Even as Sam Bankman-Fried, the former CEO of the collapsed crypto exchange FTX, was arrested and denied bail earlier this week, the questions around the case — and what lies ahead — continue to linger.
“The arrest of Bankman-Fried was both overdue and jumping the gun,” Matthew Barhoma, founder of Barhoma Law and Power Trial Lawyers, told TechCrunch.
What we have seen may just be the beginning, Barhoma hinted: “Expect more charges against Bankman-Fried and others associated with FTX.”
On Tuesday, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) all filed charges against Bankman-Fried for defrauding investors. He’s also being investigated for other securities law violations, alongside other pending investigations against others involved.
As the situation unfolds, Miles Fuller, head of government solutions for Taxbit, agrees with Barhoma that more charges will arise. “SBF’s arrest was not unexpected,” he said.
Damian Williams, the U.S. attorney for the Southern District of New York, was asked during a press conference on Tuesday afternoon whether the entities will bring charges against other individuals allegedly involved in the FTX collapse, to which he replied, “I can only say this: Clearly, we are not done.”
“Of the eight counts in the indictment, five are conspiracy counts,” Fuller said. “A criminal conspiracy, by definition, requires more than one individual, so we should anticipate that at least some other individuals will need to be identified and possibly charged as co-conspirators.”
There is much speculation around the extent of the criminal action and who was involved in the FTX saga, according to Joby Carpenter, global head of crypto assets and illicit finance at ACAMS. “The unsealed indictment from the U.S. Department of Justice references massive fraud, money laundering and violations of campaign finance laws in the U.S. There’s more to play out, though,” he told TechCrunch.
Prosecutors are likely to focus on the level of fraud and how sophisticated — or unsophisticated — the FTX scheme might have been, Barhoma said.
The biggest issue with FTX appears to be that the exchange was violating its own terms of service agreement with customers that indicated, for most account holders, that it could not use or exert control over their deposits, Fuller said. “FTX appears to have breached this agreement,” he added.
Mismanaging billions of dollars does not occur by mere negligence, Barhoma said. “As such, regulators should be ready to institute procedural safeguards to protect against the next FTX-level debacle,” he said.
Upcoming regulation
Given the amount of customer funds that have been lost — an estimated $7 billion so far, according to new FTX CEO John Ray — future regulatory efforts may focus on consumer protection measures. “What that looks like is currently unclear, but the first step is being taken through vigorous criminal prosecution for violating such an agreement,” Fuller said.
Although FTX is a crypto exchange, the financial markets industry has seen this level of alleged fraud before, too, just in its own fashion, Carpenter said.
“Wirecard collapsed with billions of Euros missing, and before that, we saw examples going back to Bernie Madoff and The Bank of Credit and Commerce International (BCCI). What do they all have in common? A charismatic and ultimately shamed and discredited leader,” he said.
“Although FTX was an exchange for crypto, the apparent fraud committed by SBF was at its core a failure of an unaudited centralized company,” Tyler Benster, technology adoption lead for layer-1 blockchain Kadena Eco, told TechCrunch. “Customer funds were misappropriated in a way that DeFi applications and smart contracts simply don’t allow.”
Knock-on effects
A case like this of course impacts the crypto industry, but the effects will vary depending on the short-term or long-term outlook, Fuller said.
This is bad for the crypto market, but it will bounce back, Barhoma said. “The crypto market is currently on its knees, given the impending recession and the collapse of one of its biggest exchanges,” he said.
Yet, the public stock markets have been through similar situations, and if they were able to recover, why can’t crypto?
“In the short term, [the FTX collapse] has some macro-level impact because it involves a lot of money and has received a lot of publicity such that it can negatively affect public sentiment around crypto,” Fuller said. “In the longer term, the impact will be much lower.”
It’s hard to believe that regulators and policy officials will be “doing anything other than frantically trying to fill the regulatory gaps and establish global oversight of the entire crypto sector,” Carpenter said. The regulatory focus will be on providing frameworks for centralized services, like exchanges, as well as on decentralized or DeFi protocols, he added.
Proactive engagement on the part of lawmakers and regulators “can be a good thing,” too, Fuller said. “It can result in more effective rules that protect consumers and create clarity while still allowing for innovation.”
Technical solutions that meet existing regulations could cause short-term pain, Benster said, “but ultimately will drive a safer and more secure financial system where regulatory compliance is enforced by smart contracts that are less vulnerable to transient human greed.”
That said, the scale of recent financial losses and harm to investors will potentially hold the industry to a “far higher standard” than before, Carpenter said. Most of all though, the sector must go back to basics and do all the simple things right, he added.
“The sector and its underlying tech aren’t going away despite what some regulators might wish,” Carpenter said.
“I believe there will be a long-term comeback in the market overall,” Barhoma said. “It’s currently too big to fail.”