After the collapse of FTX and its founder Sam Bankman-Fried’s investment empire, Washington officials are left puzzled about how regulators could not foresee or stop this mess.
According to regulators, lawmakers and lawyers to Politico, there was not much they could do.
The Bahamas-based exchange location and corporate struggle made it difficult for federal agencies to protect investors from fraud and manipulation.
The incident has led lawmakers in Congress and federal agencies to consider new laws and aggressive penalties. Crypto has typically flourished in a gray area regarding regulation, so oversight has been minimal.
The question is whether regulators have the authority or need more power for oversight. The SEC and the Commodity Futures Trading Commission both face scrutiny because they didn’t do more to protect investors.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” FTX’s new CEO, John Ray III, wrote in a bankruptcy filing on Thursday. “This situation is unprecedented.”
FTX was just a loose network of investment firms, crypto businesses and holding companies without a centralized accounting system or oversight of personnel with few internal controls to curtail Bankman-Fried and other employees from touching the company’s assets.
FTX’s bankruptcy filing includes allegations of top executives – including Bankman-Fried, a Democrat political mega-donor — treating FTX and its 130 affiliates essentially like a slush fund.
FTX’s parent company, being based in the Bahamas, never registered with the SEC or the Commodity Futures Trading Commission, spending tens of millions of dollars on a political influence campaign to fend off opponents.
The SEC and CFTC can investigate businesses that aren’t registered with them. Still, there would need to be some sign of potential fraud or manipulation impacting the securities and derivatives markets that they regulate.
“You can never stop fraud,” CFTC Chair Rostin Behnam said in a Nov. 14 interview. “A regulated entity is certainly going to be in a much better position to avoid issues around illegal activity or using customer money for illegal reasons.”
SEC Chair Gary Gensler has been calling for crypto exchanges to register with his agency. Registered firms would have to give over their books upon demand. Gensler has been arguing this matter for over two years.
But SEC efforts are met with stiff resistance, including costly legal battles and crypto-friendly lawmakers in Congress.
The CFTC had oversight of one part of Bankman-Fried’s empire LedgerX. This derivative exchange had been registered with the agency for nearly four years before FTX’s U.S. affiliate acquired it in 2021.
Behman said the CFTC only can look into LedgerX — one of the FTX entities that is still operational.
Treasury Secretary Janet Yellen on Wednesday urged Congress to address crypto regulatory gaps identified in an Oct. 3 Financial Stability Oversight Council report highlighting the dangers that could develop within the industry’s unregulated growth. The council is led by Treasury and includes the heads of the SEC and the CFTC.
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