(Bloomberg) -- IEX Group Inc., owner of the stock exchange made famous by “Flash Boys,” is looking for a new crypto partner after FTX’s crash ended a collaboration the pair started earlier this year. 

IEX has cut its ties with FTX, the digital-asset firm which spiraled into bankruptcy last week, according to people familiar with the situation. In April, FTX US acquired a stake in IEX as part of an effort to expand access to digital assets for retail and institutional investors. That stake represented less than 20% of the company, the people said. 

Companies are trying to distance themselves from the collapsed FTX amid an onslaught of revelations about the firm’s demise and spreading industry contagion. Former Chief Executive Officer Sam Bankman-Fried was a driving force behind crypto’s campaign to penetrate traditional finance, efforts that are likely to draw deeper regulator scrutiny in the wake of his firm’s downfall. 

For exchange operator IEX, the FTX relationship offered an opportunity to leverage its registration with the US Securities and Exchange Commission and gain a crucial first-mover advantage in the crypto industry, the people said. Although IEX scrapped those plans amid FTX’s collapse, the firm is still keen to enter digital-asset trading.

“Our goal is to help shape the future market structure for digital asset securities, which we believe is a key factor in the digital-asset sector reaching its full potential,” IEX said in a statement to Bloomberg. “We remain focused on that goal and intend to continue constructive engagement with regulators and other market participants.” 

FTX’s recent bankruptcy has no impact on IEX’s business, which didn’t extend beyond the equity stake, it said. The crypto platform’s stake in IEX is non-transferable, restricted and cannot be sold to a third party without IEX’s consent, according to its statement. IEX said it’s evaluating legal options related to the transaction and declined to comment further. 

An FTX US official declined to comment.

SEC Meetings

IEX, the exchange operator featured in the Michael Lewis book “Flash Boys” about high-frequency trading, launched its securities exchange in 2016. The firm sees itself as a champion for market integrity and fairness in pricing for participants.

Speculation began to swirl around IEX’s plans for crypto after its executives and those from FTX met with SEC Chair Gary Gensler in March. The meeting included Bankman-Fried as well as staff from FTX US: former President Brett Harrison, general counsel Ryne Miller and head of policy and regulatory strategy Mark Wetjen. The discussion centered on possible ways to establish an SEC-registered crypto platform, the people said.

In that meeting, which lasted just under an hour, the two firms tried to pitch an alternative trading system to trade digital-asset securities. Such exchanges typically have less onerous rules than traditional exchanges. They got to the first slide on their presentation when Gensler swiftly rejected the idea, saying he wanted to see the full sweep of investor protections that an exchange would provide. 

Over the following months, IEX went back to the drawing board and continued talks with regulators over how an exchange design might work. But indications that the plan was cracking began to emerge, as Bankman-Fried and other executives at the crypto exchange had become less responsive, the people said. FTX was also deeply invested in legislative efforts to give the Commodity Futures Trading Commission more power to oversee digital assets. 

Read more: FTX US Invests in ‘Flash Boys’ Exchange in Crypto-Trading Push

The thinking was IEX would operate an exchange with broker-dealers -- people or companies that trade securities for themselves or on behalf of customers -- as members. FTX could have applied for a special purpose broker-dealer license and become a member of the exchange along with others, or, FTX could have possibly received new licenses from the SEC to provide custodial services to IEX, the people said. The digital-asset firm’s involvement was important to IEX because it was well-known in the crypto industry and had crucial infrastructure. 

The SEC has met with other companies -- both in traditional finance and crypto -- but the IEX-FTX plan was the furthest along and the closest to what Gensler was looking for, one of the people said. Still, it would have been a long time before a formal deal was reached because the options being explored would have required them to work with the SEC’s Division of Trading and Markets on a filing, which would have to be circulated among the commissioners and ultimately come to a vote.

A representative for the SEC declined to comment.

--With assistance from Lydia Beyoud.

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