On Tuesday, December 13, the U.S. Securities and Exchange Commission (SEC) charged Sam “SBF” Bankman-Fried, the former CEO of cryptocurrency giant FTX and trading firm Alameda Research, with defrauding investors. This news comes after Bankman-Fried was arrested in the Bahamas on Monday following a sealed indictment from federal prosecutors in New York.
The arrest and subsequent charges against Bankman-Fried highlight the risks associated with using crypto asset trading platforms, and calls have sounded off for the need for strong regulatory oversight in the industry. As Gurbir S. Grewal, director of the SEC’s Division of Enforcement, stated in a statement: “FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike.”
The charges against Bankman-Fried come one month after FTX filed for bankruptcy, with a reported $32 billion in debt. Federal prosecutors in the Southern District of New York have been investigating Bankman-Fried since the collapse of FTX, and it appears that their investigation has led to the criminal charges filed against him.
While the exact details of the charges against Bankman-Fried have not been made public, a source familiar with the case has stated that he is facing a multi-count fraud indictment. This is a serious charge, and if convicted, Bankman-Fried could face significant fines and potentially even prison time.
The arrest and charges against Bankman-Fried have also garnered attention from Congress, as he was scheduled to testify before the House Financial Services Committee in a hearing on the collapse of FTX. However, following his arrest, he will no longer be able to testify, and the committee will instead hear from FTX’s new CEO, John Ray III.
What could have happened differently? While the allegations of fraud against Sam Bankman-Fried and FTX are certainly concerning, it is an obvious point to remember that the presence of regulation does not necessarily prevent fraud from occurring. The Bernie Madoff scandal is a prime example of this, as Madoff was able to operate a massive Ponzi scheme for decades despite being regulated by the SEC.
What is a bit of a misnomer is that cryptocurrency businesses are not operating in a free-for-all-wild-west. The SEC does have a framework for determining if a given digital asset is a security, which brings cryptocurrencies under security law. In the United States, exchanges can be registered with the Securities and Exchange Commission (SEC) and are subject to federal laws and regulations. Gary Gensler even went so far as to say, “the law is clear” when speaking about cryptocurrency exchanges Coinbase and BlockFi registering with the SEC.
Additionally, many states have their own laws and regulations governing cryptocurrency exchanges. For example, New York has the “BitLicense,” which requires exchanges operating in the state to obtain a license from the New York Department of Financial Services.
Exchanges are also subject to anti-money laundering (AML) and know-your-customer (KYC) regulations, which require them to verify the identity of their customers and report any suspicious activity to regulatory authorities. Exchanges are also subject to cybersecurity regulations, which require them to implement certain measures to protect customer information and prevent cyber attacks.
Yes, it is true that the rules and regulations facing these exchanges are not the same as those for Wallstreet, but these regulations are not cheesecloth.
Even with the enforcement mechanisms of the U.S government not always being straightforward when dealing with a foreign company like FTX, which was operating out of the Bahamas, there are mechanisms American authorities can use their regulatory powers to prevent American citizens and entities from using foreign exchanges that do not comply with American laws and regulations. This can be accomplished through warning and enforcement actions, such as issuing fines or revoking licenses.
Furthermore, American authorities can also use their law enforcement powers to target individuals and entities operating in violation of American laws and regulations. This could include extradition proceedings to bring individuals to the United States for prosecution, as well as seizing assets and other enforcement actions.
The U.S. federal government can prosecute FTX, even though it is a foreign company if it can be shown that the company violated American laws and regulations. One of the key factors that would allow for the prosecution of FTX is the fact that the company had American customers. American laws and regulations, including securities laws and anti-money laundering regulations, apply to transactions involving American customers, regardless of where the transaction takes place.
Additionally, if it can be shown that FTX was engaging in illegal activities that harmed American customers, such as fraudulent activities, the U.S. government could also pursue criminal charges against the company and its executives.
Furthermore, even if FTX was not directly engaging in illegal activities, if it can be shown that the company was aware of illegal activities taking place on its platform and failed to take adequate steps to prevent or report them, it could also be held liable under American laws and regulations.
American authorities have a range of tools at their disposal to hold individuals and entities operating in violation of American laws and regulations accountable.
Yes, the sheer complexity and rapid pace of change in the industry can make it difficult for regulators to keep up and adequately oversee all aspects of the market. The decentralized nature of cryptocurrencies can also make it challenging for regulators to effectively monitor and enforce rules and regulations. This is especially true in the case of decentralized exchanges, which are not subject to the same level of regulatory oversight as their centralized counterparts.
It remains to be seen how the case against Bankman-Fried will unfold. But what we have here is the failure of SBF and FTX, not a clear financial regulation failure some have made it out to be. Financial regulation does not lead to the perfectability of man. If the allegations are true, then what has occurred is outright fraud, not an outright indictment of the American system. Bankman-Fried’s prosecution is a testament to this.