(Kitco News) - Amid the fallout from the collapse of FTX, Securities and Exchange Commission (SEC) chair Gary Gensler offered a word of warning to companies looking to serve the crypto industry, saying “We need to protect crypto investors because the runway is getting shorter.”
FTX is a cryptocurrency exchange founded by Sam Bankman-Fried (SBF) that has run into liquidity issues over the past few days that sent the crypto market plunging. A failed attempt by the cryptocurrency exchange Binance to acquire FTX has led to the need for emergency funding in order to avoid bankruptcy.
Reports suggest that FTX had placed billions of dollars worth of customer funds on risky bets, with some suspecting customer funds were used to help bolster Alameda Research, a quant trading firm managed by SBF.
Gensler didn’t directly speak about the ongoing investigation into FTX, but noted that developments with the exchange are part of a pattern that is being repeated by crypto firms.
“When you mix together a bunch of customer money, and borrow against it, investors get hurt,” Gensler said, referring to the issues of insolvency faced by many struggling crypto firms such as Alameda, Terra/Luna and Celsius. “This is a very interconnected world in crypto with a few concentrated players. When markets turned on them, it appears that a lot of customers lost money.”
FTX is reportedly facing an $8 billion shortfall and is now looking to raise rescue financing in the form of debt, equity, or a combination of the two in order to stave off bankruptcy.
“For the next week, we will be conducting a raise. The goal of this raise will be first to do right by customers; second by current and possible new investors; third all of you guys,” according to a message posted on the company’s Slack by Sam Bankman-Fried.
In response to the question of whether the SEC is investigating FTX, Gensler stated that clear regulations are already in place, but the issue has been non-compliance by many crypto exchanges.
“The rules and the laws are clear, but do not assume that these firms are complying with the rules and the laws” that traditional exchanges or non-crypto financial apps follow, Gensler said.
The SEC chair said there are three main paths that the agency is taking to protect investors.
“One path is working with those crypto exchanges, and to get them properly registered and that’s so the public’s protected,” he said. “But we have another path, which is enforcement,” Gensler added. The third path focuses on educating investors.
“This field really needs to come into compliance,” Gensler stated. “We too have limited resources. We have a $100 trillion capital market to oversee.”
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| Crypto prices plummet as the FTX contagion spreads |
Kristin Johnson, Commissioner of the Commodity Futures Trading Commission (CFTC), echoed these statements from Gensler in an interview with Bloomberg Technology published on Nov. 9. Johnson stressed the need for a regulatory framework that would provide better visibility into crypto markets and cover all the elements involved in crises such as the one currently unfolding with FTX.
The commissioner noted that “the events of this week are not isolated,” highlighting “a continuous stream of events characterized by liquidity crises, acquisition, and consolidation.”
“If regulations were adopted today, we could do a better job mitigating some of these concerns in advance,” Johnson said.
The CFTC has been working with lawmakers on bipartisan bills to develop a regulatory framework “that gives the CFTC the authority over the spot market,” she said. “Access to spot markets would enable us to require the registration of exchanges and platforms that are facilitating crypto lending and cryptocurrency transaction.”
According to Johnson, “regulation would help to bring all of that under an umbrella where we could carefully review balance sheets and ensure liquidity requirements are met by platforms facilitating trade.”
“We have core principles at the CFTC, mirrored by regulation at the SEC, that would also insure against any anti-competitive mergers that might lead to consolidation in the market that is not in the public’s best interest, or consumers’ and investors’ best interest,” she concluded.
