The sudden collapse of cryptocurrency exchange FTX has raised concerns about the lack of regulation for the cryptocurrency market. Commentators were quick to compare FTX’s collapse to the Enron scandal and the 2008 collapse of Lehman Brothers. These events led to major Wall Street reforms. US authorities are actively investigating FTX for fraud. One thing is clear: after the collapse of FTX, US regulatory bodies must use whistleblower programs to regulate the cryptocurrency industry.
Comparisons between FTX and Enron are notable for their critical roles as whistleblowers, Sherron Watkins, played in exposing Enron’s accounting fraud. Insiders with direct knowledge of fraud are critical to exposing financial misconduct, holding fraudsters accountable, and protecting investors.
Fortunately, strong whistleblower provisions are in place for individuals who are exposed to cryptocurrency scams. After the financial collapse of 2008, Congress passed The Dodd-Frank Act establishing a whistleblower award program in both the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), two agencies with jurisdiction over cryptocurrency fraud.
The SEC or CFTC may consider cryptocurrency a security or commodity if it is marketed as an investment by certain companies, such as an Initial Coin Offering (ICO). The SEC and CFTC have jurisdiction over fraudulent and manipulative activities in the virtual currency market. These activities include market manipulation, insider trading, Ponzi schemes, money laundering, tax evasion, and bribery of foreign officials who violate these rules. Foreign Corrupt Practices Act.
Pursuant to the Dodd-Frank Act, the SEC and CFTC must provide monetary awards to individuals who voluntarily provide high-quality, authentic, timely, and reliable information that leads to an enforcement action that exceeds a sanction of more than $1 million. These awards include 10% and 30% of the monetary sanctions collected. A whistleblower does not need to be an individual who is an insider. Anyone with genuine information, such as victims of schemes and wrongdoing, may receive an award.
The SEC and CFTC whistleblower programs have been very successful. Since becoming law in 2010, the Dodd-Frank Act has allowed the SEC to use whistleblower information to recover more than $5 billion from securities law violators. It has also awarded more than $1.3 billion to whistleblowers for their actions. At the same time, the CFTC has awarded $123 million to whistleblowers who have helped the CFTC recover more than $1 billion.
In addition to initiating numerous sanctions and rewarding whistleblowers, the SEC and CFTC’s whistleblower programs have been very successful in generating funds for injured investors. The SEC has recovered more than $1.3 billion for investors thanks to whistleblowers. On October 31, the SEC awarded $10 million to whistleblowers whose disclosures resulted in the agency making “substantial sums of money to hurt investors.”
FTX’s collapse has left customers and investors, including celebrities like NFL star Tom Brady, in limbo and unsure whether they will ever get their money back. As more Americans pour their money into the cryptocurrency industry, whistleblowers will become a necessary tool to protect funds from fraud.
Cryptocurrency whistleblowers have come forward to US authorities in large numbers. At new annual report to CongressThe CFTC’s Whistleblower Program reports that the majority of whistleblower tips received in fiscal year 2022 “involve fraudulent abuse and fraudulent solicitations involving crypto/digital assets.”
The SEC and CFTC must fully utilize their whistleblower programs to be the best police officers on digital currencies. By continuing to use insider information, the agency is able to protect the American public as it continues to invest in the cryptocurrency industry.