FTX's Failure Is Sparking a Massive Regulatory Response

"The collapse of FTX will likely give rise to a number of criminal and civil actions against the exchange and its executives, like former FTX CEO Sam Bankman-Fried," reports CoinDesk, citing a number of legal experts. "It's also likely to push forward actual regulatory changes, either via lawmakers or through federal agencies themselves." An anonymous reader shares an excerpt from the report: FTX filed for bankruptcy last Friday, days after halting withdrawals and a little over a week after CoinDesk first reported that the balance sheet of FTX sister company Alameda Research held a surprisingly large amount of FTT, an exchange token issued by FTX. FTX was "fine," Bankman-Fried said in response to questions about his exchange's solvency, before a series of events showed otherwise. As a result, several state and federal agencies launched or expanded investigations into the company, including the U.S. Department of Justice, the U.S. Securities and Exchange Commission, the Securities Commission of the Bahamas and the Bahamas' Financial Crimes Investigation Branch. Members of the U.S. Congress from both political parties are also calling for further action as a result of the collapse. Some lawmakers are even talking about holding hearings, potentially by the end of the year, said Ron Hammond of the Blockchain Association. The fact that regulators apparently had no view into some of the major projects that fell apart this year -- such as Celsius, Three Arrows, Luna and now FTX -- is "precisely the problem," said an industry participant who works closely with policymakers. Still, the individual told CoinDesk that they don't expect any major legislative action to occur this year. Most likely, Congress will look at bills like the Digital Commodities Consumer Protection Act, a bill that Bankman-Fried supported but was written prior to that, in the upcoming year. According to an attorney who requested anonymity, the SEC may have an easier time kicking off the investigation just due to its mandate. "The SEC is in a much better position to go to court and get a freeze [on assets] if they believe there's a reason to do that," the attorney said. "The SEC also has a less cumbersome process for subpoenaing testimony and freezing documents." The SEC and DOJ are likely to cooperate though, to the extent that DOJ investigators may sit in on SEC interviews. FTX has various U.S. connections, which is all the SEC and DOJ need to assert jurisdiction for their investigations.FTX appears to be preparing for these investigations, with FTX US General Counsel Ryne Miller having already told the entire company to preserve documents. A former federal prosecutor told CoinDesk that the bankruptcy court may also shed light on the situation, thus assisting government investigators with their probes. "The bankruptcy court has the ability to now oversee the company and to obtain information from the company that, let's say the DOJ might not have been able to obtain as easily pre-bankruptcy, and they'll likely have access to a new trustee or an examiner and be able to learn in essentially real-time what's going on," the former prosecutor said. Executives like Bankman-Fried may also "be in a tough spot with respect to" deciding whether to cooperate or assert Fifth Amendment rights against self-incrimination, the former prosecutor added. "A complicating factor -- for FTX anyway -- may be the fact that Bankman-Fried has tweeted his way through his company's collapse," adds CoinDesk. "It's a complete nightmare," said Ken White, a former federal prosecutor and a partner at the Brown White & Osborn law firm. "This is a situation where all sorts of agencies are going to be looking at this, the SEC, the FTC, and probably the Department of Justice. There are all sorts of potential criminal and civil consequences -- lawsuits. Civil lawsuits are a certainty. And here he is sort of tweeting out his thoughts about it. It's every attorney's nightmare of what a client might do." The main issue being that Bankman-Fried repeatedly took to Twitter to reassure users that everything was fine. "It creates new bases for criminal or civil claims against him just based on those tweets," White said. "So if he says that everything's fine, that their assets are real assets, and that's not true, then that can be securities fraud, and wire fraud, all sorts of other stuff, not to mention all sorts of civil causes of action ... It is just disastrously reckless."

Read more of this story at Slashdot.