FTX filed for bankruptcy this month with $900 million in assets against $9 billion in liabilities. Its founder and former CEO Sam Bankman-Fried is being interrogated by police in the Bahamas and many clients are unable to withdraw their deposits. His holdings of Serum’s SRM, a token developed by Bankman-Fried, fell from over $2 billion to less than $100 million. The situation worsened over the weekend after FTX was apparently hacked, resulting in the loss of several hundred million more. Some commentators are already calling this the crypto “Lehman moment,” referring to the collapse of Lehman Brothers in 2008, which signaled that we were in a financial crisis.
After this epic crash, Congress should pull its head out of the sand and pass the Digital Goods Consumer Protection Act, which appoints the Commodity Futures Trading Commission, or CFTC, to regulate the crypto industry. The agency, which regulates commodities and derivatives trading, has already taken on a role in regulating cryptocurrencies, sharing responsibilities with the Securities and Exchange Commission, or SEC. Both agencies are in a precarious position as neither legislation defines either the enforcement agency or the determination of whether a cryptocurrency is a security or a derivative. Both companies have launched an investigation into FTX’s handling of customer accounts.
Federal regulation of cryptocurrencies is currently carried out through enforcement actions – lawsuits, fines and post-event reviews. But these actions depend on the ability of the agency to initiate a case. As a result, it is not always clear which rules apply. Moreover, many of the actions that lead to prosecution of crypto firms are legal for traditional firms under certain circumstances. Giving legal authority to a single regulator would bring clarity and stability to the industry. The CFTC is preferred because Chairman Rostyn Behnam is considered more industry-friendly than SEC Chairman Gary Gensler.
Connected: Will SBF face the consequences of mismanaging FTX? Do not count on it
Many of the actions that took place between FTX and Alameda Research that got firms into trouble were either already illegal or heavily regulated for conventional securities or derivatives firms, and the lack of clear regulations in the United States encourages companies to open stores. . in countries with little oversight, so risky actions had no consequences before the crash. Some commentators have compared FTX’s balance sheet to the creative accounting that led to the collapse of Enron in 2001.
In particular, his practice of inventing tokens and then valuing his own assets based on the value of the small amount he sold was similar to Enron’s market value accounting. FTX issued various tokens, including SRT and FTX Token (FTT), bought some from itself, and then used that price to determine its valuation. The supply of tokens was then listed as an asset on an FTX balance sheet or deposited with Alameda Research’s subsidiary, an investment firm, to be used as collateral.
Break – @CFTC likely to come under scrutiny @SBF_FTX implosion; SBF hired several ex @CFTC officials to key positions in the company and pushed @CFTC become the main regulator of crypto-sources. history development
— Charles Gasparino (@CGasparino) November 17, 2022
About $14.4 billion of the $19.6 billion in FTX assets until last week was represented by FTX-created coins and tokens, while only $5.2 billion was in conventional assets. Customer liabilities amounted to about $9 billion. What’s more, FTX has lent Alameda about (at least) $10 billion of its contributors’ money. However, he went down.
Officials such as Treasury Secretary Janet Yellen are already calling for stricter regulation to prevent another FTX-style crash. Yellen said the crash “shows the weakness of this entire sector.”
Agencies such as the SEC and the CFTC enforce regulations by requiring companies to regularly report on their activities, investigating whistleblower reports, and, when all else fails, resorting to enforcement action, which can include fines, lawsuits, or subpoenaing a judge. companies to court. records. In the wake of the Enron scandal, accounting firms must also comply. Destruction of documents is a federal crime. Most importantly, agencies have rules about how securities and commodities can be sold to the general public, some of which are limited only to firms, individuals with certain accomplishments such as certified financial analysts and “accredited investors” – people rich enough to they were regarded as knowing what they were doing.
Connected: Binance’s victory over FTX means more users are leaving central exchanges
One consequence of this is that prospectuses must clearly state actual risks and expected returns, and overly optimistic prospectuses may indicate an attempt to deceive people. For example, Alameda Research reportedly promised investors a risk-free 15% annual return — an impossibility that would have alerted US regulators when it was made in 2018.
CFTC Chairman Behnam said the SEC and CFTC are capable of working together to regulate cryptocurrencies, but appointing a single regulator would help clear confusion immediately and avoid jurisdictional conflicts or institutional “splits” that could prevent agencies from communicating with each other.
Quality, sensible reforms will be key to restoring trust in crypto firms and preventing future issues from spiraling out of control.
Brendan Cochrane, Esquire, CAMS, is a blockchain and cryptocurrency partner of YK Law LLP. He is also the CEO and founder of CryptoCompli, a cryptocurrency compliance startup.
This article is for general informational purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are those of the author only and do not necessarily reflect or represent the views and opinions of Cointelegraph.