The surveillance gap that enabled FTX’s disastrous failure was one of the most respected cryptocurrency businesses in the world until a few weeks ago, but the deep risks of trading on unregulated digital currency exchanges. is emphasized. This has prompted policymakers in Congress and federal agencies to consider new laws and more aggressive penalties to avoid future meltdowns. Cryptocurrencies have thrived in a regulatory gray area where even activities resembling traditional financial instruments have escaped scrutiny.
The big question is whether regulators have enough power or need more power. Two major financial markets bodies, the SEC and the Commodity Futures Trading Commission, face scrutiny as to why they did not take further steps to protect consumers.
Kate Judge, a professor at Columbia Law School, said: “There are signs that the financial regulatory system is not evolving as quickly as it needs to to deal with emerging threats.
FTX’s bankruptcy filing includes gruesome allegations by management, including former political mega-contributor Bankman-Fried, who are treating FTX and its 130 affiliates like slush funds. Behind the sophisticated veneer, FTX is actually a loosely organized network of investment firms, cryptocurrency businesses and holding companies, with no centralized accounting system and little oversight of human resources. , there were also few internal controls to prevent Bankman-Fried and other employees from jumping into the company.
“Never in my career have I seen such a complete failure of corporate management and complete lack of reliable financial information as what happened here,” said the former Enron restructuring manager. FTX’s new CEO, John Ray III, wrote in its bankruptcy filing on Thursday. “This situation is unprecedented.”
FTX’s parent company, based in the Bahamas, has never registered with the SEC or the Commodity Futures Trading Commission and spent tens of millions of dollars on Washington’s influence campaigns to fend off arguments that it needed to do so. internal operations were not scrutinized. Like Wall Street banks and traditional exchanges.
The SEC and CFTC have the power to initiate investigations into unregistered companies, but require indications of potential fraud or manipulation affecting the securities and derivatives markets they regulate.
“Fraud cannot be stopped,” CFTC Chairman Rostin Behnam said in a Nov. 14 interview. , is undoubtedly in a much better position.”
This is one of the reasons SEC Chairman Gary Gensler has been asking cryptocurrency exchanges to register with his agency, according to sources familiar with the committee’s thinking. Registered exchanges are required to fork their books on demand.
For two years, Gensler, who led the CFTC during the Obama administration, has argued that securities laws cover most cryptocurrency activity.
But the SEC’s efforts to investigate unregistered digital currency businesses often meet with fierce resistance, including costly legal battles from the industry and broadsides from crypto-friendly members of Congress.
In March, Gensler discussed plans to enter the cryptocurrency market with Bankman-Fried, FTX executives and stock exchange operator IEX, according to people familiar with the meeting. FTX’s US affiliate later announced his investment in IEX.
Gensler interrupted the meeting to discuss how cryptocurrency exchanges should meet stock exchange standards before management began their presentation, the people said, asking not to be identified.
“Under our framework, I don’t think the SEC had an opportunity to intervene in this case. Stephen Lynch The chairman of the House Financial Services Committee’s Financial Technology Task Force (D-Massachusetts) said in an interview:
Senate Bank Chairman sherrod brown (D-Ohio) said the SEC Commissioner “believes he has the power to do a lot, but Gensler’s problem is essentially inherited by the agency that opened the door to these cryptocurrency companies.” That’s right,” he said.
The CFTC oversaw one component of Bankman-Fried’s empire, LedgerX. LedgerX is a derivatives exchange registered with the CFTC for about four years before being acquired by FTX’s US affiliate in 2021.
Critics such as consumer group Better Markets have recently complained that the CFTC should have pursued the red flags surrounding FTX.
However, Behnam said the CFTC only has the ability to monitor LedgerX. LedgerX is not bankrupt and continues to operate, he is one of the FTX entities.
Benham has repeatedly called on Congress to give Congress power over exchanges that facilitate trading in bitcoin and other cryptocurrencies.
Behnham put his endorsement on the back burner Senate bill While this would allow his agency to crack down on digital assets, the law now faces political headwinds, partly due to the support of FTX.
Treasury Secretary Janet Yellen told Congress Wednesday Financial Stability Oversight Council report It highlights the dangers that can arise with the industry’s unregulated growth. The council is led by the Treasury Department and includes other top financial regulators, including heads of the SEC and CFTC.
Meanwhile, with Congress likely to be at odds for months over how to monitor markets, Yellen hopes regulators will start expanding their powers.
“For most financial instruments and markets designed to address these risks, there are very strong laws protecting investors and consumers,” she said in a statement. “Where existing regulations apply, they must be strictly enforced so that the same protections and principles apply to crypto-assets and services.”
Zach Warmbrodt contributed to the report.