FTX, the downfall of a giant powerhouse: A Compliance officer’s assessment
Mini-series on the current Banking Crisis and Financial Instability
In November 2022 the cryptocurrency exchange FTX filed for bankruptcy and its chief executive, Sam Bankman-Fried, resigned, a failure that shocked the entire crypto industry and stunned most crypto insiders. Nobody in the industry expected such a rapid downfall for such a powerhouse.
The collapse turned to soap opera for FTX after its rival and the world’s largest crypto exchange, Binance, pulled out of a deal to buy out the company.
In its bankruptcy filings, John Jay Ray III, said that he had never seen “such a complete failure of corporate control.” Mr. Ray was involved in the aftermath of some of the largest corporate collapses in the recent financial history, including the collapse of Enron in 2001.
FTX was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money.
Hundreds of thousands of customers who deposited their holdings on the FTX platform lost their savings. So far, the bankruptcy team has secured about $740 million worth of cryptocurrency belonging to parts of FTX’s business, amounting to “only a fraction” of what the team was hoping to recover.
FTX’s downfall initiated a regulatory change in the US
After the fall of FTX, the crypto scene have come together to recognize that the regulatory framework regarding Web3 oversight has to change. If 2022 was a time for setting the basis of regulatory activity in the crypto industry, 2023 is a milestone for opening the door to ever-evolving crypto regulations.
To respond to the FTX failure, the current administration is considering responding through the Senate Agriculture Committee’s Digital Commodities Consumer Protection Act (DCCPA). The proposed bill, which was drafted at the time of FTX’s failure remains an option in Washington for two reasons:
- It would give the Commodity Futures Trading Commission (CFTC), not the SEC, jurisdiction over Bitcoin, Ethereum, and other cryptocurrencies. The two bodies have argued with one another over a central question: are digital assets (cryptocurrencies) commodities or securities? If classified as the later, they’d likely fall under the jurisdiction of the CFTC. And while CFTC Chair Rostin Behnam has stated and defended that the perception of the organization being a more flex regulator of the industry is an illusion, one could easily argue the opposite considering the latest versions of the DCCPA.
- Regulators have not yet t reached a definitive consensus on whether certain digital tokens are securities or not. For years, the SEC has been advocating to bring digital assets under the purview of the regulatory body, repeatedly asserting that most cryptocurrencies should be classified as securities and that crypto exchanges, such as FTX, should register as National Securities Exchanges (NSE).
Crypto exchanges and brokers waited for the U.S. Treasury Department and the Internal Revenue Service (IRS) to clarify their stance on how these entities should interact with Sections 6045 and 6045A of the Internal Revenue Code. Those sections mandate reporting obligations that broker needs to report details of their customers’ names, addresses, and a set of other information to the IRS.
The answer to the question of who qualifies as a broker remains uncertain for now. The Infrastructure Investment and Jobs Act (IIJA), which President Joe Biden signed into law in November 2021, provided an updated definition of the term “broker,” including “any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Crypto exchanges, whether they are centralized and decentralized, are now trying to guess if they fall under this new category.
As a conclusion, the Web3 world continues to recover after the collapse of FTX and Sam Bankman-Fried’s behavior, making some regulatory changes a must-do. How that plays out exactly will certainly determine a large part of the evolution of the crypto industry.
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