Grygo is the chief content officer for FTF & FTF News.
The bankruptcy of cryptocurrency exchange FTX Trading Ltd. is causing multiple upheavals in digital asset trading markets and has spurred the collapse of cryptocurrency lender BlockFi Inc., which recently filed for chapter 11 protection.
To quickly recap, “on November 11, 2022, and November 14, 2022, FTX Trading Ltd. and 101 affiliated debtors … each filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware,” according to a statement on the company’s website about “Case No. 22-11068.”
In addition, the FTX website names the debtors’ counsel and offers information about court dates and next steps.
The initial causes for the FTX collapse were given as “improper fund transfers and poor accounting” and a “complete failure” over other controls, according to a Reuters report. The story is evolving and there may be more revelations about how FTX collapsed.
Amid the bombshells, though, there is a new reality that is emerging, according to a blog posting and a new report from market research firm Coalition Greenwich.
The author of the blog posting and report David Easthope, a senior analyst overseeing fintech research on the Market Structure and Technology team at Coalition Greenwich, makes the case that digital asset trading participants must adopt better institutional-grade custody services and conform to regulation.
In the Nov. 21 blog posting, “FTX Collapse Points to Need for Greater Adoption of Institutional-Grade Custody, Regulation,” Easthope argues that the fiasco should mark the end of “vertically integrated platforms to trade, settle, custody, and lend/borrow digital assets.”
In fact, Easthope says the FTX collapse “has turned that model on its head. … At FTX, apparently, the assets were not in verifiable, segregated accounts held on-chain, with the movement of the assets controlled by the asset owner. These assets were likely held in omnibus accounts managed by FTX and commingled with the assets of other business entities. This comingling reached epic proportions, according to press reports. Moreover, the assets do not appear to be bankruptcy remote,” according to the blog.
Easthope is strongly suggesting that the FTX collapse will spur change such as the clear separation of trading and custody and more regulatory oversight.
“There will clearly be hearings on the FTX matter, and Congress will (try to) act,” says Easthope, also the author of the report on the subject, “Providing Digital Asset Services: An Institutional Infrastructure Roadmap.” More about the report can be found here: https://bit.ly/3Vpk4wg
Yet more regulatory oversight may not mean an avalanche of new regulations. Instead, it could mean that digital assets will have to be governed by existing federal securities laws, says SEC Commissioner Jaime Lizárraga, who recently gave a keynote address on the matter at the Brooklyn Law School.
“To be clear, not every issued digital token necessarily represents a securities offering, and not every digital asset intermediary is necessarily operating as an unregistered market participant. But I generally agree with SEC Chair [Gary] Gensler that most of the nearly 10,000 digital asset tokens in the market are likely offered as securities. In addition, and without prejudging any particular entity, I am also concerned that intermediaries that sell, trade, or advise on digital assets that are securities may be operating as unregistered market participants,” Lizárraga says.
With so many market participants operating outside the law, it “undermines the general principle of transparency as well as our ability to protect vulnerable investors in a market that is susceptible to volatility and fraud,” Lizárraga says.
“A key question for them [digital asset market participants] to consider is whether operating outside of the federal securities laws is in the best interest of investors and a fair and transparent market,” Lizárraga says.
The full text of Lizárraga’s remarks can be found here: https://bit.ly/3Bmquo7
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