by TFeds arrested FTX founder Sam Bankman-Fried in the Bahamas Monday night as part of an eight-point indictment involving money order fraud, securities fraud and money laundering. Then, more hammer blows fell. The Securities and Exchange Commission (SEC), which regulates financial markets, has filed a civil lawsuit for allegedly defrauding its investors and customers. The Commodity Futures Trading Commission (CFTC), which Bankman-Fried (nicknamed “SBF”) once lobbied to regulate FTX and the crypto industry, did the same with its own claims.
After weeks of speculation about when the 30-year-old former multi-billionaire will be charged, he now faces a long prison sentence and the prospect of years of litigation with an alphabet soup of federal regulators. But so far, the accusations against the SBF have been narrowly focused, leaving the broader cryptocurrency industry largely unscathed by the new regulatory oversight.
According to experts, in its complaint, the SEC gave up the opportunity to seize control over a much broader area of the crypto market by declaring certain cryptocurrencies as “securities” – which would have made them subject to much more intense federal rules. Industry experts say the growing public interest around Bankman-Fried could really slow down Congress’ efforts to pass crypto legislation.
The result is that the chaotic status quo of crypto remains in place for now. Any crypto critic who hopes that the fall of SBF will put rapid pressure on the entire industry will have to wait.
“I’m happy to see the way it’s being framed,” says Kristin Smith, executive director of the Blockchain Association, a DC-based crypto lobby, citing the SEC and DSNY complaints. “I don’t see them having much of a ripple effect on other parts of the industry.”
SEC keeps its course
Over the past year, several federal agencies, including the SEC and CFTC, have been competing for crypto oversight. Earlier on Tuesday, the SEC went on the offensive. He became the first federal regulator to file a complaint against Bankman-Fried. (The US Attorney for the Southern District of New York, which handles many of the largest financial prosecutions in the country, filed the original indictment on December 9. It wasn’t made public until late Tuesday.)
SEC Chairman Gary Gensler used harsh language against crypto in his accompanying statement, writing that the action against Bankman-Fried was a “clear call to crypto platforms that they must abide by our laws … platforms that do not.” Our securities laws, the SEC’s Enforcement Division, are ready to act.”
Crypto critics applauded the statement. “My next guess is that the SEC will file a series of lawsuits against crypto exchanges,” said John Reed Stark, a former SEC enforcement attorney. tweeted. “Do not fail at your peril. @Coinbase, @SECGov brought you in front of him.”
But crypto lawyers soon realized that the original complaint against Bankman-Fried did not attempt to broaden the scope of the SEC. Gensler has tried for months to argue that many cryptocurrencies are securities rather than commodities, which would have him auditing them, unlike the CFTC, a smaller regulatory body that is often perceived as more crypto-friendly. However, the way the SEC really takes control is through either passing a congressional bill or making a legal claim approved by a judge.
But securities attorney Orlando Cosme says the second route is risky for the SEC. If the SEC files charges against the SBF, which defines a cryptocurrency as a security, a judge can rule against that claim, which will limit the SEC’s ability to regulate cryptocurrency in the future.
In this case, the SEC took the opportunity to argue that FTX gave investors the opportunity to trade securities. However, the agency chose not to do so, as the word “security” was never included in the complaint. Instead, they focused on allegations that SBF defrauded investors of FTX’s stock, which is more clearly covered by securities laws.
“They tend towards the clearest arguments and I think they focus appropriately on FTX,” Smith says.
Cosme, who is also the co-founder of web 3 startup StackerDAO Labs, said the SEC’s attempts to set a precedent about crypto could jeopardize its core claims against Bankman-Fried. “I think their main concern is to bring the SBF to justice. It makes more sense for them to go after him and lie to the FTX investors, because that’s a fruit to be taken lightly,” he says.
The SBF has yet to make a plea and has repeatedly told the press that it was unaware of the extent of FTX’s financial problems.
However, Mark Kornfeld, an attorney at Buchanan Ingersoll & Rooney PC, says the involvement of the SEC could bring change down the road, even if no regulatory precedent is set by the complaint itself. Kornfield got involved in asset recovery following Bernie Madoff’s pyramid scheme, saying, “Post-Madoff federal prosecutors and regulators modernized their tools for investigating financial crimes by improving access to important data. “I think you will see some parallels in crypto as this evolves over the coming years,” he says.
Congressional confusion
While federal agencies seem to be chasing the man instead of dealing with the entire ecosystem, Congress seems no closer to converging on a regulatory approach than it was before the FTX debacle. There are many crypto-related bills floating in the House and Senate, and some members have used this fiasco to prioritize their own bills. For example, Senators John Boozman and Debbie Stabenow used a recent Senate hearing to discuss bills called the Digital Goods Consumer Protection Act (DCCPA) actively supported by Bankman-Fried.
But Miller Whitehouse-Levine, policy director at The DeFi Education Fund, told TIME in a phone call two weeks ago: “I don’t think this hearing is indicative of the momentum behind the DCCPA. If anything, I think it adds a lot to think about over the next few months.”
Read more: Sam Bankman-Fried’s Shadow Looks Prominent on First Crypto Hearing After Congress’ Post-FTX Crash
Smith suggested a similar prognosis. “The fact that we have so many policy makers paying attention to these issues right now may actually have the effect of slowing the process down a bit as they speed up and start examining different options,” he said.
While some senators hope to crash cryptocurrencies, others turn their focus to Genlser, adding to the confusion. Representative Tom Emmer, Minnesota Republican and prominent crypto supporter, called Gensler testify before Congress on the “cost of regulatory failures.” And Ritchie Torres, a New York Democrat, requested Congress’s Office of Government Accountability is investigating the SEC’s inability to protect the public from the fall of FTX. Torres wrote that Gensler was “exclusively responsible for the regulatory failures surrounding FTX’s collapse.”
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