The former Enron undertaker John Ray III, who was chosen by the court to guide the defunct cryptocurrency exchange through one of the worst bankruptcy proceedings in history, said he had never witnessed “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here” after the collapse of FTX.
Few of those hailed as the golden children of cryptocurrency are, in fact, viewed in such dazzling light today. Since the failure of Terrain 2022, Do Kwon, the co-founder and CEO of Terraform Labs, has been on the run from law enforcement.
After Terra’s demise, Three Arrows Capital, a cryptocurrency hedge fund, failed to return loans. This led to the bankruptcy of lenders Celsius Network and Voyager Digital, the loss of customer cash, and the devastation of all the other businesses from which Three Arrows had borrowed money.
Now that the corporations have collapsed, regulators and lawmakers are picking up the pieces and looking into the cause. In December 2022, the U.S. House Financial Services Committee hosted a hearing on FTX.
After FTX failed, FINRA began gathering data on cryptocurrency marketing techniques, which could lead to new policy. According to Nik De, this is the kind of case that investigators are interested in pursuing, and “lawmakers are paying notice.” This may maintain the “regulation by litigation” trend that has long characterized the cryptocurrency industry.
What steps will authorities take to repair the industry in the coming year, and are new rules required to prevent another collapse like the FTX? If you are planning to exchange or you are buying and converting cryptocurrencies this year, this article should give you some heads up to understand more about the value of buying cryptocurrency.
Regulators Will Litigate
Kim Kardashian and a number of other well-known celebrities were sued by the U.S. Securities and Exchange Commission (SEC) in 2022 for promoting ethereumMax during the bull market in 2021. Following a settlement between the Treasury Department and BitPay over the latter’s decision to allow users from sanctioned countries, such as North Korea and Iran, to use its platform, the DOH established a team to impose sanctions on Russia in March 2022.
The U.S. government’s legal measures are likely to continue in 2023, according to a note from the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, and “we will see new crypto-related sanctions recommendations, enforcement actions, and designations in the near term.” President Joe Biden’s executive order on cryptocurrencies from March 2022, which mandated federal agencies to report on the sector, is partially to blame for this.
There won’t be a scarcity of cases in this year, without a doubt. In August 2022, the Treasury Department increased the restrictions imposed on Tornado Cash, a decentralized Ethereum crypto-mixing service. Additionally, the SEC continues to pursue its legal case against Ripple Labs, the organization that developed XRP, for allegedly using the cryptocurrency in illegal securities transactions.
The bankruptcy courts continues to rule on the cases of Three Arrows Capital, FTX, Voyager, and Celsius (plus the companies they allege were the victims of their failures), surely creating legal precedents for the industry.
Policymakers and Regulators Will Make New Laws
Every government agency is concentrating on preventing a collapse like the one experienced during the FTX. The UK should “continue to bring these activities and organizations within regulation,” the deputy governor of the Bank of England recommended.
It’s supposed that the new rules should ensure that stablecoins “meet criteria similar to those needed of commercial bank money,” as they will do so. The separation of client funds and corporate assets has been demanded by American Treasury Secretary Janet Yellen.
The Senate Agriculture Committee’s Digital Commodities Consumer Protection Act (DCCPA) imposes strict rules on clients’ assets in an effort to protect people from another Celsius or Voyager.
If it goes forward, the Commodity Futures Trading Commission (CFTC) will oversee its execution and pursue legal action against those who break the law. Opposition exists, though, as some people think this will make decentralized financial (DeFi) protocols more challenging to use. In an opinion piece, Jennifer Schulp and Jack Solowey from the Cato Institute said that it jeopardizes “DeFi’s distinctive qualities of composability and permissionlessness.”
However, it’s possible that adopting multiple new laws is not the wisest course of action.
After FTX’s demise, Yellen urged “more effective monitoring of the cryptocurrency markets,” stressing that “the majority of our financial products and markets are covered by extremely rigorous investor and consumer protection laws that are meant to address these risks.”
Lisa Braganca, a former SEC branch chief, believes that the CFTC and the SEC will be the ones to impose any new legislation, not Congress.
“I still have serious doubts about whether Congress wants to step in and take action rather than leaving the SEC and the CFTC handle it”, she told the media.
SEC Commissioner Hester Peirce said that having just one regulator focused on cryptocurrencies could be problematic and urged the two regulators to collaborate on new laws.
The SEC may have amended its standards prior to FTX’s failure because not enough was done to prevent it from stealing consumer funds, claim regulators’ critics. John Gulliver, the research director for the Committee on Capital Markets Regulation, and professor emeritus Hal Scott argued in an opinion piece for Financial News that the SEC accounting rule deterred reputable large banks from holding crypto assets.
“Banks and affiliated broker-dealers might provide their services to the U.S. investors in cryptoassets and to crypto exchanges, placing cryptoassets in the hands of the safest custodians in the world,” they said in their statement.
