The collapse of cryptocurrency exchange FTX is unprecedented, and in some ways, unbelievable. As the firm seeks bankruptcy protection, at least $1 billion in customer funds is missing, according to a Reuters report. A bankruptcy court filing revealed debtors have been in contact with the U.S. attorney’s office, the Securities and Exchange Commission, the Commodity Futures Trading Commission and dozens of other agencies.
The fallout continues rippling through the cryptocurrency space and sparking debate over whether the dramatic demolition of a crypto giant will cause changes in regulation. Some are even comparing FTX to the fall of Lehman Brothers and Enron.
“I think this is actually an inflection point and we have finally reached the point where the regulation of crypto offerings and crypto exchanges is not only on the table, it’s been delivered to the diners and it’s ready to eat,” said Howard Fischer, attorney and former senior trial counsel at the SEC.
Fischer said the SEC will likely investigate what FTX told customers about the safety and segregation of its crypto. FTX founder Sam Bankman-Fried transferred $10 billion in customer funds from FTX to another company he also controlled, trading firm Alameda Research, according to Reuters sources. But he also said investigators will likely question what sort of due diligence major investors did before putting funds in FTX.
“There are investors of all kinds, all means, who are going to be damaged,” Fischer said. “One of the main purposes of government regulation is to protect investors.”
Fischer said he believes that beyond agency investigations, this case will end up being a catalyst for regulatory changes in the cryptocurrency space. In fact, he said it has to be.
“The government is concerned with the systemic integrity of how markets function,” he said. “If the FTX collapse risks the systemic integrity of those markets and has the risk of contagion to other non-crypto parts of the market, that’s a legitimate reason for the government to step in and just start regulating this.”
Complicating the case for regulation in this instance is the fact that FTX is based out of the Bahamas and there’s an element of alleged fraud that would arguably happen with or without regulation. But while fraud will happen even in heavily-regulated industries – see Bernie Madoff – Fischer still sees an ounce of prevention in regulation.
“Providing transparency into operations, which is a necessary part of regulatory oversight, is what might have prevented this,” Fischer said. “If Bankman-Fried was not segregating customer accounts, if he had a backdoor, if he was using those funds of customers to prop up his other operations, that might have been stopped if they actually had a legitimate fear that regulators would see it.”
