SEC Charges FTX Founder As Congress Discusses Crypto Rules

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The arrest of FTX co-founder Sam Bankman-Fried on charges of fraud is sparking growing debate among policymakers about whether to pass cryptocurrency legislation to protect investors and consumers.

FTX, a cryptocurrency exchange, filed for Chapter 11 bankruptcy last month after discovering that Bankman-Fried had secretly transferred billions of FTX to its Alameda Research cryptocurrency trading platform. Alameda spent $5 billion of FTX client money on multiple businesses and investments between 2021 and 2022, FTX CEO John Ray testified during a House Financial Services Committee hearing. United States on Tuesday. Ray, who has a background in corporate restructuring, was named CEO of FTX in November and is currently investigating the collapse of FTX.

Not only did Bankman-Fried mix assets between FTX and Alameda without the knowledge of clients, but he also granted himself several loans from Alameda exceeding $1 billion, Ray said. During the ongoing investigation, Ray said his team identified several unethical business practices, including no security controls preventing senior management from accessing and redirecting client assets, as well as the Alameda’s ability to access funds “without any effective limit”.

“The collapse of the FTX Group appears to stem from the absolute concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals who have implemented virtually none of the systems or controls necessary for a business to operate. control of other people’s money or assets,” Ray said.

The U.S. Securities and Exchange Commission on Tuesday charged Bankman-Fried with fraud, accusing him of building a “house of cards based on deception,” SEC Chairman Gary Gensler said in a statement. a statement.

FTX’s collapse “is a clear call to crypto platforms that they need to comply with our laws,” Gensler said.

Even before the collapse of FTX, congressional policymakers began to question whether legislation beyond existing SEC statutes might be needed to provide accountability and clearer direction to cryptocurrency firms.

FTX’s collapse sheds light on cryptocurrency legislation

Currently, the SEC maintains regulatory authority over digital assets considered a security, i.e. an asset that includes an investment contract. The SEC describes it as “the investment of money in a joint venture with a reasonable expectation of benefits from the efforts of others.”

Other cryptocurrency regulators include the Commodity Futures Trading Commission (CFTC) and the US Treasury Department. Individual state laws also govern cryptocurrency businesses.

But policymakers say more regulation is needed. They cite outright industry growth as well as TerraUSD’s crash earlier this year, which cost investors billions.

In August, U.S. Senators Debbie Stabenow, D-Mich., and John Boozman, R-Ark., introduced the Digital Commodities Consumer Protection Act of 2022 to give the CFTC more power to regulate digital products, such as FTX .

During Tuesday’s House committee hearing, chairwoman Sen. Maxine Waters, D-California, said the continued failures of cryptocurrency firms highlighted by TerraUSD and “most importantly” FTX and Alameda Research reinforce the need for Congress and regulators to prevent such failures. Waters said a committee task force is working on cryptocurrency legislation.

Sen. Patrick McHenry, RN.C., a ranking member of the committee, reiterated the committee’s work toward a legislative outcome, questioning the SEC’s ability to stop bad actors like FTX going forward.

“I will work to provide clear rules of conduct for the digital asset ecosystem here in the United States,” McHenry said.

Application of existing crypto regulations

Gartner analyst Avivah Litan said there are many regulations governing cryptocurrency businesses, but regulators need to do a better job of enforcing the rules.

Between the SEC, the CFTC, the US Treasury Department and state laws, there’s “a lot of regulation already,” she said. If cryptocurrency companies are SEC-registered brokers, for example, companies must file financial statements and other documents that should reveal suspicious activity.

I will work to provide clear rules of conduct for the digital asset ecosystem here in the United States. Senator Patrick McHenry, RN.C.

However, regulators lack the resources to properly assess a backlog of data to uncover what Litan said should include “numerous complaints from whistleblowers” and other information revealing suspicious activity. Regulators “can’t keep up with this,” she said. “They don’t have the skills, they don’t have the tools, they don’t have the resources.”

FTX’s collapse was not due to a lack of existing regulation, said Martha Bennett, analyst at Forrester Research. Instead, it was due to a lack of vigilance and enforcement on the part of regulators. Beyond specific cryptocurrency rules, Bennett said general rules exist for all businesses requiring proper record keeping and prohibiting fraudulent activity.

“There are many existing laws and rules that have been flouted by cryptocurrency companies for some time,” she said.

Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a generalist reporter for the Wilmington StarNews and a crime and education reporter for the Wabash Plain Dealer.

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