Kirill Krasilnikov – The United States is likely to tighten regulatory pressure on cryptocurrencies following the collapse of a major exchange, FTX, which showed the need for clear rules to protect investors and consumers, industry experts told Sputnik.
FTX announced last week that it was filing for bankruptcy, sending bitcoin and other notable digital currencies into free-fall. FTX could no longer stay afloat after its rival Binance walked away from a proposed acquisition and left it scrambling to raise about $9.4 billion from investors.
Some reports allege that FTX’s financial woes stem from lending customer funds to Alameda Research, a cryptocurrency hedge fund created by FTX founder and former CEO Sam Bankman-Fried, which collapsed alongside FTX. The fund lost money in several crypto deals earlier this year. If proven true, this would be an egregious violation of financial industry rules that mandate separation of client assets from other company property. Furthermore, without regulatory framework, customers may never get their funds back.
The exchange’s crash sent ripples through the crypto industry, with doubts about its future resurfacing amid waning trust in cryptocurrencies. US Treasury Secretary Janet Yellen said Wednesday that FTX’s failure shows that greater oversight over cryptocurrencies is needed.
The regulatory pressure on cryptocurrency and blockchain projects in the US, as well as across the globe, is likely to increase now, a US-based lawyer working in the crypto industry, who wished to remain anonymous, told Sputnik. Much of the focus will be coming from agencies such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Trade Commission (FTC), with the US House of Representatives expected to look into the relationship between the SEC and Bankman-Fried, the lawyer said.
“Bankman-Fried was a major supporter of the Digital Commodities Consumer Protection Act (DCCPA), which many observers have claimed would enact a de facto ban on decentralized finance in the U.S. compared to the centralized model that FTX and Bankman-Fried pursued,” the expert said.
The lawyer also noted to Sputnik that, in light of the recent events, the industry will focus on decentralized finance projects, as much of the regulatory pressure will fall on centralized exchanges, subjected to the same rules and regulations as centralized securities exchanges. However, the path forward for decentralized finance is not clear.
“There is a need for adequate consumer protection of crypto/blockchain projects, particularly for centralized exchanges. However, the ideal approach for blockchain would be that clear rules are established so that the successful, legitimate projects succeed and those that are opaque, criminal enterprises fail,” the expert said.
Until now, many government agencies, like the SEC, have regulated through enforcement, resulting in a lack of clarity for entrepreneurs, while fraudulent projects were taking advantage of regulatory ambiguity, according to the lawyer.
“This lack of pro-consumer, pro-industry regulation has also led many U.S. consumers to turn away from projects in the U.S. that have an uncertain regulatory footing and to offshore projects that are even more opaque and have less clear regulation,” the expert told Sputnik.
The Lummis-Gillibrand Responsible Financial Innovation Act, in this regard, could be a great start for future conversation and eventual legislation, the expert added.
A similar sentiment was expressed by Rosario Girasa, a distinguished professor at Pace University’s Lubin School of Business, who also drew attention to an alleged “undercurrent of jurisdictional dispute” between the SEC and CFTC regarding which agency should regulate and prosecute offending behavior.
“Congressional enactments are clearing wanting which would delineate jurisdictional and other issues for effective regulatory activity. Congress must finally come to terms with rules and regulations to guide agencies to lessen investor risks as it did post-Enron with the Sarbanes Oxley and Dodd-Frank Acts,” Girasa said.
“It should do so in coordination with industry, investment organizations, and international entities, particularly with the European Union,” he added.
Girasa warned that the crypto industry is ripe for corruption and fraud, making investors vulnerable to major losses, while the very nature of cryptocurrencies makes it almost impossible for government authorities to investigate, prosecute, and punish bad actors.
“Hope for alternative modes of risk lessening may be found in the rise of stablecoins but fraud remains a distinct possibility by incipient entrees. An excellent alternative is central bank digital currencies, backed by government resources, has arisen but the major reasons for the rise of cryptocurrencies (secrecy due to inability to identify parties to transactions, criminal behavior, and tax avoidance) negate their effectiveness and attraction,” the professor suggested, adding that “the cryptocurrencies’ industry will be affected especially by the lesser known forms thereof.”
As for the future of Bankman-Fried, who has lost his entire fortune and is now facing legal scrutiny in the Bahamas, the lawyer who spoke with Sputnik said chances were high he would not face harsh punishment. The former billionaire has been a major donor to multiple organizations in the Bahamas, where his company was registered and where he is residing. This could incentivize the island nation’s authorities to treat him more easily than his actions warrant, the expert suggested. On the other hand, the government may also consider treating the investigation more seriously to avoid a “potential blowback from voters,” the expert argued.