Bring on the Crypto Regulators

○ If FTX had followed existing US rules, many customers would have been protected and it may not have imploded

In retrospect, there were red flags everywhere. Sam Bankman-Fried’s FTX crypto empire was a tangled web of offshore companies rife with conflicts. It mixed client money with its own. It had little or no corporate governance. There were few financial disclosures. But there were celebrities— lots of celebrities.

As prosecutors and creditors circle, everyone seems to be asking a version of the same two questions: How could this have been allowed to happen? And what can be done to keep it from happening again?

The FTX flop has driven home that a large chunk of the digital-asset industry thrives in regulatory gray zones and jurisdictional gaps, adding urgency to calls for new laws and regulations. Yet many experts agree that even though its offshore location put it largely outside US jurisdiction, there already are road-tested rules that might have prevented FTX’s downfall, if only they’d been followed. “FTX is a centralized entity like any other corporate entity,” says Carla Reyes, an assistant law professor at the SMU Dedman School of Law. “It wasn’t a case that the rules didn’t exist. It was a case that they didn’t follow them.” In interviews with securities experts and statements from lawmakers and regulators, five areas have emerged as crucial for Congress and regulators to focus on.

○ COMMINGLING OF ASSETS

At the center of a string of crypto failures is the lack of protection of customer assets. FTX may be the most egregious case, having lent customer funds to its sister company, hedge fund Alameda Research, to shore up risky trades.