The Collapse of FTX
The collapse of FTX raises the question of the regulation of crypto-assets. Is this the catalyst for global government oversight?
Chronicle of a Crypto Fall
Market Destabilization
The collapse of FTX, a leading crypto-asset manager, could be the straw that breaks the camel’s back. Any government surveillance is likely to affect other digital assets developed by companies globally.
Legislative Urgency
Lawmakers are now pushed to create central oversight of an unregulated market. Bahamas-based FTX Trading filed for bankruptcy after falling sharply into multi-billion dollar debt.
Platform Genesis
Founded in 2019 by Sam Bankman-Fried and Gary Wang, it quickly became the third-largest exchange, raising nearly $2 billion in venture capital from top-tier investors.
Security & Failures
FTX is not the first exchange to go under. Reports surfaced that the platform and users of its wallet services were hacked immediately following the bankruptcy filing.
Increased Monitoring and Transparency
Industry leaders debate the inflection point for cryptocurrency oversight.
“I sincerely hope regulators finally act,” said Martha Bennett of Forrester Research. As the early stages of FTX’s insolvency process demonstrate, when there’s a will, there’s a way.
Howard Fischer, former SEC counsel, believes many want oversight to restore “some semblance of trust.” He suggests regulations similar to the Glass-Steagall Act of 1933, prohibiting high-risk investments with client deposits.
Proposed Reforms include: Regulatory oversight of balance sheets, segregation rules for client assets, and prohibition of marketplaces operating in conjunction with investment transactions.
Court Jurisprudence & Asset Taxonomy
The SEC’s role in defining the regulatory gray area for exchanges like Coinbase and Binance.
1. Decentralized Crypto
Core assets built on a blockchain crypto ledger, such as Bitcoin and Ether, operating independently of central banks.
2. Stablecoins
Company-backed currencies like JP Morgan’s JPM Coin, Wells Fargo Digital Cash, or Facebook’s Libra.
3. Digital Tokens
Fungible and non-fungible tokens representing goods, financial assets, securities, and specific services.
4. CBDCs
Central Bank Digital Currencies (digital dollars) created by governments, currently being piloted worldwide.
5. Legal Precedents
The SEC accused Coinbase of insider trading, while winning a lawsuit against LBRY for offering digital assets.
6. Operational Safety
Financial services and governments are re-evaluating crypto projects to mitigate reputational and operational risks.
