FTX implosion has U.S. regulators on watch

Quick Take

  • U.S. regulators are monitoring announcement that Binance is buying FTX. 

U.S. regulators are monitoring the implosion of crypto exchange giant FTX, which announced earlier today that it is selling FTX.com to rival exchange Binance.

The Commodity Futures Trading Commission is watching the situation, but, "any regulatory issues right now are unclear," spokesperson Steven Adamske told The Block. 

A spokesperson for the Securities and Exchange Commission did not immediately respond to a request for comment, nor did a U.S. Treasury Department spokesperson.  

FTX CEO Sam Bankman-Fried had pushed for legislation to grant the CFTC more direct power over crypto markets, including direct oversight and rulemaking of any token or cryptocurrency classified as a digital commodity, as bitcoin is in the U.S. The legislation received behind-closed-doors blowback from DeFi advocates before a broader Twitter blow-up aimed at the FTX CEO over his lobbying push.

Bankman-Fried also appeared before the CFTC earlier this year to advocate for allowing his company and others like it to directly clear derivatives trades.

U.S. regulators had already planned to “double down” on enforcement of existing financial laws that apply to cryptocurrencies, following Biden administration reports on the topic of digital asset regulation issued this fall. The Financial Stability Oversight Council, a super committee of regulators, has recommended additional legislation to grant a regulator more direct power over crypto markets, similar to the legislation that Bankman-Fried supports. In September, CFTC Chairman Rostin Behnam testified in support of the same bill backed by the FTX CEO.

Though regulators have for years taken enforcement actions against digital asset companies and projects, the majority of FTX and Binance’s businesses exist outside the U.S. But the run on FTX’s utility token and subsequent sale to Binance will be top of mind for policymakers in Washington.

“It becomes a Rorschach test, right? In which you could imagine the proponents of aggressive regulation of crypto could say, one, this proves that we need the SEC and CFTC to swoop in and to apply their rules right now, no new rules have to be written, let's just do this right now,” said Ty Gellasch, president and CEO of the Healthy Markets Association and a former SEC lawyer.

Added Gellasch: “You could argue that this proves like hey, we need legislation to do this as soon as humanly possible, and try to pass legislation. Or you could see others argue, see, Sam Bankman-Fried doesn't know what he's talking about and we shouldn't do anything and the regulators shouldn't do anything lest they screw this up more.”

Agnes Gambill West, a policy researcher at George Mason’s Mercatus Center, compared the FTT token collapse to last spring’s collapse of TerraLuna, an event that contributed to contagion within the crypto financial ecosystem — one that Bankman-Fried and FTX helped stem.

“It’s obviously going to be attracting the interest of Congress and all these committees and agencies, so I’m sure we have that to look forward to in the coming days,” said Gambill West. “If JP Morgan did this to Morgan Stanley, and then turned around and bought Morgan Stanley, it would be ridiculous,” she added, speaking to how Binance publicly dumped FTT over the weekend, sparking a run on the rival exchange.  

A statement from Rep. Patrick McHenry, R-N.C., confirmed that lawmakers are watching as well.

“The recent events show the necessity of Congressional action," McHenry, who is likely to become chair of the House Financial Services Committee that helps set digital asset policy, said in a statement. "It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S. I look forward to learning more from FTX and Binance in the coming days about these events and the steps they will take to protect customers during the transition.”

Gambill West, who also co-founded an Ethereum-related startup and advises one of the regional Federal Reserves, added concern that Binance's the move could spark a new round of contagion in crypto markets, something that regulators would monitor.

“The fact that there aren’t a ton of financial disclosures in the crypto world is a problem,” she said, referring to the sudden demise of FTX. “It’s definitely going to raise the radar for crypto regulation. The interesting thing though is, these companies are not in the U.S. So the question is, whose laws apply?”


Stephanie Murray and Kollen Post contributed to this report.

Update: This story has been updated with new comment throughout. 

Disclaimer: The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.

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