“I f—ed up.” That what Sam Bankman-Fried was supposedly going to admit under oath to the House Financial Services Committee Tuesday. But his indictment and subsequent arrest Monday night obviously canceled his planned appearance. And within hours, the Securities and Exchange Commission and the Commodity Futures Trading Commission have now piled on for additional civil actions against SBF.
SEC charges Sam Bankman-Fried with defrauding investors in now-bankrupt FTX
Yes, he and the executives at FTX/Alameda f—ed up. But these failures are not in a vacuum. He was allowed to f—up by a system that has ignored the need for regulatory guidance and oversight in a time of unprecedented financial innovation.
“ The SEC and the CFTC failed FTX, its investors, and the crypto community as a whole. ”
Historically, the U.S. financial sector is one of the most regulated environments in the world. The SEC, CFTC, FTC, Fed, FDIC, OCC, and CFPB, as well as numerous self-regulatory organizations (“SROs”) all have their hands on the regulation of financial products and services, with the general goals of investor and consumer protection, financial stability, market efficiency, competition, the prevention of financial crime, and fairness.
Dusty rule books
But these regulations were drafted decades ago and are framed on the so-called “traditional” bricks-and-mortar banks and an investing community of high-price brokers and sophisticated, wealthy investors. With the rise of cryptocurrency, the crypto investment community has significantly grown, and both sophisticated and novice investors have joined the fray.
Also read: ‘Crypto is a garden of snakes,’ Democrat says as Congress probes FTX fallout
With several high-profile issues with exchanges and wallets and the associated public outcry, new regulation was inevitable. But the FTX debacle shocked the world and will likely significantly quicken the regulation. How it will affect the crypto investment community depends on what that regulation looks like.
Ultimately FTX was unsurprising, as it shows that there is a significant hole in crypto exchange transparency. It also shows the fragile nature of crypto and the risk/reward for those that are looking for alternative investments. The unreliable financials and questionable leadership outlined today in the congressional hearing were shielded by the unregulated environment that also led to significant gains in the past few years.
FTX is a reminder of the need for due diligence, and a true understanding of a business that is necessary for solid investments. And even strong due diligence can fail an investment into what may look like a solid company with a shaky foundation.
FTX fallout continues with Bankman-Fried arrest. But where is former Alameda CEO Caroline Ellison?
This, however, is dangerous territory for the regulators. A hasty attempt to rein in every potential for wrongdoing or anticipated event would likely fail and cause more damage than good to the investing community. Conversely, a well-designed regulatory scheme that aims to affect the bad actors only and not overregulate the technology that has allowed greater market access would likely be a positive. And this would require a collaborative effort between legislators, regulators, and the industry.
It’s too early to tell what the regulators will do with cryptocurrency exchanges, but traditionally, the regulators lag in rulemaking and policy in unexplored areas of innovation. With this lag, the agencies must turn to regulation by enforcement, which is frustrating to industry participants and their lawyers. Rules and guidance should be sufficient for companies to know the who, what, and how the industry is regulated.
So, where were the regulators? There has been the occasional enforcement action against cryptocurrency companies. But there is no guidance nor plan for the regulators to rein in control of the actions of FTX-like entities that operate offshore for a reason yet pull in investment dollars from hedge funds and celebrities located on U.S. soil.
For an innovative financial company, in crypto or otherwise, the lack of guidance is deafening. Be it a lack of understanding, a continuing turf war, or political motivation, the SEC and the CFTC failed FTX, its investors, and the crypto community as a whole.
SBF f—d up. But he was allowed to by an antiquated regime. It’s time the regulators focus on the future and not be caught in the past.
Braden Perry is a regulatory and enforcement attorney. He was a senior trial attorney at the CFTC and chief compliance officer of a financial firm. He currently is a partner at Kennyhertz Perry and represents individuals and entities in front of the SEC, CFTC, FTC, DOJ and numerous other federal, state, and local agencies.