FTX and the Crisis of Crypto Regulation

The separation of dreams and lies often rests on fragile glass. When they shatter, they pierce the lives of the many living under them and transform roadmaps for success into highways of uncertainty.

There was a time when Sam Bankman Fried’s existence was made of the stuff dreams are made of. It was a story of a young entrepreneur who turned the table of the financial game by creating a new way of thinking about the whole crypto exchange process. We couldn’t see it back then, but the falling pieces of glass were already eroding such achievements.

In late 2022, SBF was eventually charged with conspiracy to commit wire fraud, commodities fraud, behaviors fraud, money laundering, conspiracy to defraud the Federal Election Commission, and commit campaign finance violations. According to the indictment, since 2019, Bankman-Fried had allegedly used billions of dollars of his customer funds for personal use. With this capital, he’d invest by pouring millions of dollars toward political donations to US Democratic and Republican candidates. Additionally, he allegedly also used customer funds to repay billions of dollars in loans owed by Alameda Research, a cryptocurrency hedge fund also founded by him.

At that time, FTX was one of the world’s largest exchanges. Since then, it has become the most remarkable example of how unregulated crypto exchanges have engaged in reckless behavior over the years. Samuel Bankman Fried’s name has gone from being equivalent to FinTech genius to being synonymous with incompetent scammer.

Crisis of Crypto Regulation


The Landscape before the Storm –  The Actions of Bankman-Fried


Despite Bankman-Fried’s shocking alleged behavior, there has been a growing concern within the media about crypto-exchange practices since 2016. At the time, FTX was just an idea in the head of a young Bankman-Fried, working as a trader at Jane Street Capital. The concern was manifested into three main fears for the market.

Investment Writer and ex-CNBC reporter Saheli Roy Choudhury drew attention to the first of these fears in 2017. She envisioned money launderers paying a premium to wash illegal funds in Crypto exchanges, then reflecting the concerns of later Federal prosecutors and other regulators’ who accused exchanges of doing too little to ensure Anti-Money Laundering policies. In this way, the accusations towards Bankman-Fried are the fruit of such anti-money laundering concerns linked to the crypto industry since its beginning.

The second fear for the crypto exchange market was their “act-as-bank” approach. Many crypto exchanges combine several features typically separated in a traditional exchange, such as trading, custody of client assets, and trade settlement. The FIAT currency assets of FTX have been deposited and operated much the same way as an ordinary bank. However, simultaneously, the crypto holdings of the doomed exchange were assured in its T&Cs not to be touched. Despite this, FTX was cunningly licensed in the Bahamas. As a result, the regulations surrounding the traditional banking world were not present.

Therefore, FTX would take advantage of a very favorable enactment of the Caribbean country’s Digital Assets and Registered Exchanges Act of 2020, which would grant a series of licenses in place. The company would use these licenses to ensure trade safety on the exchange. Documents seen by Reuters revealed a regulatory agenda aiming to acquire a series of companies that already possessed the licensing needed in the country of reference. In this way, FTX and its CEOs could easily buy themselves the client’s trust while using the loophole of acquiring the licensing from their acquisitions. As a result, FTX was littered with a flurry of fraud accusations.

The third point concerns the capability of a top player to gain nightmarish influence over the regulators concerning cryptocurrency. During July 2022, it was clear that FTX was seeking a green light from regulatory authorities over an ambitious new venture. Bankman-Fried wanted permission to use derivatives to begin placing leveraged bets on bitcoin by investors. By November 2022, The Wall Street Journal reported that: “Crypto firms […] spent $15 million on lobbying in the first nine months of this year.”

Top-down pressure was necessary to develop Bankman-Fried’s mechanisms of influence for the regulations he wanted. His strategy to achieve this was different in several countries, while some were non-existent. Bankman-Fried had the novelty of a young, moving cast of influential players that were globally dispersed for this goal. They were subject to varying operating styles and degrees of regulation – which stood in opposition to creating a stable, reliable bench of firms that could grow trust and social capital through repeated interactions and mutual risk and benefit sharing.

Therefore the background of the FTX downfall arose from a regulatory need for more oversight by the relevant authorities. Additionally, the exploitable loopholes within tax havens made it easier for FTX to overcome regulatory best practices.


The Landscape after the Storm – Bankman-Fried and the Intervention on the Industry Standards


Samuel Bankman-Fried’s shattered dream serves as a Memento Mori for others seeking financial success through illicit practices. When it collapsed, the company owed over $3.1 billion to its creditors, leaving many smaller exchanges to face untimely ends. Since then, Bankman-Fried has become vilified for transforming a once flourishing ecosystem of Crypto exchanges into freshly dug cemeteries around the abandoned cathedral that was once FTX. BlockFi, a leading Australian digital asset lender, had lost more than $23.4 million in assets from its dealings with FTX and Alameda Research. In late January, the firm agreed to a bailout deal offering its 30,000 customers access to their money for the first time since the Debacle; however, BlockFi is one of the lucky ones. 

On an Institutional level, “the collapse of FTX definitely has an impact on the way people in Congress think about this,” Rep. Jim Himes (D-Conn.) told CoinDesk TV earlier this month.

U.S. lawmakers have yet to produce any significant laws to establish crypto oversight, despite several legislative efforts that fizzled out in 2022. So far, the most robust legislative progress has been overseeing stablecoins such as Tether’s USDT and Circle Internet Financials’ USDC, which are pegged to the U.S. dollar. Regulators universally agree stablecoins need unimpeachable reserves and disclosures to avoid threatening the broader financial system.

The U.S. Senate and House Agriculture Committees have been active in drafting new bills, primarily focused on giving the Commodity Futures Trading Commission (CFTC) new powers to regulate crypto – including the spot market for crypto commodities such as bitcoin.

Despite this, a fundamental question still looms over the Industry: What makes a crypto token a security or a commodity? Congress’s answer would likely require a bill that cuts across both chambers’ financial and agricultural committees and would call for many different lawmakers to come together.


The Possible Dawn of a New Crypto-Age


Undoubtedly, Bankman-Fried’s shattered dream has challenged cryptocurrency regulation and the dynamic between actors within the space. The main issue is not only economic; it’s legal. Regulation with tighter requirements should fill the void between the private firm ecosystem and the institutional actors, just as the anti-money laundering requirements had been doing for the traditional financial world after the 2008 crisis. However, cooperation between firms, private ecosystems, and institutional actors is still necessary. 

Such cooperation needs to start from the ecosystem itself. Since FTX’s downfall, Crypto Exchanges have had to weigh personal gain against the benefit of a more substantial non-institutional financial market. Sam Bankman Fried chose the first path, and only time will tell the choice of the Industry.

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