The Collapse of FTX
The collapse of FTX one of the world’s leading crypto-asset managers could be the straw that breaks the camel’s back in a move to create oversight of cryptocurrencies, how they are stored and places where they are exchanged. Any government surveillance is likely to affect other digital assets developed by companies.
The collapse of FTX, a crypto-asset management platform, is expected to push lawmakers to create central oversight of an otherwise unregulated market. And while cryptocurrencies such as those traded on FTX are different from those backed by fiat currency or other assets, the market’s downfall looks set to chill a growing number of industry and government efforts. to embrace digital currencies. Bahamas-based FTX Trading filed for bankruptcy after cryptocurrency prices fell sharply and the company, once valued at $32 billion, found itself multi-billion dollars in debt.
The platform was founded in 2019 by two MIT graduates, Sam Bankman-Fried and Gary Wang. It quickly became the third-largest cryptocurrency exchange, raising nearly $2 billion in venture capital from top-tier investors. FTX is not the first cryptocurrency exchange to go under. Some 42% of exchange bankruptcies occurred without any explanation for consumers, while 9% were due to scams, according to a report. After FTX announced its bankruptcy filing, reports surfaced that the platform and users of its online wallet services had been hacked.
Increased monitoring and more transparency
“I sincerely hope regulators finally act,” said Martha Bennett, principal analyst and vice president of Forrester Research. “Yes, it can be a challenge when the entities involved are specifically designed to evade regulatory oversight. But as the early stages of FTX’s insolvency process demonstrate, when there’s a will, there’s a way.” Howard Fischer, former senior litigation counsel at the U.S. Securities and Exchange Commission (SEC), believes the cryptocurrency market is at an “inflection point” where many want oversight to restore “some semblance of trust “.
“It is likely that there will be significant proposals aimed both at creating greater transparency in the operation of cryptocurrency exchanges, including regulatory oversight of their balance sheets, calls to impose segregation rules and protection of client assets, and a push to prohibit marketplaces from operating in conjunction with investment transactions,” Fischer added. According to him, the regulations will likely be similar to the Glass-Steagall Act of 1933, which prohibited banks from using deposits to finance high-risk investments. Following such a high-profile failure by a cryptocurrency manager, financial services and governments are also likely to take a second look at their own cryptoasset and exchange projects. “At this point, there is too much reputational risk to be associated with such a volatile asset – at least not until government regulation makes it a safer space, both reputationally and operationally.” , he continues.
The jurisprudence of the courts participates in the regulation
SEC Chairman Gary Gensler has pushed for greater regulation of cryptoassets in recent years. Like exchanges, cryptocurrency platforms such as FTX, Coinbase, and Binance process transactions for customers. But unlike the New York Stock Exchange or NASDAQ, cryptocurrencies operate in a regulatory gray area and without explicit SEC approval. Oversight of crypto exchanges and other businesses has been an ongoing process, much of it developed through court case law. For example, the SEC accused Coinbase of insider trading earlier this year. Earlier this month, the SEC won a lawsuit against blockchain-based payment network LBRY for offering cryptocurrencies as digital assets.
There are four main types of cryptocurrencies, all of which are built on top of a blockchain crypto ledger: cryptocurrencies, such as bitcoin and Ether; stablecoins, or company-backed cryptocurrencies, like Facebook’s Libra; fungible and non-fungible digital tokens representing goods, financial assets, securities and services; and central bank digital currency (CBDC) or digital dollars created by governments. States around the world, including the United States, are already developing or piloting CBDCs. Stable currencies are created and administered by financial services companies, such as JP Morgan’s JPM Coin and Wells Fargo Digital Cash, as well as companies such as Facebook’s Libra, for peer-to-peer transactions, which bypass networks slower and more expensive financial institutions such as SWIFT. In particular, stablecoins should eventually have to meet a number of regulatory conditions, according to Martha Bennett.