The rapid collapse of the cryptocurrency empire FTX is sparking urgent calls in Washington for legislation to rein in the digital asset industry.
But after two top executives associated with FTX plead guilty to fraud charges on Wednesday, Gary Gensler, the chairman of the Securities and Exchange Commission, is pushing back calls for new laws, arguing that existing SEC rules and Supreme Court decisions will suffice. and that crypto issuers and exchanges simply have to comply.
“The road is getting shorter,” said Mr. Gensler in an interview Thursday, warning other crypto issuers and exchanges not registered with the agency that they could soon face enforcement action.
On Wednesday, the SEC announced it had reached a civil fraud settlement with two former top executives of the FTX empire, Gary Wang, a co-founder of the exchange, and Caroline Ellison, the CEO of FTX’s trading arm, Alameda Research. , which used billions in FTX client funds to back its high-risk bets.
The former executives pleaded guilty to criminal fraud charges filed by federal prosecutors in Manhattan, and they are cooperating with authorities in their investigation of 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. Bankman-Fried.
What you need to know about the collapse of FTX
What is FTX? FTX is a now-bankrupt company that used to be one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. Based in the Bahamas, the company built its business on risky trading options that are not legal in the United States.
The indictment alleges, among other things, that Ms. Ellison conspired with Alameda and Mr. Bankman-Fried to prop up the value of FTT, a cryptocurrency the exchange issued and used Alameda as collateral for its trading activities.
Many other crypto exchanges also issue their own tokens, including the world’s largest, Binance, which issues BNB. Individually, thousands of startups issue digital currencies to raise capital for their businesses, and these are traded on exchanges or “shop windows.”
But only about six out of every 10,000 or so of the crypto tokens in circulation at any given time are registered with the SEC, Mr Gensler estimated, meaning investors aren’t getting the same kind of disclosures they get with investing in stocks.
So the public should not have confidence in the reported figures on the volumes traded or the values of the tokens, Mr. Gensler said.
“Financial history would tell you that most of these tokens will fail,” he said, because most entrepreneurial ventures do. And “microcurrencies,” or currencies with very limited acceptance, have not been adopted because they simply aren’t useful, he added.
The aftermath of FTX’s demise
The sudden collapse of the crypto exchange has stunned the industry.
Many of those thousands of cryptocurrencies listed on exchanges and websites that track digital asset markets are sparsely traded cryptocurrencies, Mr Gensler said, and are subject to the same kind of manipulation as micro-cap companies or shares of small publicly traded companies with a market capitalization of approximately $50 million to $300 million.
Insiders on these projects can “sell an idea to the public while potentially fraudulently inflating the stock,” said Mr. Gensler.
“This leads to distorted incentives and further puts the public at risk of the token not being properly registered and having proper disclosures and complying with the various anti-fraud and anti-tampering provisions of the Securities Act,” he added.
Mr Gensler said he hoped the civil fraud allegations against Mr Bankman-Fried and the charges against Ms Ellison and Mr Wang would show the crypto community that their activities must comply with existing securities laws.
Mr Gensler said he would support legislation to regulate certain crypto sectors such as stablecoins – digital assets ostensibly linked to the value of a stable asset such as the dollar and often serve as a bridge between the worlds of traditional and futuristic finance. There is clear investor interest in such assets, he said, and some 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 the securities laws are quite robust and cover a lot of the activity,” concluded Mr. Gensler, “not just of the tokens, but especially of the brokers in crypto securities.”