Even After FTX, SEC Chairman Sees No Need For New Crypto Laws

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The rapid collapse of the FTX cryptocurrency empire is prompting urgent calls in Washington for legislation to curb the digital asset industry.

But after two top FTX-linked executives pleaded guilty to fraud charges on Wednesday, Securities and Exchange Commission Chairman Gary Gensler is pushing back on calls for new laws, arguing that existing SEC rules and rulings of the Supreme Court are enough and that crypto issuers and exchanges simply have to come into compliance.

The roadway is getting shorter, Gensler said in an interview on Thursday, warning other issuers and crypto exchanges that are not registered with the agency that they could soon find themselves facing enforcement action.

On Wednesday, the SEC announced that it had settled civil fraud charges with two former top executives of the FTX empire, Gary Wang, co-founder of the exchange, and Caroline Ellison, who was the branch’s chief executive. commercial of FTX, Alameda Research. , which used billions in FTX client funds to back its high-risk bets.

The former executives pleaded guilty to criminal fraud charges filed by federal prosecutors in Manhattan, and they are cooperating with authorities in their investigations into FTX and its founder, Sam Bankman-Fried, who was extradited from the Bahamas on Wednesday night. On Thursday, a federal judge in Manhattan approved a restrictive bond for Mr. Bankman-Fried.

What to know about the collapse of FTX

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What is FTX? FTX is a now bankrupt company that used to be one of the largest cryptocurrency exchanges in the world. It allowed customers to exchange digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The Bahamas-based company has built its business on risky business options that are not legal in the United States.

Who is Sam Bankman Fried? He is the 30-year-old founder of FTX and former CEO of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to Effective Altruism, a charitable movement that urges adherents to donate their wealth in efficient and logical ways.

How did the FTX problems start? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold his stake in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. This decision, which lowered the price of FTT, spooked investors.

What led to the collapse of FTX? Mr. Zhaos’ announcement drove the price down and spooked investors. Traders rushed to pull out of FTX, resulting in an $8 billion shortfall for the company. Binance, FTX’s main rival, offered a loan to save the company, but then pulled out, forcing FTX to file for bankruptcy on November 11.

Why was Mr. Bankman-Fried arrested? FTX’s collapse sparked Justice Department and Securities and Exchange Commission investigations focused on whether FTX improperly used client funds to support Alameda Research, a crypto trading platform Mr. Bankman-Fried had helped get it started. On December 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The next day, the SEC also filed civil fraud charges.

Among other offenses, the complaint states that Ms. Ellison conspired with Alameda and Mr. Bankman-Fried to underpin the value of FTT, a cryptocurrency issued by the exchange and used by Alameda as collateral for its trading activities.

Many other crypto exchanges also issue their own tokens, including the world’s largest, Binance, which issues BNB. Separately, thousands of start-ups issue digital currencies to generate capital for their businesses, and these are traded on exchanges or storefronts.

But only about six out of roughly 10,000 crypto tokens in circulation at any given time are registered with the SEC, Gensler said, meaning investors don’t receive the same kinds of disclosures as with equity investments. .

The public should therefore not rely on reported figures on traded volumes or token values, Gensler said.

Financial history would tell you that most of these tokens will fail, he said, because most entrepreneurial ventures fail. And micro-currencies, or currencies that have very limited acceptance, have not been adopted because they are simply not useful, he added.

The aftermath of FTXsDownfallThe sudden collapse of the crypto exchange left the industry stunned.

Many of those thousands of cryptocurrencies listed on exchanges and websites that track digital asset markets are thinly traded cryptocurrencies, Gensler said, and are subject to the same type of manipulation as companies at micro-cap or stocks of small publicly traded companies with a market capitalization of approximately $50-300 million.

Insiders of these projects can sell an idea to the public as they potentially fraudulently inflate the stock, Gensler said.

This leads to distorted incentives and further exposes the public to the risk that the token may not be properly registered and subject to appropriate disclosures and comply with the various provisions of securities law regarding anti-corruption. fraud and manipulation, he added.

Mr. Gensler said he hopes the civil fraud charges against Mr. Bankman-Fried and the charges against Ms. Ellison and Mr. Wang will show the crypto community that their operations must comply with existing securities laws.

Mr. Gensler said he would support legislation to regulate certain areas of crypto, such as stablecoin digital assets ostensibly pegged to the value of a stable asset like the dollar that often serves as a bridge between the worlds of traditional finance. and futuristic. There is clearly investor interest in these assets, he said, and some of those involved in traditional finance are intrigued by the prospects. But he is wary of bills that could undermine the authority of the SEC.

I think securities law is quite robust and covers a lot of activity, Gensler concluded, not just tokens, but in particular crypto securities intermediaries.

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