Why FTX and Big Crypto Pushed to be Regulated by the CFTC

Why the CFTC was Sam Bankman-Fried’s favorite Washington agency

Before his undoing this month, crypto mogul Sam Bankman-Fried aggressively pursued powerful allies in Washington. None was more important than Rostin Behnam.

The chief of the federal agency that oversees commodities markets, Behnam holds a strategic perch among the nation’s financial regulators. And the 44-year-old Washington bureaucrat was indispensable in the boyish billionaire’s ambitious plans to reshape U.S. crypto regulation.

Since last year, the two have worked in parallel on critical initiatives which, if not for the sudden demise of Bankman-Fried’s FTX empire, might have radically altered the nation’s attempts to govern the freewheeling market for digital currencies.

Now that FTX has collapsed amid allegations of fraud, those initiatives may be doomed. But as the financial world examines why major firms threw hundreds of millions of dollars at the 30-year-old Bankman-Fried, the capital is looking anew at his courtship of Washington and why he sought to build ties with Behnam and the agency he leads, the Commodity Futures Trading Commission.

Big Crypto's Bogus Demands for "Regulatory Clarity"Despite its pervasiveness and bluster, the laughable Big Crypto tagline calling for regulatory clarity is nothing more than a desperate deflection and noxious red herring. Intended to sidetrack and dissemble the plain truth — that the crypto-emperor has no clothes — the regulatory clarity and SEC hit-pieces are pure subterfuge, and an impulsive and frantic attempt to appeal and co-opt fundamental notions of fairness, liberty and freedom (which most people cherish and hold dear). Here’s why:

First off, securities regulation is not meant to be precise but is instead intentionally drafted to be broad and all-encompassing; clarity is not just uncommon, it is deliberately avoided.

Second, though securities regulation is primarily a principles-based legal framework, there already exists extraordinary regulatory transparency and lucidity regarding crypto.

Finally, although the crypto industry constantly grouses for regulatory clarity, whenever any specific regulatory crypto-related rules are promulgated or proposed, the crypto industry cries foul and almost instantly files a flashy legal challenge to its enactment.

Crypto’s Final Price Could Be Zero

The new poster child for the toxic cocktail of technology and debt is Sam Bankman-Fried, with his imploded FTX and Alameda empires. Sure, these companies misappropriated, to put it nicely, customers’ assets. And yes, withdrawals that acted like a bank run drove the company into Chapter 11. But the company’s original sin was to borrow against its own FTT token, which was held up by nothing but air.

This was crypto’s mass delusion. FTT was so thinly traded that FTX could set any price, but not forever. FTX and Alameda borrowed against tokens they themselves were manipulating, including Solana and others, which some called Sam Coins, now Scam Coins. The fatal conceit: They thought FTT would stay high forever, so they invested in often illiquid positions. FTX was even paying employees, vendors and whoever else would take it in FTT tokens, whose total market cap used to be almost $10 billion and is now about $400 million.

FTX Hires Ex-Regulators to Investigate Firm’s Collapse

In its first hearing in Delaware bankruptcy court on Tuesday, a lawyer representing FTX said the firm has hired former enforcement chiefs from the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, now both partners at law firm Sullivan & Cromwell LLP, to help the company’s new chief executive investigate what went wrong.

FTX has hired Steven Peikin, who served as co-director of the SEC enforcement division between 2017 and 2020, and James McDonald, who was director of enforcement at derivatives regulator CFTC, also from 2017 to 2020.

Another prominent FTX hire is Nicole Friedlander, who from 2008 to 2016 served as chief of the complex frauds and cybercrime unit at the U.S. attorney’s office for the Southern District of New York, one of the nation’s most influential federal law-enforcement agencies. Ms. Friedlander is also a partner at Sullivan & Cromwell.

Bahamas reels from FTX collapse: ‘Crypto was going to be our way out’Sam Bankman-Fried chose a slice of prime Bahamas real estate to build the new headquarters of his fast-growing cryptocurrency exchange FTX, posing with a shovel alongside the Caribbean country’s prime minister in a shared embrace of the huge potential for digital assets.

Just seven months later, FTX’s spectacular collapse has sent shockwaves through an industry that promised to revolutionise finance, and shattered the credibility of the Bahamas — which put the crypto boom at the heart of its economic strategy — as a jurisdiction that properly monitors digital asset businesses.

“Crypto was going to be our way out. We could interact with the global economy in a way we couldn’t before,” said Stefen Deleveaux, of the Caribbean Blockchain Alliance, from a seafront restaurant on the island group’s north coast.

No One is Using Some Bitcoin ATMs in the Crypto Downturn

Amherst County, Virginia, doesn’t have a hospital. It does have a Bitcoin ATM.

It’s inside the Dogwood Express Market, a convenience store just down the road from the local used-car dealership. The machine lets people buy, receive and send Bitcoin, the largest cryptocurrency.

Whether they choose to do so, however, is another matter. “I’ve never seen anybody even use it,” Chrissy Scruggs, a 27-year-old employee at the Dogwood Express, said in October.

States Lead Crypto Enforcement as Feds’ Deal With Inchoate Role

“There has been an absolute change in our work over the last couple of years, and I think it’s fair to say in state securities regulation,” said Joe Rotunda, the director of enforcement at the Texas agency, whose investigations and actions on digital assets account for about 10% of enforcement workload.

State securities regulators are taking on more ambitious roles in crypto enforcement as federal agencies grapple with the new technology and unclear jurisdiction. The SEC is expected to ramp up enforcement. But state regulators will continue to evolve to align their work with their federal counterparts, industry watchers say.

SEC kicks enforcement into overdrive in 2022

Gurbir S. Grewal, director of the enforcement division, in a speech at the Securities Enforcement Forum on Nov. 15, noted that in the five fiscal years prior to 2022, the commission ordered more than twice as much in disgorgement as it did in penalties. “To me, that ratio is backwards because it means, on a macro level, that the potential reward for getting away with violating the securities laws was much greater than the potential downside of being caught,” he said, according to remarks posted on the SEC’s website. “If you get $2 for violating the law, but are only fined $1 if you get caught, and required to return your ill-gotten gains, some people may see that as an acceptable calculated risk.”

Regulators’ Take On ESG Investing

As readers of this blog well know, ESG is one of the hot topics in the investment and financial world these days. ESG is also very much on the mind of regulators as well, as two recent developments show. First, on November 22, 2022, the U.S. Department of Labor issued updated rules expressly allowing plan fiduciaries to consider ESG factors when they select retirement fund investments and exercise shareholder rights, such as proxy voting. Second, the SEC, acting through its Division of Enforcement’s Climate and ESG Task Force, brought a settled enforcement action against Goldman Sachs Asset Management for policies and procedures shortcomings at funds marketed as ESG investments. These developments underscore the challenges companies, investment funds, and others face as they navigate the complex ESG landscape.