FTX Collapse Shows Urgent Need for Clearer Crypto Industry Regulation

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But just because alleged mismanagement and corruption at FTX triggered a global recession in the same way that the bankruptcy of Lehman Brothers triggered the stock market crash of 2008 is no cause for celebration. It’s just a reminder that the still fledgling company remains relatively small and isolated from the mainstream financial system. For now, most bankers seem to agree with JPMorgan Chase & Co. CEO Jamie Dimon that cryptocurrencies are decentralized Ponzi schemes.

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Will crypto remain a niche investment? Many U.S. regulators aren’t so sure, predicting that the largely unregulated industry could destabilize the wider economy as more and more investors, both small individuals and large institutions, tap into digital assets. Indeed, a year before the FTX implosion, the head of the Securities and Exchange Commission, Gary Gensler, warned that right now we just don’t have enough investor protection in crypto. Frankly, at that time, it was more like the Wild West.

What to do then?

Investigators are now digging through the rubble of FTX trying to discern what went wrong. The company was among the largest crypto exchanges of companies that help investors trade digital assets, including using fiat currency. And practically until his dizzying fall, he was considered one of the best. No longer: Congressional hearings and court filings paint a picture of a company with crude and disorganized accounting practices, where Bankman-Fried may have misappropriated investors’ money to finance risky investments, campaign contributions and his own luxurious lifestyle.

These revelations may have given impetus to efforts in Washington to toughen crypto regulations and push federal agencies, including the SEC, to be more assertive with the industry. Power is worthless if the cop on the beat doesn’t use it, Sen. Elizabeth Warren said in a Wall Street Journal op-ed after the FTX demise. The SEC has taken enforcement action related to fraudulent and unregistered crypto offerings over the past few years, but it has fallen far behind as the crypto industry has attracted millions of new investors.

In December, Warren proposed legislation with Senator Roger Marshall, a Kansas Republican, that would extend anti-money laundering rules to the digital asset market. A central goal would be to make it harder for criminals or terrorists to use anonymous accounts to finance their activities.

Although some experts have expressed concerns that the bill would impose burdens on small operators, it appears to be a good first step towards bringing the industry to light. The measure, however, does not address ways to protect investors from fraud and malfeasance of the type Bankman-Fried is accused of; The Congress should also turn its attention to this task in 2023.

Some in the crypto world, where anti-government libertarianism is strong, have attacked the Warrens bill as an unconstitutional attack on cryptocurrency. But the reality is that many companies would prefer minimal regulation, hoping to bring greater stability and an aura of legitimacy to their services. The big question in Washington is: who would regulate and how much regulation would be appropriate?

It was a lobbying battle that Bankman-Fried vigorously waged before his company went bankrupt. Spending tens of millions in campaign contributions, he and other crypto companies were pushing for Congress and the Biden administration to regulate their industry with a relatively light touch. But Warren and other crypto-skeptics in Congress pushed back, and the collapse of FTX may have strengthened their hand.

True crypto fans love to repeat a mantra: come for the gains, stay for the revolution. Or, as Peter McCormack, who got rich from bitcoin and created a popular crypto podcast, recently put it: Stop buying bitcoin to get rich. Anyone who goes there to buy it to get rich will probably fail.

Such advice could work for the disciplined, long-term, mission-driven investor. But as financial crises over the centuries have proven, most investors are indeed looking to get rich, and quickly, whether through tulips or Bitcoin. Once the memories of that dismal year fade, crypto speculation should pick up again.

The FTX scandal showed that a clearer and stricter regulatory structure is needed before the next crypto crisis sends the wider economy into a tailspin and ever more people lose their life savings. Financial calamity in traditional markets may be helpful for revolutionaries, but it won’t be good for the rest of us.

Editorials represent the opinions of the Editorial Board of The Boston Globe. Follow us on Twitter at @GlobeOpinion.

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