FTX’s Collapse Highlights Importance of Cryptocurrency Whistleblowers | Kohn, Kohn & Colapinto LLP


The sudden collapse of the FTX cryptocurrency exchange has raised concerns about the lack of regulations for the cryptocurrency market. Commentators were quick to compare the FTX collapse to the Enron scandal and the Lehman Brothers collapse in 2008. These events triggered major Wall Street reform. US authorities are actively investigating FTX for fraud. One thing is clear: in the aftermath of the FTX collapse, US regulators must make full use of whistleblower programs to regulate the cryptocurrency industry.

The comparison between FTX and Enron is notable because of the critical role a whistleblower plays, Sherron Watkins, played in the Enron accounting fraud exposure. Insiders with direct knowledge of fraud are vital to exposing financial misconduct, holding fraudsters accountable, and protecting investors.

Fortunately, strong whistleblower provisions are already in place for people who report cryptocurrency fraud. Following the financial collapse of 2008, Congress passed the Dodd–Frank Act establish reward programs for whistleblowers both in the National Stock Market Commission (SEC) and Commodity Futures Trading Commission (CFTC), two agencies with jurisdiction over cryptocurrency fraud.

The SEC or CFTC may consider cryptocurrency a security or commodity if a particular company markets it as an investment, such as an Initial Coin Offering (ICO). The SEC and CFTC have jurisdiction over fraudulent and manipulative activities in the virtual currency market. Such activities include market manipulation, insider trading, Ponzi schemes, money laundering, tax evasion, and bribery of foreign officials in violation of the Foreign Corrupt Practices Act.

Under the Dodd-Frank Act, the SEC and CFTC are required to award monetary rewards to individuals who voluntarily provide high-quality, original, timely, and credible information that leads to an enforcement action that exceeds more than $1 million in penalties. The award ranges from 10% to 30% of the monetary penalties collected. Whistleblowers need not be insiders. Anyone with original information, such as victims of the schemes and misconduct, may be eligible for an award.

The SEC and CFTC whistleblower programs have been highly successful. Since it was signed into law in 2010, the Dodd-Frank Act has allowed the SEC to use whistleblower information to obtain more than $5 billion from securities law violators. He has also awarded more than $1.3 billion to whistleblowers for his acts. In the same time period, the CFTC awarded $123 million to whistleblowers who helped the CFTC recover more than $1 billion.

In addition to initiating large amounts of penalties and rewarding whistleblowers, the SEC and CFTC whistleblower programs have been immensely successful in returning funds to harmed investors. The SEC has returned more than $1.3 billion to investors thanks to whistleblowers. On October 31, the SEC awarded $10 million to a whistleblower the disclosure of which resulted in the agency returning “a significant amount of money to aggrieved investors.”

FTX’s collapse has left clients and investors, including celebrities like NFL star Tom Brady, in limbo and wondering if they’ll get their money back. As more and more Americans pour money into the cryptocurrency industry, whistleblowers will be a necessary tool to protect your funds from fraud.

Crypto whistleblowers are already coming forward to US authorities in large numbers. In his recent annual report to CongressThe CFTC Whistleblower Program reported that most of the whistleblowers it received in FY 2022 “involve fraudulent misappropriation and fraudulent solicitation involving cryptographic/digital assets.”

The SEC and CFTC need to make full use of their whistleblower programs to be the best cops they can be in the crypto world. By continuing to take advantage of inside information, the agencies can protect the American public while continuing to invest in the cryptocurrency industry.