Sam Bankman-Fried, FTX, and the future of cryptocurrency regulation

There are now far more questions than answers about what happened to FTX, the cryptocurrency exchange that collapsed last week. Can the account holder get his money back? Will Sam Bankman-Fried, also known as SBF, be criminally charged? What will happen to everyone who receives his donations?Is it the beginning of the end of cryptocurrencies?

And the question before us is: Why did this happen, and what can we do to prevent it from happening again? Bankman-Fried, his trading firm Alameda Research, And since much of the initial research into FTX is just beginning, the answer to this question is complicated. Yet calls for regulation of an industry that has long been touted as one of its key characteristics, lack of regulation, have already been reinvigorated.

These demands are now getting louder and everyone seems to agree that something needs to be done about crypto regulation. Meanwhile, FTX has already filed for bankruptcy, but the Bahamas liquidator said Wednesday that it rejected the “validity” of the proceedings.

“FTX’s bankruptcy is devastating and alarming, but not surprising at the same time,” said Sen. Cynthia Ramis, who co-authored the crypto bill earlier this year with Sen. Republican-Wyoming) said: , told Recode. “The bottom line is that comprehensive regulation needs to be put in place to keep the bad guys out and ensure that consumers can trust the institutions they trust with their hard-earned money.”

While the FTX crash didn’t crash the stock market, other cryptocurrency platforms are certainly feeling the ripple effect, with Washington leaders calling for more or better regulation across cryptocurrencies. Senator Elizabeth Warren (D-Massachusetts) tweeted on Friday that the collapse of FTXstronger rulesConversely, cryptocurrency supporter Rep. Jake Oakincross (D-Massachusetts) said some of the proposals Congress is already considering should be taken into account. US Treasury Secretary Janet Yellen said the FTX demise is evidence that crypto platforms need better protection for their customers, while Securities and Exchange Commission Chairman Gary Gensler said the wider crypto industry Many of them claimed they were “non-compliant” with existing regulations.

Some have accused investors of not scrutinizing FTX more closely before giving the company billions of dollars. aloud about their dissatisfaction with the government’s current approach. A lot of people are mad at the SEC, especially Gensler. Rep. Tom Emmer (R-Minnesota), who co-leads the Congressional Blockchain caucus, said: defendant The SEC, which backed FTX and Bankman-Fried in trying to establish a monopoly, and Coinbase CEO Brian Armstrong accused the commission of not doing so. Clarification of regulationsSome crypto skeptics basically think the SEC has dropped the ball.

Software engineer and prominent crypto industry critic Stephen Diehl said, “The FTX collapse was a failure of financial regulators. There are no cops in the crypto market.”

FTX is not the first financial institution to go bankrupt amid fraud allegations. Still, the expert told his Recode that the legal gray area in which cryptocurrencies operate appears to make this outcome more likely. Crypto exchanges are not regulated like banks and brokerage firms. This lack of oversight has made cryptocurrencies a more speculative investment and more attractive to some investors, but it has also made FTX a riskier place to store assets. rice field. Crypto accounts do not have federal deposit insurance.

Rohan Gray, a professor at Willamette University who has advised Rep. It’s not always possible that it was expressed that way.” “But the actual fraud itself… Stealing customers’ money is an age-old story.”

The SEC, which regulates US derivatives, and the Commodity Futures Trading Commission (CFTC), along with the US Attorney General’s Office in Manhattan and the Department of Justice, are currently investigating the implosion of FTX. The company is technically based in the Bahamas, but the exchange may have enough links to the US. Some say Bankman-Fried could be convicted on evidence that he intended to cheat, while others said moving customer funds to support Alameda would not be a viable option for his use of FTX. Some legal experts have even suggested that it violates the terms. The investigator also said he could focus on FTX US, the more regulated US-based side of FTX’s business.

Christine Parlor, a professor of finance at Berkeley’s Haas School of Business, explained that FTX US has an “alphabet soup of licensing” and that some of its transactions are under the CFTC’s oversight. “What was clearly missing was a high-level overview: the fact that the funds were not ring-fenced,” she said.

It’s not clear where the debate over regulation will go next. The House Financial Services Committee has announced it will hold a hearing on FTX in December and another hearing will be held by the Senate Banking Committee. Yet there is little agreement on what the best laws are. The Senate Agriculture Committee has postponed the markup of a bipartisan cryptocurrency proposal backed by FTX and Bankman-Fried. In his Twitter DM interview with Vox’s Kelsey Piper this week, Bankman-Fried said, “Fucking regulator.”

Some suggest that the solution is not necessarily to pass new laws, but to fund and hire more people to enforce existing laws. Gray suggested that in addition to new legislation to curb the crypto industry and regulate stablecoins, governments should also consider legislation to support initiatives such as public banking. Xuan-Thao Nguyen, director of the Asian Law Center at the University of Washington School of Law, told Recode that part of the solution was regulations requiring cryptocurrency losses and gains to be reported at fair value. said it should include considering protection. For crypto custody accounts similar to those attached to stock accounts operated by brokerage firms.

Part of the challenge, of course, is navigating the broader crypto industry, which spends a lot of time and money pushing for the necessary legislation. (Until very recently, Bankman-Fried was trying to do this himself.) Meanwhile, discussions about which federal agency should lead cryptocurrency regulation, particularly his SEC and Commodity Futures Trading Commission’s The tension between certainly continues. In March, President Joe Biden signed an executive order initiating a broader effort to regulate cryptocurrencies. While the move was widely celebrated in the cryptocurrency industry (which drove the price of Bitcoin higher), it’s not yet clear whether the collapse of FTX will change their approach to creating new rules. are also involved.

“How was Bernie Madoff legally allowed? , says Aaron Klein, senior economic research fellow at the Brookings Institution. “‘Wow, this is really bad. There should have been more regulations to stop it.'” ”

Disclosure: This August, Bankman-Fried’s philanthropic foundation, Building a Stronger Future, was awarded to Vox’s Future Perfect. forgive For the 2023 reporting project. That project is currently on pause.

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