The FTX Scandal: Accountability and Regulatory Clarity Are What We Need Now

By John E Deaton

I started CryptoLaw to provide everyday investors with a “clearinghouse of information, news and analysis on key U.S. legal and regulatory developments for digital asset holders”. After the massive fraud at FTX was exposed, something that unfolded right under the nose of the Securities and Exchange Commission (SEC), I am only more passionate about continuing this work for the digital asset holders.

It still seems that we don’t have anyone protecting us. Now more than ever we need to press Congress to hold bad actors and government agencies accountable for what they’ve done and what they failed to do.

Sam Bankman-Fried defrauded millions of customers and investors of billions of dollars while he was the toast of Washington. SEC Chairman Gary Gensler has been claiming “the rules are clear” on crypto and that his agency has the authority to regulate the whole space. He said FTX should have been registered, and that would have somehow prevented this from happening. But when lawmakers from his own political party ask him what compliance and registration actually means, they get no answers, only more talking points.

Gensler repeats over and over that for retail holders and investors, like those defrauded by Bankman-Fried, the solution is for exchanges to “come in and register” but the details end there. If Gensler is telling the truth that the “rules are clear”, then he failed miserably at enforcing them. His Enforcement Division has spent much of its resources suing Ripple and LBRY in long, non-fraud cases that failed to protect a single investor while the FTX fraud was happening right under its nose.

Through the “decentralized justice” of hundreds of digital asset holders investigating government documents, we learned that Gensler and the SEC met with Bankman-Fried at least three times. Good journalists and Congressional offices took that information and discovered that the subject of those meetings was a regulatory deal that would recognize FTX as a sanctioned crypto exchange. Gensler refuses to answer questions or release notes and documents from those meetings that will clarify what was discussed, or why the fraud was never detected.

Bankman-Fried is a fraud. He’s been arrested and will face prosecution and likely a long prison sentence. But that’s only part of what went wrong here. The SEC’s mission statement is “to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”. In this instance, and in the crypto overall, Chairman Gensler and the SEC failed on every point.

Accountability and regulatory clarity are the two most important things that we need now. The bipartisan hearing of the House Financial Services Committee on December 13 was a positive step forward, where it seemed most of the committee members agreed that they have to step in and write the rules that Gensler has refused to produce. The also promised to investigate Gensler’s repeated misfires and distractions that do little or nothing to protect anyone. Those lawmakers need our support, collaboration and pressure to get it done.

Where Was Biden’s SEC Sheriff on Sam Bankman-Fried?

By Allysia Finley. December 18, 2022. (Wall Street Journal).

Securities and Exchange Commission Chairman Gary Gensler is trying to spin the FTX blow-up as a cautionary tale about the crypto “wild West.” But where was the SEC sheriff when Sam Bankman-Fried was funneling FTX customers’ funds to his Alameda Research trading house to finance risky bets and a lavish lifestyle?

In September 2021, Mr. Gensler rejected major industry players’ contention that he needed congressional authorization to regulate crypto products. “We have robust authorities at the Securities and Exchange Commission and we’re going to use them,” he told the Washington Post. “We’ll also be the cop on the beat, bringing those enforcement actions.” And the commission has—but not against FTX.

Read the full article here.

FTX crypto implosion focuses scrutiny on SEC chief Gensler

By Peter Whoriskey. December 14, 2022. (Washington Post).

The arrest of FTX founder Sam Bankman-Fried this week amid charges of a billion-dollar fraud corroborates long-standing warnings from critics who have likened the cryptocurrency markets to the Wild West. The question is: Where was the sheriff?

Leaders of the Securities and Exchange Commission, the nation’s primary financial regulator, have stated plainly for years that most digital coins are legally obliged to be registered with the government in the same way that stocks and bonds are. Yet only a tiny fraction have: Of an estimated 10,000 crypto tokens, fewer than 10 are registered with the SEC.

Among the exchanges such as FTX where crypto is traded, enforcement is likewise scant. None of the largest exchanges have registered with the SEC, and the agency has not taken legal action to force them to do so. This gap in enforcement means that thousands of entrepreneurs have been allowed to pitch crypto products without being compelled by financial regulators to disclose key information about the risks or even the identities of the people behind them.

Read the full article here.

Gary Gensler’s PR stunts can’t hide how he botched crypto regulation

By Jeff John Roberts. December 14, 2022. (Fortune).

The Securities and Exchange Commission sent a statement to reporters early Tuesday—2:10 a.m. ET to be precise—to announce its charges against Sam Bankman-Fried. The timing of the email didn’t make much sense since these sorts of communications typically go out between 6 a.m. and 9 a.m. But it did make sense if you’re familiar with the motives of Gary Gensler, the SEC’s embattled chairman.

It’s only a guess, but the unusual timing of the email was likely an effort to preempt the Justice Department, which had announced it would unveil criminal charges against Bankman-Fried on Tuesday morning. By getting his agency’s complaint out first, Gensler was presumably hoping he could soak up credit on a day when SBF was being brought to justice.

Such behavior is par for the course for Gensler, who in October took the unusual step of making a Twitter video to announce an SEC fine against Kim Kardashian, releasing it early on a Monday morning for maximum publicity. The Kardashian fine involved a relatively minor crypto boondoggle from June of 2021, but it did involve an A-list celebrity, so Gensler was all over it.

Read the full article here.

Gensler ‘Singularly Responsible’ for Failing To Expose FTX Fraud, Rep. Says

By Casey Wagner. December 7, 2022. (Blockworks).

A member of the House Committee on Financial Services is calling for the Government Accountability Office, known as Congress’ investigation arm, to look into the SEC and its “failure to protect the investing public” from FTX. 

Rep. Ritchie Torres, D-N.Y., drafted the letter, dated Tuesday. 

“Chair Gensler took the position that the SEC had clear authority to investigate crypto exchanges,” Torres told Blockworks via email.

“When it comes to government failure, the public official singularly responsible for failing to expose the FTX fraud is SEC Chair Gary Gensler.”

Torres also referred to the SEC’s handling of FTX as “egregious mismanagement.” 

“If he had clear authority to do so, why did he fail to uncover the largest crypto Ponzi scheme in history?” Torres added. “It is on Congress to pass laws, but it is on the regulators to apply those laws to conduct investigations, and in the case of Gary Gensler, the regulators failed catastrophically. Chair Gensler has some explaining to do.”

Read the full article here.

The FTX Fallout Exposes Risky Rigamarole Of Registration

By Roslyn Layton. December 1, 2022. (Forbes)

Following the collapse of FTX, the second largest digital asset exchange in the world, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler repeated sensless talking points about crypto regulation, insisting that SEC rules are “very clear” on crypto and that FTX, like Terra Luna and Celsius before it, failed because they were “not registered”. Even as hundreds of billions of dollars in investor holdings vaporize, and the evidence of staggering fraud at FTX was quickly apparent, Gensler still believes that investor protection in crypto begins and ends with a still-yet-undefined (and maybe impossible) process of registering cryptocurrencies.

Few, if any understand what Gensler is talking about. There is no guide on how a line of code that is used on a decentralized blockchain ledger can be registered as a security, or under what circumstances, or who files the forms, how frequently, or what information needs to be included, or what it is supposed to accomplish. Moreover, instead of publishing those rules that Gensler repeatedly insists are “very clear”, his SEC opts to selectively sue companies and individuals. It has been an expensive, grindingly slow, and messy failure, while the FTXs of the world destroy retail investor wealth – and faith in the crypto marketplace – at an enormous scale and speed.

Read the full article here.

BlockFi Used FTX Funds To Pay SEC Fines? Inquiries Ripple Counsel

By Ashish Kumar. November 28, 2022. (CoinGape).

Sam Bankman-Fried (SBF) led the FTX crash has impacted the crypto market in the worst way possible. Crypto lender BlockFi is reportedly preparing for bankruptcy filing due to its extensive exposure to FTX. However, Ripple Counsel has raised some crucial questions over the FTX-BlockFi connection and its U.S. SEC settlement.

FTX paid for Blockfi-SEC deal?

SEC in a release mentioned that it has pressed charges against BlockFi for failing to register the sales and offers of its lending product. The commission highlighted that this is the first of its kind of action taken against crypto lending platforms.

Stuart Alderoty, General Counsel of Ripple has found something fishy in the BlockFi and SEC settlement. He stated that nothing was ever “registered” as per the BlockFi/SEC deal.

Read the full article here.

Crypto executives urge light touch as Congress mulls new regulation

By Pete Schroeder and Katanga Johnson. December 8, 2021. (Reuters).

WASHINGTON – Top executives from six major cryptocurrency companies including Coinbase and Circle on Wednesday urged Congress to provide clearer rules for the booming $3 trillion industry, but warned that overly tough restrictions would push it overseas.

The U.S. House of Representatives Financial Services Committee hearing marked the first time the industry’s senior leaders have explained their businesses to U.S. lawmakers amid growing concerns cryptocurrencies may pose systemic risks and hurt investors.

Crypto executives repeated calls for careful, bespoke rules rather than forcing the industry to comply with existing regulations.

Read the Full Article Here.