note on Tuesday morning, saying the company “grew too quickly” as crypto products became popular.

“It is now clear to me that we over-hired,” he wrote. A Coinbase spokesman declined to comment.

“It had been growth at all costs over the last several years,” said Ryan Coyne, who covers crypto companies and financial technology at the Mizuho Group. “It’s now turned to profitable growth.”

memo to staff, the Winklevoss twins said the industry had entered a “crypto winter.”

commercial starring the actor Matt Damon, who declared that “fortune favors the brave” as he encouraged investors to put their money in the crypto market. Last week, Crypto.com’s chief executive announced that he was laying off 5 percent of the staff, or 260 people. On Monday, BlockFi, a crypto lending operation, said it was reducing its staff by roughly 20 percent.

Gemini and BlockFi declined to comment. A Crypto.com spokesman said the company remains focused on “investing resources into product and engineering capabilities to develop world-class products.”

Cryptocurrencies have long been volatile and prone to boom-and-bust cycles. In 2013, a Chinese ban on Bitcoin sent its price tumbling. In 2017, a proliferation of companies creating and selling their own tokens led to a run-up in crypto prices, which crashed after regulators cracked down on so-called initial coin offerings.

These bubbles are built into the ecosystem, crypto enthusiasts said. They attract talented people to the industry, who go on to build valuable projects. Many of the most vocal cheerleaders encourage investors to “buy the dip,” or invest more when prices are low.

“We have been in these downward spirals before and recovered,” Mr. Jones, the Science Inc. investor, said. “We all believe in the fundamentals.”

Some of the companies have also remained defiant. During Game 5 of the N.B.A. finals on Monday night, Coinbase aired a commercial that alluded to past boom-and-bust cycles.

“Crypto is dead,” it declared. “Long live crypto.”

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