FTX’s implosion has shown how much the crypto industry thrived between regulatory and jurisdictional gaps.
It has also revealed the dangers inherent to consumers that exist when the companies they’ve handed control of their assets over to collapse into these gaps.
What U.S. regulatory bodies will do to prevent this, and how they’ll ensure this will never happen again to U.S. consumers who are still looking to one day invest in alternative currencies, is an increasingly common and important question. That’s especially given that over a million customers have likely lost everything they entrusted to FTX.
The failed exchange’s downfall was not without collateral damage to the crypto industry either. FTX’s unexpected bankruptcy severely rattled investor confidence and sent deep tremors throughout the broader marketplace, simultaneously felling several of FTX’s entangled peers.
Are Cryptocurrencies Securities?
The answer to that question will likely determine the fate and viable usage of most tokenized digital assets, at least as it relates to their ability to legally operate on U.S. soil and market themselves to U.S. consumers.
And the answer to appears to be, yes. Cryptocurrencies are in fact securities. All 10+ thousand of them — at least according to the agency in charge of their regulation, the Securities and Exchange Commission (SEC).
In a Wednesday (Dec. 7) interview with Yahoo! Finance, SEC chairman Gary Gensler stated that “there’s nothing incompatible about our securities laws and crypto… most of these tokens are securities, that means [they] need to come into compliance with our time-tested laws.”
This comes as Gensler’s agency, as reported by the Wall Street Journal (WSJ), faces increasing calls to step up and apply the repercussions of those laws.
Unfortunately for the Investing Public
There is just one big problem with the clamored-for enforcement of those existing securities laws: Many crypto companies are strategically set up in offshore locations like the Bahamas, Bermuda or the British Virgin Isles. These island havens, beyond just offering attractive tax environments, allow companies to technically operate outside the purview of America’s regulatory and governmental bodies.
Unless the companies themselves tap into U.S. markets, or service U.S. customers through domestically incorporated business arms, they are subject only to the regulations of their host nation. Several of these countires, including the Bahamas, have crafted legislation specifically geared toward attracting crypto businesses, creating a thorny situation at best.
Crypto is a worldwide market. Companies headquartered overseas can still market their wares to American consumers. U.S. consumers can still invest in their offerings. It is, at the end of the day, up to consumers to do their own due diligence and make their own responsible decisions with their hard-earned money.
Still, the “runway is getting shorter” for crypto firms operating in the U.S., or hoping to, Gensler said. He has put the onus on entrepreneurs and business leaders in the crypto space to work with the SEC to ensure their compliance with American laws. And the American investing public is an attractive audience to tap.
“Much of this is offshore,” Gensler has said. “Unfortunately for the investing public, the entrepreneurs in this field have chosen — and it’s a choice — they have chosen to try to skirt the law, whether they’re setting up overseas and they’re servicing overseas actors. That’s for other jurisdictions. That’s for other regulators around the globe. But if they’re in U.S. markets, they need to come into compliance.”
One of the biggest steps crypto companies would need to take in order to come into compliance is disaggregating their various businesses. After all, it was the allegedly improper relationship between FTX’s cryptocurrency exchange business and its hedge fund Alameda Research that purportedly led to the rapid downfall of both.
“We don’t let the New York Stock Exchange (NYSE) also run a hedge fund and trade against customers. Separate out a separate broker-dealer. Separate out separate custody function. And really use the time-tested rules of the road that are on the books,” is Gensler’s advice for the crypto industry.
As reported by PYMNTS, the owner of the NYSE whole heartedly agrees with that sentiment.
Gensler is welcoming crypto leaders from around the globe to work with his agency to find a happy, compliant and safe solution to operating in the U.S.
Fortunately for the Investing Public
Regulatory clarity will come with time. Both the Commodity Futures Trading Commission (CFTC) and SEC are each confident in their authority and ability to oversee the industry. There are also multiple and major bipartisan crypto bills being introduced in Congress this year that would expand regulatory authority and powers of enforcement.
Gensler, who himself served as chair of the CFTC over a decade ago, has supported giving the separate regulatory body a bigger role regarding crypto oversight around derivatives and the spot market. If the two agencies can successfully work together to protect the American public from bad actors in the still-emergent crypto industry, it could also go a long way toward closing the trust gap that has widened over the past month.
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