Sam Bankman-Fried Accusations Don’t Match Crypto Crackdown

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The feds threw the hammer at FTX founder Sam Bankman-Fried, arresting him in the Bahamas Monday night in an eight-count indictment that includes wire fraud, wire fraud, securities and money laundering. Then, more hammer blows fell. The Securities and Exchange Commission (SEC), which regulates financial markets, filed civil charges alleging he defrauded his investors and clients. The Commodity Futures Trading Commission (CFTC), which Bankman-Fried (nicknamed “SBF”) once lobbied to regulate FTX and the crypto industry, has followed suit with its own allegations.

After weeks of speculation over when — or even if — the 30-year-old former multibillionaire would be charged, he now faces a lengthy prison sentence and years of litigation with an alphabet soup of federal regulators. But the charges against SBF so far are narrowly focused and leave the broader cryptocurrency industry largely unscathed in terms of further regulatory scrutiny.

The SEC, in its complaint, missed the opportunity to try to take control of a much larger part of the crypto market by declaring certain cryptocurrencies as “securities” – which would subject them to much stricter federal rules, experts note. And heightened public interest around Bankman-Fried could actually slow congressional efforts to pass crypto legislation, industry experts say.

The result is that the chaotic crypto status quo remains in place for the time being. Any crypto critics who hoped that the fall of SBF would bring about a swift industry-wide crackdown will have to wait.

“I’m glad to see how they’ve been framed,” says Kristin Smith, executive director of the Blockchain Association, a DC-based crypto lobby, referring to complaints from the SEC and DSNY. “I don’t see them having much ripple effect on other parts of the industry.”

The SEC stays the course

Over the past year, various federal agencies have struggled over crypto oversight, including the SEC and the CFTC. Early Tuesday, the SEC appeared to go on the offensive. It was the first federal regulator to publicly issue a complaint against Bankman-Fried. (The U.S. Attorney’s Office for the Southern District of New York — which handles many of the nation’s largest financial lawsuits — filed the original indictment on Dec. 9. It wasn’t released until later Tuesday. .)

SEC Chairman Gary Gensler used harsh language against crypto in his accompanying statement, writing that the action against Bankman-Fried was “a clear call to crypto platforms that they need to comply with our laws… To platforms that do not comply with our securities laws, the SEC’s Enforcement Division stands ready to act.

Crypto critics applauded the statement. “My next prediction is that the SEC will file a series of cases against crypto exchanges,” tweeted John Reed Stark, a former enforcement attorney with the SEC. “Don’t fail at your peril @Coinbase, @SECGov has you in their sights.”

But crypto lawyers were quick to note that the lawsuit against Bankman-Fried did not attempt to expand the SEC’s jurisdiction. For months, Gensler has tried to argue that many cryptocurrencies are securities as opposed to commodities, which would give him oversight as opposed to the CFTC, a smaller regulatory agency that is often seen as more crypto-friendly. However, the SEC’s route to actually gaining that control is either through the passage of a congressional bill or through the filing of a lawsuit confirmed by a judge.

However, the second route is risky for the SEC, says Orlando Cosme, a securities attorney. If the SEC files charges against SBF that defines a cryptocurrency as a security, a judge could rule against that claim, which would limit the SEC’s ability to regulate cryptocurrency in the future.

In this case, the SEC had the opportunity to claim that FTX gave investors the ability to trade securities. But the agency chose not to, as the word “security” never appeared in the complaint. Instead, they focused on allegations that SBF defrauded FTX stock investors, which fall more squarely under securities laws.

“They’re going for the clearer arguments and I think they’re focusing appropriately on FTX,” Smith says.

Cosme, who is also the co-founder of Web 3 startup StackerDAO Labs, said any attempt by the SEC to set crypto precedents could have jeopardized their central claims against Bankman-Fried. “I think their main concern is to bring SBF to justice. It makes more sense that they go after him by lying to FTX investors because he is a low hanging fruit,” he says. “You don’t have to get into this major battle over whether certain stocks were trading on his platform, when you can go for the lay-up here and put it on all these other violations.”

SBF has yet to make a plea and has repeatedly told the press that it is unaware of the extent of FTX’s financial problems.

However, Mark Kornfeld, attorney at Buchanan Ingersoll & Rooney PC, says that while no regulatory precedent is set by the complaint itself, the SEC’s involvement could bring changes down the road. Kornfield has been involved in asset recovery following Bernie Madoff’s pyramid scheme, and says “after Madoff, federal prosecutors and regulators modernized their tools to investigate financial crimes by improving access to key data . “I think you’ll see parallels in crypto as it evolves in the years to come,” he says.

Confusion in Congress

While federal agencies seem to be man-hunting instead of tackling the entire ecosystem, Congress doesn’t seem any closer to coalescing on a regulatory approach than it was before the FTX debacle. . Numerous crypto-related bills are floating around the House and Senate, and some members have used the debacle to oppose the prioritization of their own bills. Senators John Boozman and Debbie Stabenow, for example, used a recent Senate hearing to talk about their bill, the Digital Commodities Consumer Protection Act (DCCPA), which has been actively supported by Bankman-Fried himself. .

But Miller Whitehouse-Levine, policy director of the DeFi Education Fund, told TIME in a phone interview two weeks ago that “I don’t think this hearing is indicative of the momentum behind the DCCPA. If anything, I think it added a lot more to think about in the next few months.

Read more: Sam Bankman-Fried’s shadow loomed over Congress’ first crypto hearing after FTX collapse

Smith offered a similar prognosis. “The fact that we have so many decision-makers paying attention to these issues now may actually have the effect of slowing the process down a bit as they get up to speed and start looking at the different options,” he said. she declared.

While some senators hope to crack down on crypto, others are focused on Genlser himself, adding to the confusion. Rep. Tom Emmer, a Minnesota Republican and notorious crypto proponent, called on Gensler to testify before Congress about the “cost of his regulatory failures.” And Ritchie Torres, a New York Democrat, has demanded that the Congressional Government Accountability Office investigate the SEC’s failure to protect the public from FTX’s downfall. Torres wrote that Gensler was “singularly responsible for the regulatory failings surrounding FTX’s collapse.”

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