Last week’s spectacular collapse of the cryptocurrency exchange FTX will likely go down in history as a classic example of why we need diligent and active consumer regulators.
For those who haven’t been following the story closely, a brief primer: Unlike many crypto firms in the news in recent years, FTX didn’t have anything to do with a specific digital currency, meme-based or otherwise. Instead it was an exchange, a bit like the Nasdaq, where people could trade cryptocurrencies “safely,” according to its marketing pitch.
It sold itself to regular consumers through celebrity endorsements, stadium naming rights and $75 million worth of splashy TV ads in 2021 alone, according to CNBC. It famously touted the ordinary person’s ability to make money investing in speculation-driven spikes in crypto assets without needing to fully understand the ins and outs of the asset.
Then it emerged two weeks ago that FTX finances were, in fact, a shambles and it had lent $1 billion shore up to ex-CEO Sam Bankman-Fried’s other crypto trading company, Alameda Research. Much of that money appears to have disappeared. FTX’s new CEO said in a regulatory filing that the company had suffered “a complete failure of corporate control.”
Customers who had plowed tens of thousands of their savings into the company started racing to liquidate their crypto assets and withdraw their money from FTX – effectively a multi-billion-dollar bank run.
How did all this happen, leaving so many ordinary people financially up the creek without a paddle? In short, crypto exchanges are hardly regulated. Even brokerage firms face tighter scrutiny from the federal government. While some aspects of FTX’s problems may not have presented any differently if the company was subject to more traditional guardrails, it’s a near-certainty that such guardrails could have made aspects of the apparent fraud less likely.
And why is the crypto industry so lightly regulated? Largely because Congress failed to spot – or was induced not to spot via lobbying and other pressures – the potential for serious consumer harm even as these firms paraded themselves to ordinary people as safe and high-quality investments. The American people – few of whom are financial experts or have access to expert advice – were left to fend for themselves.
The FTX saga should spur consumer-centered congressional action. If crypto proponents on Capitol Hill and elsewhere are going to continue hailing the asset class as a democratic investment uniquely accessible to the masses, the masses need help from the government to make sure they aren’t duped and defrauded.
But it’s also a reminder that many existing regulations serve a vital purpose. More than a few are outdated or badly written, but regulations and the regulators and prosecutors that enforce them are the only things keeping markets honest, even when they create paperwork we find irritating.
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