Regulators face public anger after FTX collapse, experts call for coordination

2022 is coming to an end and could become one of the most turbulent years for the crypto industry due to the prolonged winter that wiped out over 70% of the market capitalization from the summit and the barrage of companies from imploding cryptography. This was mainly due to poor internal management and an uncontrolled decision-making process.

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

While lawmakers in the United States have promised to bring crypto to regulation several times this year, after every major crypto spinoff like Terra and FTX, we see another round of regulatory talk without any concrete action.

The role of regulators has come under scrutiny in the wake of FTX’s collapse due to former CEO Sam Bankman Fried’s close ties to policymakers. Some reports indicate that eight members of Congress, five of whom received donations from FTX, tried to prevent the Securities and Exchange Commission from investigating FTX.

Coinbase CEO Brian Armstrong was unhappy with regulators’ failure to avert another contagion and claimed that enforcement action against US-based companies for irregularities committed by a currency exchange offshore crypto didn’t make sense.

Armstrong also faulted the SEC for failing to develop regulations in a timely manner, driving nearly 95% of trading activity to offshore exchanges.

Jim Preissler, co-founder of decentralized exchange service provider SOMA.finance, explained that most do not fully understand the role of regulators such as the SEC.

He told Cointelegraph: “The SEC makes rules and guidelines. For example, the SEC has repeatedly made clear that other than perhaps Bitcoin, it views all other crypto offerings as potential security. Violators are then faced with a potential application and, in extreme cases, they can approach the DOJ for criminal cases. Right now, the SEC has a huge backlog of violators to potentially prosecute. They always do the kinds of cases that set precedents – initial coin offerings, influencers, exchanges, lending products, etc. : ”

“This will lay the groundwork for future application. As the SEC ramps up, we could see the cases come even faster and more furiously.

As Armstrong noted, the failure of regulators and policymakers to come up with clear crypto regulations has been the main driver for investors turning to offshore exchanges.

Preissler noted 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 registration as alternative trading system (ATS) with the SEC if they offer blockchain-based securities.

He added that any new regulations could add to existing ones or potentially supplant them. However, “without either of these categories in the United States, an exchange would be in violation of existing regulations.”

Patrick Daugherty, a former SEC attorney, told Cointelegraph that “the SEC and the CFTC [Commodity Futures Trading Commission] have jurisdiction over token sales by or through non-US platforms and exchanges to US persons. Although the details vary depending on the particular platform or exchange, many US persons are clients of non-US platforms and exchanges, giving US agencies jurisdiction over them.

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

“These are questions that need to be asked by House and Senate committee members in their oversight capacity. There is no effective private remedy against the SEC in a case like this. That’s what congressional oversight is for.

The CFTC and SEC have come under greater scrutiny in the wake of the collapse of crypto exchange FTX, as the exchange lobbied to make the CFTC the primary market oversight board of crypto. Republican lawmakers accused the SEC chairman of coordinating with FTX “to gain a regulatory monopoly.”

US regulators need to put in place better safeguards

The regulatory process takes time due to the number of parties involved and any legislation must go through Congress before being implemented. However, regulators like the SEC can use court injunctions to develop policies that protect their investors. One such example is seen in the ongoing case between the agency and Ripple executives. In this lawsuit, the SEC is using legal means to enforce the laws despite the lack of clear regulations on which cryptoassets qualify as securities and which can be considered assets.

David Kemmerer, CEO of crypto tax solutions provider CoinLedger, called for intergovernmental collaborations with tax havens to ensure mutual compliance with applicable laws. Also important, offshore exchanges should only use authorized dealers.

He also said that regulators should promote safe and efficient markets, so that 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 technologies. Additional funding to protect offshore trading investors, such as subsidized loans, should also be opened up by regulators. Likewise, there should be less political interference and favorable taxation.

In light of the crypto meltdown, US regulators need to put in place guardrails to protect investors while allowing domestic innovation to thrive.

Richard Mico, chief legal officer of crypto solutions provider Banxa, told Cointelegraph that establishing comprehensive crypto regulation is a long road, but there are clear guidelines that prudential regulators can establish and clarify to allow investors good players in the space to continue to innovate. in the United States while holding bad actors accountable. He told Cointelegraph:

“Regulation by application should not be the primary means of policing the industry. In the absence of a strong and consistent regulatory framework, proactive industry engagement and the creation of appropriate warning signs and advice is essential.

Mico also suggested cracking down on advertisers and promoters, saying that “although legally based in the Bahamas, the collapse of FTX.US has hurt US citizens who invest in the platform. Crackdown on crypto influencer campaigns that lack appropriate disclaimers and/or disclosures (eg, conflicts of interest) is one way the SEC can protect consumers.

US regulators have had a recurring relationship with crypto. Since the FTX debacle, there is now a strong call for increased regulation. Richard Gardner, CEO of crypto infrastructure provider Modulus, believes that regulation must bring a mandate prohibiting the mixing of client assets and exchange assets. He cited the example of the European Union’s MiCA regulations, telling Cointelegraph:

“It becomes much easier to argue that knowledgeable investors will see a real reduction in risk by using exchanges overseen by US and/or European regulators. Beyond offshore exchanges, the risk extends to DeFi projects that are borderless by design. Not only is there a surveillance issue, but there are security concerns, given that the vast majority of hacked assets in 2021 came from defi projects.

He added that the inability of regulators to act has certainly hurt the cryptocurrency industry. However, the party responsible for the FTX debacle is the exchange and its CEO, Sam Bankman-Fried. “It is easy and convenient to pass the blame on to regulators, but what SBF has done is absolutely wrong. Regulators have certainly learned their own lesson from recent events and, in a perfect world, that will mean quick action on the part of the regulator. next Congress,” Gardner said.

The collapse of FTX has put regulators in the hot seat over their failure to protect investors from losing money in the collapse of another billion-dollar company. Going forward, it will be interesting to see how regulators and legislators approach issues of jurisdiction, jurisdiction, and oversight in an effort to make the crypto ecosystem more stable.