Regulators Face Public Anger After FTX Collapse, Pundits Call for Coordination

2022 is drawing to a close and could go down in history as one of the most eventful years for the crypto industry due to the long winter that wiped out more than 70% of the market cap and the barrage of imploding crypto firms. This was mainly due to internal mismanagement and unverified decision-making processes.

Through all the ups and downs, one thing has remained clear: retail clients have lost a significant amount of money due to a lack of regulatory oversight.

While lawmakers in the United States promised to bring crypto under the purview of oversight many times this year, after every major crypto fallout like Terra and FTX, we see another round of regulatory discussions without concrete action.

The role of regulators came under heavy scrutiny following the collapse of FTX due to the close ties between former CEO Sam Bankman Fried and policymakers. Some reports indicate that eight congressmen, five of whom received donations from FTX, attempted to block the Securities and Exchange Commission from investigating FTX.

Coinbase CEO Brian Armstrong was not pleased with regulators’ failure to prevent further contagion, claiming that enforcement action against US-based companies made no sense over the irregularities committed by an offshore crypto exchange.

Armstrong also accused the SEC of failing to issue timely regulations and moving nearly 95% of trading activity to offshore exchanges.

Jim Preissler, co-founder of decentralized exchange service provider SOMA.finance, explained that most don’t fully understand the role of regulators like the SEC.

He told Cointelegraph, “The SEC makes rules and guidelines. For example, the SEC has repeatedly made it clear that it considers every crypto offering other than perhaps Bitcoin a potential collateral. Violators then face potential enforcement, and in extreme cases they can turn to the DOJ for criminal matters. Right now, the SEC has a huge backlog of violations that may need to be prosecuted. They’re still doing the exemplary types of cases – initial coin offerings, influencers, exchanges, lending products, etc.:”

“This will set the basis for future enforcement. As the SEC ramps up, we could see cases coming even faster and angrier.”

As Armstrong noted, the inability of regulators and policymakers to issue clear crypto regulations was a key reason investors went to offshore exchanges.

Preissler pointed out that regulation already exists in the United States — exchanges must have either a state-level money transfer license, a banking license to offer cryptocurrencies, or an alternative trading system (ATS) registration with the SEC if they offer blockchain. based securities.

He added that any further regulation could add to or potentially replace the existing ones. “However, without one or both of these categories in the US, an exchange would violate existing regulations.”

Patrick Daugherty, a former SEC attorney, told Cointelegraph that “the SEC and the CFTC [Commodity Futures Trading Commission] are responsible for token sales by or through non-US platforms and exchanges to US persons. Although details vary by platform or exchange, many US persons are clients of non-US platforms and exchanges, making US authorities responsible for them.”

When asked why the SEC failed to take timely action against offshore exchanges, Daugherty recommended a congressional hearing, stating:

“These are questions that must be asked by members of the House of Representatives and Senate Committee in their oversight roles. In such a case, there is no effective private remedy against the SEC. That’s what congressional oversight is for.”

The CFTC and SEC came under closer scrutiny following the collapse of crypto exchange FTX, as the exchange pushed to make the CFTC the top regulator of the crypto market. Republican lawmakers have accused the SEC chairman of coordinating with FTX “to gain a regulatory monopoly.”

US regulators need to take better security precautions

The regulatory process is time consuming due to the number of parties involved and all legislation must pass Congress before being implemented. However, regulators like the SEC can use injunctions to create strategies that protect their investors. One such case can be seen in the ongoing case between the agency and Ripple executives. In this lawsuit, the SEC is using legal means to enforce the laws, although there are no clear rules as to which crypto assets are considered securities and which can be considered assets.

David Kemmerer, CEO of crypto tax solutions provider CoinLedger, called for intergovernmental cooperation with tax havens to ensure relevant laws are mutually respected. Also important is that offshore exchanges are only allowed to use authorized traders.

He also said that regulators should encourage safe and efficient marketplaces so US regulators can avoid the exodus of investors to offshore exchanges, telling Cointelegraph:

“There should also be equity investments from local companies to support innovative and cutting edge technology. Additional funding to protect investors from offshore exchanges, such as subsidized loans, should also be opened up by regulators. Likewise, there should be less political interference and favorable taxation.”

In the face of the crypto meltdown, U.S. regulators must erect guard rails to protect investors while allowing native innovation to thrive.

Richard Mico, chief legal officer at crypto-on-ramp solution provider Banxa, told Cointelegraph that establishing comprehensive crypto regulation is a long way off, but there are obvious guidelines that regulators can set and clarify so good players can enter continue to innovate in this area within the US while bad actors are held accountable. He told Cointelegraph:

“Regulation through enforcement should not be the leading way to monitor the industry. In the absence of a robust and coherent regulatory framework, proactive industry engagement and the creation of purposeful signposts and guidelines is essential.”

Mico also proposed crackdowns on advertisers and promoters, saying, “Despite being legally based in the Bahamas, the FTX.US meltdown has hurt American citizens who have invested on the platform. Cracking down on crypto influencer campaigns that lack appropriate disclaimers and/or disclosures (eg, conflicts of interest) is one way the SEC can protect consumers.”

American regulators have a recurring relationship with crypto. Since the FTX debacle, there has now been a strong call for more regulation. Richard Gardner, CEO of crypto infrastructure provider Modulus, believes regulation must bring a mandate that prohibits the mixing of customer assets and exchange assets. Citing the example of the European Union’s MiCA regulations, he told Cointelegraph:

“It becomes much easier to make a strong case that competent investors will see real risk reduction by using exchanges that are overseen by US and/or EU regulators. Beyond offshore exchanges, the risk extends to DeFi projects, which are inherently limitless. There is not only an issue of oversight, but also security concerns as the vast majority of assets hacked in 2021 come from Defi projects.”

He added that regulators’ failure has certainly been a detriment to the cryptocurrency industry. However, the responsible party in the FTX debacle is the exchange and its CEO, Sam Bankman-Fried. “It’s easy and convenient to pass the buck on to regulators, but what SBF has done is absolutely ruthless. Regulators have certainly learned their own lesson from recent events, and in a perfect world, that will mean swift action by the incoming Congress,” Gardner said.

FTX’s collapse has put regulators in the hot seat for failing to protect investors from losing money in the collapse of another billion-dollar company. Looking ahead, it will be interesting to see how regulators and legislators address issues of jurisdiction, jurisdiction, and oversight to make the crypto ecosystem more resilient.