Post-FTX Authority Tightening Its Anti-Crypto Course?

Gary Gensler, head of the US Securities and Exchange Commission, fired another warning shot against the crypto industry after the billion-dollar FTX affair. “The runway is getting shorter and shorter,” the 65-year-old told Bloomberg. Most players in the space are “wild west casinos”. The message is clear: the time for unregulated stock exchanges and the like is over.

The SEC boss also criticized the newly created practice of so-called “proof of reserves”. It became popular after the FTX crash. Sam Bankman-Fried’s 135-company crypto empire collapsed in November 2022 within a week after holes in its balance sheet and evidence of customer funds being misappropriated became public. The US Attorney’s Office already sees FTX as one of the “biggest financial scandals” in its history. Between 30 and 50 billion US dollars are said to be missing.

Critics call for tougher action by the SEC

In response to the disaster, major crypto exchanges like Binance disclosed their assets to prove their solvency. This form of evidence is “neither a complete record of a company’s assets and liabilities, nor does it suffice to segregate customer funds under securities laws,” Gensler said. The practice has also been criticized within the crypto industry with these arguments, for example by Jesse Powell, ex-CEO of Kraken, a leading crypto exchange.

Shortly after the FTX crash, fears arose in the industry that the SEC would tighten its line against crypto. Shortly thereafter, US Democrat and crypto opponent Elizaberth Warren called for “more aggressive measures” against the industry. “The SEC failed to legislate and failed to anticipate industry disasters and protect consumers, from Terra-Luna to FTX,” said Rep. Josh Gottheimer in a hearing in early December 2022.

No clear crypto regulation

The SEC is already in litigation with several large companies, including Ripple and Binance. The accusation: Your tokens are illegal securities. From the point of view of the financial supervisory authority, this applies to almost all so-called Altcoins. If this view prevails, most companies could face hefty fines, but possibly also imprisonment. But so far there are still no clear regulations for crypto in the USA. In early 2022, US President Joe Biden called for the creation of a legal framework for the industry by decree.

Is the SEC complicit?

The SEC is now under pressure to act due to the FTX scandal. The agency’s attorney general resigned after his involvement with FTX founder Sam Bankman-Fried became public.

Some US politicians, such as Republican Senator Tom Emmer, see the SEC as partly to blame for the disaster. Gary Gensler is responsible for “regulatory failures” and should be brought before Congress.

Brian Armstrong, CEO of the largest US crypto exchange, also sees responsibility at the SEC. Their inaction in creating moderate regulations would have led to 95 percent of crypto exchanges fleeing to unregulated countries. FTX was registered in the Bahamas. It makes no sense now to punish US companies for this failure.