The rapid collapse of cryptocurrency empire FTX is prompting urgent calls in Washington for legislation to curb the digital asset industry.
But after two top FTX-connected executives pleaded guilty to fraud charges on Wednesday, Securities and Exchange Commission chairman Gary Gensler is pushing back calls for new legislation, arguing that existing SEC rules and Supreme Court decisions are sufficient and that crypto issuers and exchanges just have to meet the requirements.
“The road is getting shorter and shorter,” he said. Gensler said in an interview on Thursday, warning other crypto issuers and exchanges not registered with the agency that they could soon face enforcement action.
On Wednesday, the SEC announced that it had settled civil fraud charges involving two former top executives of the FTX empire, Gary Wang, a co-founder of the exchange, and Caroline Ellison, the chief executive of FTX trading arm Alameda Research, which trades billions in FTX customer funds to back up his very risky bets.
The former executives have pleaded guilty to the fraud charges brought by Manhattan federal prosecutors and are cooperating with authorities in their investigation into FTX and its founder Sam Bankman-Fried, who was extradited from the Bahamas on Wednesday night. On Thursday, a federal judge in Manhattan approved a restrictive bail package for Mr. Fried, a banker.
What you should know about the FTX collapse
What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It allowed customers to exchange digital currencies for other digital currencies or traditional money; It also had a native cryptocurrency called FTT. The Bahamas-based company built its business on risky trading options that are not legal in the United States.
Among other offenses, the complaint states that Ms. Ellison conspired with Alameda and Mr. Bankman-Fried to prop up the value of FTT, a cryptocurrency that the exchange issued and that Alameda used as collateral for its trading activities.
Many other crypto exchanges also issue their own tokens, including the world’s largest Binance, which issues BNB. Regardless, thousands of startups are issuing digital currencies to raise capital for their ventures and these are traded on exchanges or “storefronts”.
But only about six out of every 10,000 crypto tokens in circulation at any given time are registered with the SEC, Mr. Gensler, meaning investors don’t get the same disclosures they would get when investing in stocks.
So the public shouldn’t have any faith in the numbers being reported on the volumes traded or the values of the tokens, Mr. Gensler said.
“Financial history would tell you most of these tokens are going to fail,” he said, because most entrepreneurial ventures do. And “microcurrencies,” or currencies with very limited acceptance, haven’t been launched because they’re just not useful, he added.
The aftermath of FTX’s demise
The sudden collapse of the crypto exchange has left the industry stunned.
Many of those thousands of cryptocurrencies listed on exchanges and websites that track digital asset markets are thinly traded cryptocurrencies, Mr. Gensler said, and are subject to the same type of manipulation as micro-cap companies or shares of small public companies with a market capitalization of around 50 to 300 million US dollars.
Insiders of these projects can “sell an idea to the public while potentially fraudulently pumping up stock,” Mr. Gensler said.
“This leads to distorted incentives and exposes the public to further risk that the token will not be properly registered and properly disclosed and will comply with the various provisions of the Securities Act on anti-fraud and anti-tampering,” he added.
Mr. Gensler said he hopes the civil fraud charges against Mr. Bankman-Fried and charges against Ms. Ellison and Mr. Wang would show the crypto community that their operations must comply with existing securities laws.
Mr. Gensler said he would support legislation regulating certain crypto sectors like stablecoins — digital assets said to be tied to the value of a stable asset like the dollar, which often serves as a bridge between the world of traditional and futuristic finance. Investor interest in such assets is clearly there, he said, and some of those involved in traditional finance are intrigued by the prospects. But he’s wary of bills that could undermine the SEC’s authority.
“I believe that securities law is quite robust and covers a lot of activity,” Mr. Gensler concluded, “not just the token, but particularly the intermediaries in crypto-securities.”