Regulation
SBF, FTX and the future of crypto regulations
THE The 2022 FTX collapse resulted in $8 billion in customer losses in one of the largest frauds in US history.
This incident highlights the volatility and regulatory challenges in the cryptocurrency market, highlighting the urgent need for comprehensive understanding and risk management strategies in this rapidly evolving industry. Founder and former billionaire Sam Bankman-Fried, widely known as SBF, was convicted of seven counts of fraud and conspiracy and later sentenced to 25 years in prison.
This scheme has cast a dark cloud over the cryptocurrency industry for some investors and invited greater scrutiny from regulators. However, as digital assets continue to grow in popularity and solidify their place as a digital asset key component of global tradewhat will be?
Jessica Cath, head of financial crime at Thistle Initiatives, and Mardi MacGregor, partner at Fox Williams LLP, joined Converge to discuss the consequences of fraud and what regulatory changes they expect to see implemented.
How FTX Eroded Confidence in Cryptocurrency Investing
“[This case] it raises a lot of questions about fraud more generally and also questions about trust in the cryptocurrency sector,” Cath said. “It has really eroded trust in the sector due to the prevalence of cryptocurrency-related scams, which have played a significant role in undermining the trust.”
As Cath describes, the situation ultimately boils down to weak governance and weak controls over crypto risk management. In such a fast growing company: FTX once added $7 billion in value in just a few months – maintaining strong compliance is easier said than done.
Now, however, other cryptocurrency players can learn valuable lessons. Being vigilant against crypto scams, including giveaway scams and the challenges of recovering funds after falling for a crypto scam, is essential to reframing the way many people think about cryptocurrencies and their trading platforms.
Additionally, diversifying investments across different cryptocurrencies as part of a well-thought-out crypto portfolio strategy can mitigate risk. Emphasizing cryptocurrency trading risk management is critical to protecting yourself from losses and changing consumer sentiment in the cryptocurrency industry, as these scams, which often involve impersonating well-known figures, further erode trust in digital assets.
Cryptocurrency companies and exchanges are moving towards increased regulation in the wake of FTX fraud as both a form of legitimacy and a way to make money trust with investors surrounding digital assets, according to MacGregor.
“I think transparency and regulatory compliance are crucial when it comes to rebuilding trust in the cryptocurrency industry,” he says.
Building authority for cryptocurrency trading risk management in the UK and beyond
The Financial Conduct Authority (FCA) regulates 50,000 financial services firms and markets in the UK, but MacGregor said it was a work in progress.
“At the moment, here in the UK we have a patchwork of cryptocurrency regulations. We don’t have a coherent regime, and that’s a bit of a problem.”
This contrasts sharply with the more uniform and stringent regulatory frameworks seen in traditional financial markets, where rules have long been established to manage risks, including the use of hedging strategies to protect against market volatility. The regulatory landscape of the cryptocurrency market, in comparison, exposes traders to a greater potential for fraud and scams due to its less regulated nature.
He added that while the government and Treasury offer rhetoric supporting cryptocurrencies, regulators have been much more skeptical in trying to protect investors from FTX-type fraud. The result? Complicated regulations.
This has created higher barriers to entry for crypto companies, which can mean higher compliance costs, according to Cath. “There are many costs involved in putting your compliance structures in place before you can launch and offer your services in the UK”
Regulatory planning and compliance for crypto assets in an evolving landscape
Registering crypto companies with the FCA requires a clear regulatory and growth plan. Cath said the next step will be to create a broad range of compliance policies and procedures in the world of digital assets.
The one policy that she believes is critical to implement is cryptocurrency risk management, underlining the importance of effective risk management in the cryptocurrency industry. This involves a systematic and structured process to identify, analyze, evaluate and develop treatment plans for the risks associated with investing in cryptocurrencies.
There are key tools to achieve this, such as risk checklists, risk registers and risk workshops for in-depth risk identification. These are in addition to other risk mitigation techniques including avoidance, mitigation, transfer and acceptance to effectively manage the risks associated with cryptocurrency investments.
Such an approach ensures that companies not only consider how their products could be used for nefarious purposes, but also create controls that map those risks to ensure strong governance.
It is also essential to emphasize the security of digital assets, especially the importance of protecting private keys. Losing access to private keys means a permanent loss of crypto assets, highlighting the need to back up private keys and move assets into cold storage to maintain full custody and mitigate risk.
Building authority for cryptocurrency trading risk management in the UK and beyond
Meanwhile, MacGregor stressed that cryptocurrency exchanges must prioritize customer protection. “The primary regulatory concern in this space is consumer protection, and I think the FTX case really highlights that.”
He also said regulators are still trying to find a balance between consumer protections and burdensome corporate regulations for crypto assets.
“If regulation is too excessive or disproportionate, it will create an unacceptable barrier to business entry. But equally, as we know from the FTX case, where there is no regulation, customers are not protected.”
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