FTX: Crime, crypto, calamity?
While initially we looked at the wider use of cryptocurrency and the arguments for its adoption and its proponents' attitudes as well as the usage within the context of government. We must turn a wider eye to government regulation itself to explain why you should care. Before looking at arguably the largest failure in FTX.
What was FTX?
FTX was a cryptocurrency exchange- short for Futures Exchange. Being one of the largest cryptocurrency exchanges in the world. Founded by CEO, Sam Bankman-Fried. It had a 32 billion USD value in January 2022 before collapsing in November 2022 due to major fraud that we’ll explore later.
Crypto regulation:
As the IMF puts it, cryptocurrency has gone from a ‘niche product’ to more ‘mainstream presence as speculative investments'. It has become a more serious proposal. Regulation has had to shift in its approach and take the industry more seriously. From a UK government consultation response in April 2022 a stated goal was:
‘Establishing a regulatory environment for stablecoins used as payment simultaneously creates a basis to enable market entry to support innovation, while ensuring that appropriate regulatory standards apply’
The admission here is that there wasn’t a regulatory environment to begin with or much regulation since. This does make sense as cryptocurrency is relatively new, but it does point to a change in approach. Moving away from letting crypto go unchecked. Language of innovation is to be expected
While only a slim amount of U.K. wealth (0.1%) was held in crypto assets, there’s obviously a significant risk if the asset faces a significant collapse and 0.1% is still a large amount of money on the scale of the U.K.’s entire wealth. While this concern is less relevant prior to the risks and flaws in the cryptocurrency market being exposed it has been exacerbated since this fact.
This risk is heightened considering the push for the use of crypto on a wider scale with figures like Elon Musk promoting it. The value of individual's assets being at risk as people can be scammed or lose a lot of money. The obvious risk here is vulnerable people hear the ‘success stories’ and fall prey to scams or don’t realise how much this is like gambling and lose life savings7 or any amount really. This being demonstrated with crypto when a U.K. investor reportedly lost £1 Million in the collapse of FTX.
The collapse of FTX:
Giant cryptocurrency exchange company FTX collapsed in November 2022, losing billions and leading to the arrest of CEO Sam Bankman-Fried on charges of fraud as well as evading political contribution limits. It's been a headlining case in crypto and tech news as a collapsed industry giant. With a shift in regulation of cryptocurrency due to what prosecutors called ‘one of the biggest financial frauds in American history.’ This being the story of FTX’s downfall.
Key points of collapse are the evading contribution limits seen through lobbying various congress members (Essentially, we’ll donate Millions to your re-election campaign if you don’t regulate us too much.). As well as desiring good PR and cleaning up the company's image. One example from the indictment is ‘being the centre left face of our spending... for transactional purposes.’ In reference to donating $1 Million USD to a Pro-LGBT senate candidate.
Furthermore, it was alleged that Bankman-Fried had a loophole in the system where, the alarms wouldn’t be set off allowing to ‘alter the companies records.’ and moving funds around with no scrutiny or legal recourse. This then leading to potentially $1 Billion being missing at the time. This was allowing ‘to posses... at his hedge fund.’ This obviously being significant fraud and very illegal.
We’ll now consider regulation since the collapse to discern if there has been a shift in approach to regulation or any notable attitude changes.
Where are we now?
A new government paper has been released pushing for more regulation in the crypto industry. This specifically looks at the collapse of FTX as this consultation focuses on ‘exchange activities.. And lending activities.’ Which was FTX‘s role. With the desire to bring it into the ‘regulatory perimeter.’. Obviously, this is in reaction to the collapse, and this offers a more reactive approach to regulation. Partly understandable as it is still hard to predict.
However, this again references the consultation discussed previously of April 2022. With the U.K. still desiring to be a ‘global hub for cryptoasset technology.’. The desires and dreams are still unchanged in their goals but should be highly tempered by the actual realities of the prior complete unregulation, as its identical rhetoric from the past few years. There is some change but if this is sufficient caution is still unknown. The regulation will be the way forward due to the significant financial risk attached as the confidence in crypto has been shaken to some degree. So, the questions remain, have companies and media learnt the right lessons and will the Crypto market get any better for regular people?
