FTX collapse fans flames of crypto regulation debate

If you haven’t heard about the FTX accident last week, you’ve probably been living under a rock. The consequences of this unprecedented fiasco are many and varied, but one key aspect is the extent to which it has once again highlighted the growing need for better regulation and transparency in the digital asset space.

Multiple US regulators have already come forward and expressed views to that effect, including Federal Reserve Vice President of Supervision Michael Barr, who told the Senate committee on banking, housing and urban affairs yesterday that it was imminent. stricter supervision of digital assets. “[The sector] it requires effective supervision that includes safeguards to ensure that cryptocurrency companies are subject to similar regulatory safeguards as other financial service providers,” he said during the hearing.

Speaking about his organization’s priorities before the same committee, Acting Comptroller of the Currency Michael Hsu said that as the digitization of banking accelerates and partnerships between banks and financial technology grow, the Office of the Comptroller of the The OCC should focus on adapting its experience and regulatory framework to ensure that the safety, soundness and fairness of banking is maintained or indeed strengthened.

“Regarding cryptocurrencies, the OCC has taken a ‘careful and cautious’ approach,” he said. “Last November, we issued guidance reminding the banks we supervise that they cannot engage in certain cryptographic activities unless they can do so in a secure and robust manner.”

This approach, Hsu added, has helped mitigate the risk of cryptocurrency contagion to the federal banking system following the Terra/Luna collapse earlier this year, as well as limit the fallout from the FTX bankruptcy. He also reiterated that the OCC would establish an Office of Financial Technology early next year, building on the work of the Office of Innovation launched in 2016.

“This change will allow us to engage more substantively with non-bank technology firms and better oversee bank-fintech partnerships so that we can help ensure that bank consumers are treated fairly, as well as help maintain a level playing field. level play as the industry evolves,” he added.

Meanwhile, in Europe, the chairman of Germany’s Federal Financial Supervisory Authority (BaFin), Mark Branson, spoke of the need to adopt a global set of rules before cryptocurrencies become too entwined with traditional finance and begin to pose serious threats to financial stability. “The recent decline in digital assets was timely given [those] ties remain limited, [but] Crypto assets must be subject to global rules if they are embraced by mainstream finance and expose banks and a broader swath of investors to risk,” he said. said during an industry event in Frankfurt

On the day of the official FTX collapse, the Financial Stability Board posted a note saying that its consultative group for Europe had met in Lisbon to discuss global and regional economic and financial market developments, including the need to promote consistent and effective regulation of crypto assets and stablecoins.

“The Binance/FTX situation demonstrates that these new types of financial institutions face the same challenges as existing ones,” said Mercedes Tunstall, a partner at Cadwalader. “Keeping the faith of your customers, investors and the general public is more important than anything else, and even the suggestion that trust is misplaced can cause catastrophic problems.”

These kinds of public lessons show that the cryptocurrency market is beginning to mature, which will likely produce more scrutiny, Tunstall argued. “Regulators will come under increasing pressure to act,” agreed Peter Malyshev, one of the firm’s partners.

capitalizing on the moment

Yet despite all the talk, many elements in the digital asset regulatory framework debate remain stalemate, especially in the US, where regulators are still at a loss. trying to make up my mind about which agency should take the lead.

“The crypto-asset market needs an effective and proportionate regulatory system, but policymakers are once again asleep in this crisis, either through ignorance or a slow pace of reaction,” said Etay Katz, a partner at Ashurst. “This crisis should be the catalyst for structural changes in the global regulation of the sector. Ultimately, cryptocurrency exchanges and brokers would greatly benefit from the legitimacy associated with a proportionate regulatory framework.”

In the United States, several bills have been introduced in recent months to address the issue, including the Lummis-Gillibrand Bill – what one of its authors said in a tweet this week it would have helped avert the FTX disaster, had it been implemented.

“Gensler’s SEC [Securities and Exchange Commission] has spent years saying there was no need to clarify law and regulation in the space as most crypto tokens are securities and companies like FTX are essentially unlicensed exchanges,” said James Lovely, consultant at FPExpert. “To the extent that this is true, the SEC owns much of the cascading issues as far as US investors and cryptocurrencies. You can’t have it both ways: say these assets are securities and then, when things fall apart, deny that you are at least partially responsible for the rampant wave of securities fraud.”

Much of the serial crashes that occurred in 2022, Lovely added, can be attributed to poor enforcement by the SEC.

Defending his record as SEC chairman, Gary Gensler said in a CNBC interview last week that the agency had carried out 100 enforcement actions in space under his and his predecessor’s leadership. The key problem, he argued, was not a lack of regulation to regulate the space, but that many crypto asset companies do not abide by existing rules.

“This is an industry that has regulation, which is often very clear, but it is also an industry that is significantly non-compliant,” he said. “We have multiple paths, one of which is to work with cryptocurrency exchanges and lending platforms to properly register them so the public is protected.”

Another avenue, Gensler added, is investor education. However, he agreed that the space should be more regulated and called on industry players to engage with the agency, saying “the track is getting shorter.”

“The American public and investors around the world are being hurt by a field that has benefited from many elegant talks. [from] celebrities and famous CEOs and entrepreneurs,” he said. “The public can fall prey to promotions and marketing, but it is highly speculative. We have been very clear with people in this industry that default is not going to work, and we will continue down these paths if necessary. [being] the policeman on the beat, going to court and putting the facts and the law before the judges.”

In an exemplary enforcement action, the SEC recently fined Kim Kardashian a whopping $1.26 million in fines for promoting a value of EthereumMax crypto assets on his social media channels without disclosing the payment he had received for doing so.

However, some industry members agree that more regulation is not the answer to all problems in the crypto space.

“all right [the FTX collapse] What happened is due to illegal and possibly unethical practices,” said a director on a crypto derivatives exchange. “When an investor deposits money on an exchange, that is where the money should stay; this is already written in the contracts, and the regulation would not help in that sense. However, more transparency into the company’s operations and practices would certainly have made a difference, as people would have seen early on that it was not safe to put their money in it.”

Whether or not further regulation is the key missing piece of the crypto puzzle, the cascade of events that has unfolded in the last 10 days is, if nothing else, an indication that there should be some kind of reckoning in the future. space.

“Cryptocurrency, one way or another, is here to stay and the cryptocurrency market is only going to grow, so it needs to get in the regulatory tent and hold to the same standards as the rest of the financial system,” said Nigel Green, director executive. at DeVere Financial Advisory Group. “Crypto does not need saviors in the form of business leaders with their own interests at stake. However, what it does need is for a robust and enforceable regulatory framework to be established and approved internationally.”

Although crypto cynics and Bitcoin attackers may use the latest events to attack the booming sector, future-focused investors will understand that the inevitable fate of finance is digital, Green argued. As such, regulators should use the momentum created by the FTX crash to really advance the debate, or as the saying goes: they shouldn’t let a good crisis go to waste.

“Investors need to appreciate the intrinsic value of digital, borderless global currencies, which have already changed the way the world handles money, does business, transacts and manages assets,” Green said. “Industry players and financial supervisors must now seize this moment as a turning point and work together to further prop up the sector and instill confidence and transparency through sensible and workable regulation.”