{"id":5126,"date":"2023-02-09T11:07:50","date_gmt":"2023-02-09T17:07:50","guid":{"rendered":"https:\/\/blogs.luc.edu\/compliance\/?p=5126"},"modified":"2023-02-09T11:07:50","modified_gmt":"2023-02-09T17:07:50","slug":"regulatory-ecosystem-post-ftx-sbf-disaster","status":"publish","type":"post","link":"https:\/\/blogs.luc.edu\/compliance\/?p=5126","title":{"rendered":"Regulatory Ecosystem Post-FTX (SBF) Disaster"},"content":{"rendered":"

Junmo Yoon<\/em><\/span><\/p>\n

Associate Editor<\/em><\/span><\/p>\n

Loyola University Chicago School of Law, JD 2024<\/em><\/span><\/p>\n

From \u201cHow are institutions and companies investing in crypto<\/a>\u201d and \u201cSequoia Capital launches $500 million fund to invest in crypto<\/a>\u201d to \u201cFTX files for bankruptcy<\/a>\u201d and \u201cSequoia Capital marks down its $210 million crypto investments to $0<\/a>\u201d \u2013 the crypto market capitalization<\/a> skydived from $3 trillion in November 2021 to $881 billion, experiencing a 71% freefall in just one year.<\/span><\/p>\n

Major household names such as FTX, BlockFi<\/a>, Celsius<\/a>, Genesis<\/a>, TerraLuna, Three Arrows Capital<\/a>, and Voyager all evaporated within days after public recognition of corporate issues including capitalization and intra-firm lending. Last summer\u2019s TerraLuna<\/a> and Voyager<\/a> bankruptcies foreshadowed the debacle to come. However, enthusiasts remained naively optimistic until the shockwave of FTX\u2019s evaporation<\/a> led to the collapse of an entire market. Investors rushed to withdraw their investments only to see their accounts already frozen or funds already missing<\/a>. Before it is too late, either the Commodities Futures Trading Commission (CFTC) or the U.S. Securities and Exchange Commission (SEC), or the agencies jointly together, should take action on this volatile decentralized market.<\/span><\/p>\n

<\/p>\n

Still reacting, not pro-acting<\/strong><\/span><\/p>\n

Reacting after the fact, regulators and lawmakers<\/a> are now picking up the pieces and investigating why the companies collapsed. The US House Financial Services Committee<\/a> held a hearing on FTX. The Financial Industry Regulatory Authority<\/a> (FINRA) started collecting information about crypto companies\u2019 marketing practices, which may result in new policies concerning market promotions and communications. The SEC<\/a> sued high-profile celebrities that allegedly promoted false information about cryptocurrencies. The enforcement and investigation actions of the SEC and FINRA illustrate reactive \u201cregulation through litigation\u201d that dominated crypto for years. However, regulators need to become more proactive<\/a> about the way they oversee digital currency to prevent a clear case of fraud like Sam Bankman-Fried\u2019s FTX.\u00a0<\/strong><\/span><\/p>\n

The scale and impact of FTX\u2019s collapse means the Biden administration<\/a> will soon act to advance legislation the administration believes is necessary to address gaps in regulations. This presents the issue of which agency, such as the CFTC or SEC, is best suited to protect the American public by assuming additional regulatory authority. Outside of future consumer protections and a driving sense of urgency to get something on the books, is an underlying regulatory \u201cturf war\u201d over which agency should be responsible for overseeing crypto exchanges \u2014 and who deserves the subsequent increase in budget and staffing.<\/span><\/p>\n

Tug of war: CFTC vs SEC<\/strong><\/span><\/p>\n

The SEC<\/a> regulates traditional securities, such as equities, debt instruments, investment contracts. The CFTC, on the other hand, has plenary jurisdiction over derivatives, such as futures or swaps involving commodities, except to the extent such commodities constitute securities. The CFTC also has the authority to bring enforcement actions against persons who commit fraud in connection with commodity transactions even when they do not involve derivatives. As such, although the CFTC currently oversees<\/a> certain important regulatory aspects, the agency\u2019s abilities are limited to regulating crypto derivatives. The CFTC has requested $365 million<\/a> in 2023 for its operations, far fewer resources than the SEC, which asked for more than $2.1 billion for the same fiscal year.<\/span><\/p>\n

CFTC Chairman Rostin Behnam<\/a> appeared before the Senate Agriculture Committee on December 1 to answer questions about the FTX collapse. Behnam was adamant about the need for legislation that allows for increased responsibility of CFTC in policing the crypto industry. Behnam, along with Agriculture Committee chair, Sen. Debbie Stabenow, D-Mich., who is sponsoring the bill, and ranking member Sen. John Boozman, R-Ark., have all been trying to push through the Digital Commodities Consumer Protection Act (DCCPA)<\/a> as a solution for crypto regulation. The DCCPA would put the power to regulate the spot digital commodity market \u2013 where commodities, currencies, and securities are traded for immediate delivery \u2013 under the CFTC\u2019s jurisdiction.<\/span><\/p>\n

Behnam highlighted<\/a> a CFTC-regulated entity, LedgerX LLC<\/a>, which with the CFTC frequently communicated with to ensure it was compliant. He emphasized that<\/a>: \u201cMost of the coverage about FTX in the past weeks has focused on the over 130 different entities that filed for bankruptcy. Of significantly less focus is the entity registered with and successfully overseen by the CFTC.<\/span><\/p>\n

Conclusion<\/strong><\/span><\/p>\n

Some have argued that it is unlikely the CFTC will win full jurisdiction because crypto assets are understood to be securities. Experts also say the SEC is a tougher regulator<\/a> when it comes to consumer protection and enforcement. On the other hand, in 2022, the CFTC has better demonstrated its aggressiveness as more than 20% of the agency\u2019s enforcement actions<\/a> were against the crypto household names for various alleged offenses. As such, the U.S. government remains uncertain on which agency should regulate. \u00a0<\/span><\/p>\n

After an action-filled 2022, 2023 will be a year of regulation against decentralization. Rather than wasting time figuring out who has proper jurisdiction, the CFTC and the SEC should cross boundaries and establish a new regulatory framework to effectively control the decentralized.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

From \u201cHow are institutions and companies investing in crypto\u201d and \u201cSequoia Capital launches $500 million fund to invest in crypto\u201d to \u201cFTX files for bankruptcy\u201d and \u201cSequoia Capital marks down its $210 million crypto investments to $0\u201d \u2013 the crypto market capitalization skydived from $3 trillion in November 2021 to $881 billion, experiencing a 71% freefall in just one year.<\/p>\n

Major household names such as FTX, BlockFi, Celsius, Genesis, TerraLuna, Three Arrows Capital, and Voyager all evaporated within days after public recognition of corporate issues including capitalization and intra-firm lending. Last summer\u2019s TerraLuna and Voyager bankruptcies foreshadowed the debacle to come. However, enthusiasts remained naively optimistic until the shockwave of FTX\u2019s evaporation led to the collapse of an entire market. Investors rushed to withdraw their investments only to see their accounts already frozen or funds already missing. Before it is too late, either the Commodities Futures Trading Commission (CFTC) or the U.S. Securities and Exchange Commission (SEC), or the agencies jointly together, should take action on this volatile decentralized market.<\/p>\n","protected":false},"author":155,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[371,547,917,1788],"class_list":["post-5126","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-cftc","tag-cryptocurrency","tag-ftx","tag-sec"],"_links":{"self":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts\/5126","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/users\/155"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5126"}],"version-history":[{"count":0,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts\/5126\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5126"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5126"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5126"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}