The spectacular collapse of FTX and founder Sam Bankman-Fried's investment empire had Washington officials scratching their heads: Why didn't US regulators shut it down before it destroyed the cryptocurrency market?
According to more than a dozen interviews with regulators, lawmakers, lawyers, and other compliance professionals, there wasn't much they could do. The Bahamas-based exchange's offshore location and sprawling corporate structure make it a tough target for federal agencies tasked with protecting investors from fraud and fraud.
"Blame them?" said John Reed Stark, a crypto skeptic who once headed the Securities and Exchange Commission's Office of Internet Compliance. Oswald blamed the Kennedy assassination on the Secret Service.
The oversight lapses that led to the catastrophic collapse of FTX, one of the world's most respected cryptocurrency firms before it was exposed like a house of cards weeks ago, highlight the serious risks of trading on unregulated exchanges. digital currency This has led lawmakers in Congress and federal agencies to consider new laws and tougher penalties in the future. Cryptocurrencies thrive in a regulated gray area, where even assets such as traditional financial products are exempt from regulation.
A big question is whether regulators have enough power or need more power. Two major financial market agencies, the SEC and the Commodity Futures Trading Commission, are under investigation for failing to do more to protect consumers.
"Part of what we're seeing is the failure of the financial regulatory system to quickly address potential threats," said Kate Judge, a professor at Columbia Law School.
FTX's bankruptcy filing contains frightening allegations from top executives, including Bankman-Fried, a former political mega-donor, that they use FTX and 130 of its subsidiaries as junk funds. Behind the scenes, FTX was a loosely organized investment firm, a cryptocurrency business, and the companies had no centralized accounting system, few HR controls, and few internal controls to keep Bahnmann-Fried and other employees from to join the company. Kanagli.
FTX's new CEO, John Ray III, who previously led the restructuring of Enron, wrote in the bankruptcy filing that "I have never seen such a complete failure of corporate control and such a complete lack of reliable financial information in my career". Thursday "This situation is unprecedented".
Because FTX's parent company in the Bahamas has never registered with the SEC or the Commodity Futures Trading Commission and has spent millions of dollars on a lobbying campaign in Washington to avoid the discussions needed to do so, the internal workings of FTX have never been controlled like the Wall Street banks or the traditional exchange. .
The SEC and CFTC have the authority to launch investigations into firms that do not register with them, but only when there is an indication of fraud or fraud that could affect the securities and derivatives markets they regulate .
"You can never stop fraud," CFTC chairman Rustin Behnam said in an interview Nov. 14. "A regulated entity should be in a better position to avoid problems related to illegal activity or the use of client funds for illegal purposes."
That's one reason SEC Chairman Gary Gensler is urging cryptocurrency exchanges to register with his agency, according to sources familiar with the commission's thinking. They have to transfer their books according to the request of the registered exchange.
Gensler, who led the CFTC during the Obama administration, has argued for two years that securities laws cover most crypto assets.
But the SEC's efforts to police unregistered digital currency companies often encounter stiff opposition: costly industry lawsuits and a broad spectrum of pro-crypto lawmakers in Congress.
In March, Gensler spoke with Bankman-Fried, other FTX executives and exchange operator IEX about IEX's plans to enter the cryptocurrency market, people familiar with the meeting said. The US branch of FTX later announced that it had invested in IEX.
Gensler stopped by before executives got to their presentation and spent the rest of the meeting talking about how cryptocurrency exchanges should comply with stock exchange standards, said the people, who spoke on condition of anonymity to discuss their private conversation.
"I don't think, within our framework, that the SEC has had an opportunity to intervene in this matter," the representative said. Stephen Lynch (D-Mass.), who chairs the House Financial Services Committee's Financial Technology Task Force. In an interview.
Senate Banking Chairman Sherrod Brown (D-Ohio) said the SEC chief "believes he has the power to do a lot, but the problem with Gensler is that he inherited an agency that basically opened the door for these companies cryptographic".
CFTC-regulated LedgerX, part of the banker-less empire that was registered by the agency for four years before being bought by FTX's US branch in 2021.
Critics like consumer group Better Markets have complained in recent days that the CFTC should have been monitoring FTX for warning signs.
But Behnam's CFTC only has the power to look into LedgerX if one of the FTX entities doesn't fail and continues to operate.
“Any reasonable person would assume that this regulation works,” said Behnam, who has repeatedly called on Congress to grant his agency more authority in exchange for facilitating transactions in bitcoin and other cryptographic products.
Behnam supported a Senate bill that would have given the agency control over digital assets, but the bill now faces political problems due to FTX's support.
Treasury Secretary Janet Yellen has urged Congress to address the cryptocurrency regulatory failings identified in an Oct. 3 Financial Stability Oversight Board report, highlighting the dangers that could arise from unregulated growth in the sector. The Council is chaired by the Treasury and includes other top financial regulators, including heads of the SEC and CFTC.
Meanwhile, with Yellen urging regulators to expand their powers, Congress is likely to wrangle for months over how to regulate the markets.
"We have very strict consumer and investor protection rules designed to address these risks for most financial products and markets," it said in a statement. “Where existing regulations apply, the same safeguards and policies should strictly apply to cryptographic assets and services.”
Zach Warmbrodt contributed to this report.