The cost to global markets of multiple recent failures of digital asset service providers, particularly Sam Bankman-Fried’s FTX, a collapse playing out as we close this issue of ACAMS Today, remains unknown.
But because FTX’s bankruptcy is likely to result in billions of dollars in losses for its investors and users, efforts to assign blame are already raging. Politicos and pundits are pointing to various “culprits,” generally based on how they viewed virtual assets before these latest bankruptcies.
The accused include the usual suspect: Regulators!
Regulators, particularly in the U.S., the U.K. and a handful of other places, have been too hostile to virtual asset service providers (VASPs) and other crypto businesses, or so one argument goes. These critics blame regulators for not working more closely with digital asset entrepreneurs to arrive at principles for a sounder market.
This particular argument overlooks the fact that many in the virtual asset world fought regulation aggressively, enlisting lobbyists to prevent the U.S. Congress and other legislative bodies from imposing restrictions on their behavior. Efforts to escape regulation have included registering VASPs in countries (or U.S. states) with lax regulatory requirements, as described in ACAMS Today last year1 and revisited in our September-November issue.2
It is true that in so far as prudential oversight goes, regulators had little visibility into the failed crypto businesses.
Yet, despite their limited reach, a number of regulatory agencies responsible for overseeing anti-money laundering and counter-terrorist financing (AML/CTF) compliance deserve credit for containing the potential damage from the current tumult. While the dust is still settling, the bankruptcy filings of FTX, Digital Holdings, Celsius Networks and Three Arrows Capital do not contain mention of exposure to bank creditors.
“Despite contagion across cryptocurrencies and several crypto-platforms, the federally regulated banking system has, for the most part, been largely unaffected,” Acting Comptroller Michael Hsu testified before the Senate Banking Committee in November, as reported in ACAMS moneylaundering.com.3
Several factors explain the U.S. banking system’s limited exposure to crypto. A year ago, federally supervised banks received a formal notice from the Office of the Comptroller of the Currency (OCC) mandating that they disclose plans to serve cryptocurrency companies and request permission to do so. The OCC’s approach echoed the caution of other federal banking regulators to support crypto businesses that—with a few notable exceptions—were resisting compliance with the Bank Secrecy Act.
Nevertheless, 31 states, with the notable exceptions of New York, Texas and California, granted FTX licensing or similar approvals. FTX also claimed legitimacy and the ability to operate nationally in the U.S. because it holds licenses from the Commodities Futures Trading Commission (CFTC), which Bankman-Fried publicly tried to advance as the primary federal regulator of VASPs.
All of this, and the fact that FTX was headquartered in the Bahamas, looks—it is an understatement to say—suspiciously like an effort on the part of FTX, along with many VASPs, to evade rigorous prudential and anti-financial crime oversight.
While there is little amusing in all this, one thing to watch for now is how some in Congress will blame regulators for the hurt done to constituents who did business with the failed VASPs: Some will be the same legislators who have consistently sought to defund and hamper the oversight agencies on the grounds that regulation is anti-free market.
Innovation in markets is important but so are rules. FTX is only the most recent example of the importance of government oversight. The Republic for Which It Stands, a history of the U.S. during reconstruction and the gilded age by Stanford University professor Richard White, offers several chapters illustrating how industry, including railroad, cattle and mining, were spared self-destruction by government oversight.4
Whatever happens to bitcoin, ethereum and its derivatives, including stablecoins, some forms of virtual assets will arise from this year’s VASP meltdown. Following the lessons of history and of today’s news reports, champions of the next generation of blockchain distributed ledger technology should learn to embrace regulation for the sake of their customers and investors. And, with the example of Bankman-Fried before them, their own sake as well.
- Kieran Beer, “It Is All About the Digital World,” ACAMS Today December 2021-February 2022, https://www.acamstoday.org/it-is-all-about-the-digital-world/
- Kieran Beer, “Time to Come Together on Crypto Regulation,” ACAMS Today September-November 2022, https://www.acamstoday.org/time-to-come-together-on-crypto-regulation/
- Fred Williams, Benjamin Hardy and Koos Couvée, “Due Diligence, Supervisory Failures Preceded FTX’s Collapse,” ACAMS moneylaundering.com, November 28, 2022, https://www.moneylaundering.com/news/due-diligence-supervisory-failures-preceded-ftxs-collapse/?type=free
- Richard White, “The Republic for Which It Stands,” Oxford University Press, 2017.