TradFi Fights For Stricter Crypto Rulebook Following FTX Collapse

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International plans to break up major crypto conglomerates appear to have been boosted by the collapse of FTX, with allegations of embezzlement revealing that regulators’ worst fears were true.

Now, major players in traditional finance (TradFi) are urging international standard setters to be even bolder in tackling the excesses perceived by the crypto industry despite warnings from Binance and Coinbase that they could end up limiting benefits of blockchain technology, documents released on Wednesday reveal.

The companies were responding to an open consultation in October 2022 in which the Financial Stability Board (FSB) proposed comprehensive international crypto regulations covering financial stability and consumer protection, just as the standard setter sought to do for TradFi at the following the 2008 crisis. .

The Financial Stability Board appears to have been prescient when, last year, it warned that major crypto companies were facing conflicts of interest, saying that, for example, a crypto exchange could block competition from miners. market rivals operating on its platform.

A few weeks later, CoinDesk revealed a blurring of lines between FTX and its supposedly separate trading arm, Alameda Research. This snowballed into allegations of misuse of customer funds and that Alameda had an unlimited line of credit.

The company has now filed for bankruptcy and former chief executive Sam Bankman-Fried pleaded not guilty on Tuesday to money laundering and wire fraud charges in a New York courtroom.

Following the collapse of crypto lender Celsius, stablecoin terraUSD, and hedge fund Three Arrows Capital, crypto’s turbulent year has only provided additional grist to the mill for TradFi players who want players of crypto play by the same rules.

The case for extending the regulatory perimeter is now clear, the regulatory approach must be comprehensive, said British bank Standard Chartered in its response to the FSB consultation.

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The glaring examples of the collapse of FTX and others show the need for clarity on how to segregate and protect client assets, the TradFi lobby group, the Institute for International Finance, told the FSB.

Given recent market developments in the crypto-asset ecosystem and the uncertainty brought by the collapse of major market players, we support global regulators and standard setters in their mission to bring order and from financial stability to crypto-asset markets, said the Global Financial Markets Association. , which represents capital market players such as investment banks.

According to the World Federation of Exchanges, whose members include the Nasdaq, the Intercontinental Exchange and the London Stock Exchange Group, the FSB should even strengthen its position by demanding the separation of activities, ensuring that the same standards apply. than for TradFi players, when crypto companies simultaneously operate platforms, execute transactions, and hold or issue cryptocurrencies.

Established crypto players, meanwhile, have warned the FSB not to throw the baby out with the bathwater and address crypto risks without hampering the benefits of its innovation.

Crypto risks need to be properly considered and therefore require tailored and bespoke regulation, Binance said in its response, adding that segregation of duties should play out differently even though they are legally similar to TradFi services.

They are joined by rival crypto exchange Coinbase, which said it would be a mistake to call for separation of activities simply because it is done for TradFi services which use inferior technology.

Combining exchange services with custody would allow the benefits of real-time settlement without significant additional risks, said the submission, presented by Coinbases Chief Policy Officer Faryar Shirzad.

The FSB has said it wants to produce a final report in July, forming the core of a global system of crypto laws, and there seems to be little indication it will fully relax its stance by then.

In December, the FSB, whose members include heads of ministries, central banks and regulators from 24 jurisdictions, including the United States, United Kingdom and European Union, said it had learned the lessons preliminaries of FTX’s collapse and reiterated the risks posed by major crypto conglomerates.

India’s finance minister, who is due to chair the meeting of the world’s twenty largest economies that leads the work of the FSB, has also pledged to make new crypto laws a priority.

Read more: Comprehensive international crypto rules offered by Influential Finance Watchdog

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