CryptoassetsNov 15 2022

Crypto bosses tell MPs more regulations is needed, amid FTX collapse

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Crypto bosses tell MPs more regulations is needed, amid FTX collapse
Sam Bankman-Fried, former chief executive of crypto firm FTX (Eva Marie Uzcategui/Bloomberg)

Speaking to the Treasury committee yesterday (November 14), Ian Taylor, executive director at trade body CryptoUK, said: "If we had had some regulation, some of these recent events may not have taken place."

Daniel Trinder, vice president of government affairs at crypto exchange Binance, said the collapse of FTX was not due to failures around crypto or the associated technology.

"The key failures were largely down to issues relating to governance, risk management, excessive leverage, and inappropriate use of client assets", he said.

He added that these are "traditional failures" that have also plagued "traditional finance".

Tim Grant, head of Emea at Galaxy Digital, another crypto firm, told MPs he was concerned about the impact FTX’s collapse would have on the wider industry.

“Are we feeling upset that we have a very bad actor within our midst who was doing exactly what all of us would never do?”

“Yes, because that is going to [cause] a headwind.”

The government announced a consultation into crypto earlier this year, and Rishi Sunak has previously said it was his ambition to make the UK a ‘global hub’ for cryptoasset technology.

FCA resourcing

Taylor told MPs that to be able to adequately regulate the industry, the FCA would need more resources and better understanding and training around crypto.

The regulator has hired 95 additional staff in its authorisations division in the past year, alongside more financial analysts with market expertise in these areas, which it said had resulted in a 54 per cent reduction in the number of pending crypto registrations.

Trinder said the issues around a lack of resource at the FCA had been “well highlighted”.

“There needs to be a systematic education of the regulators if we want to improve the industry,” he said.

Susan Friedman, head of policy at crypto exchange Ripple, said she was encouraged by the FCA’s “forward leaning” attitude to crypto, which has been appreciated by the industry.

“Our expectation is that that will continue…[and] there is more that the industry can do," she said.

We have seen too many financial crime red flags missed by the cryptoasset businesses seeking registrationFCA

However, further effort is needed from enforcement agencies to tackle crime in crypto, Trinder said, adding that fraud was a "massive issue".

"[This is despite] it being easier to hide cash than to hide crypto assets.”

An FCA spokesperson said it continued to warn consumers to be prepared to lose all their money if they purchase cryptoassets as they are unlikely to be protected due to them being largely unregulated. 

“Successful registration depends upon a firm meeting the minimum standards we expect to prevent money laundering and terrorist financing, and we have seen too many financial crime red flags missed by the cryptoasset businesses seeking registration.

"We work with crypto firms to help them understand our expectations, and if they can meet the conditions for registration, we will register them."

FTX’s collapse

The sudden collapse of crypto exchange FTX has shocked the digital asset community, after it lost most of its market value and filed for bankruptcy in the space of a few days.

The $32bn empire was built by 30-year-old entrepreneur Sam Bankman-Fried, who stood down from the company on Friday after it found itself unable to meet a slew of customer withdrawals, driven by concerns over its links to a proprietary trading group.

Bankman-Fried was the darling of the crypto industry, donning a uniform of shorts and t-shirts in public appearances, sponsoring the US Super Bowl and even suggesting the company might buy Goldman Sachs.

He was duly rewarded with investment from a number of high profile asset managers.

Since its launch three years ago, FTX raised $1.8bn (£1.5bn) from BlackRock, SoftBank and Sequoia Capital, among many others.

However, the company’s collapse came almost as quickly as its rise, with court filings analysed by the Financial Times showing dozens of regulators around the globe are showing "substantial interest" in the company amid warnings of a million creditors.

The shape of crypto regulation

In their evidence to the Treasury committee yesterday, the panel agreed UK regulators need to develop a wider framework to effectively manage crypto firms.

The FCA currently does not regulate crypto, other than requiring UK-based cryptoasset exchanges to register under its anti-money laundering rules.

To widen its coverage, the government would have to change the FCA's scope, which could be done in an amendment to the financial services and markets bill which is currently making its way through the House of Commons.

[The FCA's scope] is capturing a minor slice of the issues that affect the industrySusan Friedman, Ripple

Susan Friedman, head of policy at Ripple, a cryptocurrency exchange, said the FCA’s remit was too narrow and needed to be more comprehensive.

“That’s the problem, [it is] not so much that what is in place is insufficient, [it is] that it is capturing a minor slice of the issues that affect the industry,” she said.

This has resulted in the FCA’s hands being tied, without the ability to “interject itself” into the crypto space, Friedman added.