- Cryptocurrencies don't solve financial failures, they make them worse, said SEC Commissioner Jaime Lizaraga.
- At Brooklyn Law School on Wednesday, he reflected on Crypto's "disturbing" week without mentioning FTX.
- Investors told experts they welcomed the deal and more federal guidance.
US Securities and Exchange Commission Commissioner Jaime Lizaraga did not mention cryptocurrency exchange FTX by name when discussing digital assets on Wednesday night. at an event at the Brooklyn Law School.
But with several references to what he called "unsettling events in the digital asset market over the past week", Lizaraga's speech made it clear that he was concerned about the impact of the fall of FTX on the market.
The comments come less than a week after FTX filed for bankruptcy on Friday. Concerns about FTX's financial health, sparked by CoinDesk's cryptocurrency report, caused customers to withdraw assets from their accounts, triggering a liquidity crunch on the exchange. The bankruptcy brings a new perspective on the tensions between regulators and cryptocurrency enthusiasts, as both sides grapple with how the new currency fits into traditional banking rules. And investors, founders, and regulators are rethinking their stance on crypto regulation.
According to Lizárraga, many cryptocurrency companies are not only replicating the shortcomings of the traditional financial sector, but exacerbating them by operating in a regulatory gray area. Conversely, cryptocurrency businesses can protect themselves and their customers by embracing regulations rather than trying to circumvent them, he said.
But while not all cryptocurrency companies oppose tougher regulatory scrutiny, the details of how to proceed are still being debated, the founders and investors told Insider.
Some Founders and Investors Ready for Clarity on Cryptocurrency Regulations
Zoe Barry, founder and CEO of trading platform Zingeroo, told Insider that before her company started offering crypto products, she tried to work with regulators early on. He said his team initially consulted with FINRA, the industry organization that regulates brokers. He chose to partner with fintech Apex for cryptocurrency offering Zingeroo, not just a cryptocurrency exchange, because he had more confidence that Apex would follow through with proper compliance.
"A lot of people find compliance and regulation unappealing," Barry told Insider. "But I think regulation is good for business." After the fall of FTX, he hoped retail investors would take a look at the company's compliance practices before deciding where to put their money, he said.
However, others, including some venture capitalists, argued that federal regulators had failed to provide cryptocurrency companies with sufficient clarity.
"No one knows what happened yet," Tusk Ventures co-founder and managing partner Jordan Knopf told Insider. "There are no guidelines at the federal level."
Lizaraga disputed this notion.
"In fact, there are lots of references," he said in his speech. "It's not a lack of guidance, it's guidance that's out there probably what a lot of market participants want to hear."
Crypto Promises Decentralized Assets, But Lack Of Regulation Can Make Delivery Difficult
Cryptocurrencies have become an attractive alternative to stocks, bonds and other investments for groups such as low-income people who are not well served by the traditional financial system, said Lizárraga, who served as SEC commissioner in July. But despite the optimistic predictions of cryptocurrency enthusiasts, in their view, they have largely failed to address the big problems that should have been fixed.
First, according to Lizárraga, the promise is to decentralize assets or not to concentrate them in a small group of giant institutions. Without naming FTX, he described circumstances plaguing the now-defunct exchange, such as a lack of strict segregation between client assets and those of companies and affiliates, meaning clients were unable to recoup their losses.
Lizárraga also said he agreed with the view of SEC Chairman Gary Gensler that most crypto tokens are likely to be securities because they are investment contracts defined by four known criteria, as the Howey test. As a result, many of the cryptocurrency companies that have issued tokens, as well as exchanges that allow people to buy and sell them, operate outside of US securities laws, Lizarraga said.
"Frankly, the problems in the digital asset market are worse than the traditional financial system because they occur in a largely unregulated space," said Lizarraga.
Not everyone agrees that the FTX downturn is a major regulatory crisis
FTX co-founder Sam Bankman-Fried was once one of the leaders of the crypto industry to proclaim openness to regulation. But he has since said the commercial was "just public relations".
"They made it worse," he said on Twitter in a series of direct messages to Vox reporter Kelsey Piper. "They don't protect customers at all."
But some investors defend the crypto space's current setup and instead blame FTX for being a bad bet. Venture capitalists Kathy Haun and Fred Wilson wrote a blog post together on Tuesday comparing FTX to US-based crypto exchanges such as Coinbase, in which they both invest, and Kraken.
“You will see that it is the companies that play by the rules and do the right thing through this storm,” they wrote.