Wharton Professor of Legal Studies and Business Ethics Kevin Werbach was present when FTX founder Sam Bankman-Fried testified before a US Senate committee in February – months before the cryptocurrency exchange collapsed under the weight of his own financial crimes.

Answering politicians’ questions about the risks faced by consumers in the cryptocurrency market, Werbach advocated for law enforcement to provide a better regulatory framework and more funding to combat crime in the digital space. While his comments to the committee now seem hypocritical, Bankman-Fried also supported the idea of ​​increased oversight. FTX, once worth $32 billion, filed for bankruptcy after a deposit flow uncovered a deep hole in its balance sheet and Bankman-Fried resigned over fraud allegations. The US House committee hearing is scheduled for December.

“It’s pretty shocking what’s happened in the last few days with the collapse of FTX, and I’m sure more will come,” Werbach of SiriusXM told Wharton Business Daily. “It’s easy in terms of business ethics: Don’t scam, don’t steal customers’ money, and don’t use it for any personal thing.”

Werbach said the incident raises more serious questions about what’s going on with cryptocurrency exchanges and how it should be regulated to protect investors. Congress has been considering these issues for several years, and some bills are pending, but he said the FTX case will likely “light the fire” for policymakers to establish a more formal and broad regulatory framework.

“I think this disaster – when there is no framework in the US and when these exchanges are created abroad and become very large – will put a lot of pressure on the legislation here,” Werbach said.

Who has authority over cryptocurrency?

Digital assets are not entirely unregulated, but there is no formal structure at the federal level. The professor explained that the Securities and Exchange Commission regulates any investment that meets the definition of securities, and the agency takes action against fraudulent offers of cryptocurrencies and other digital assets. But the laws regulating securities are not advanced enough for digital assets.

“The SEC was reluctant to be clear on what exactly makes a cryptocurrency token or digital asset a security,” Werbach said. said. “They’re reluctant to say, ‘Here’s a bright line,’ because I think they’re worried that if they do, everyone will try to push that line a little bit.”

Digital assets can be regulated by the independent Commodity Futures Trading Commission (CFTC), which also takes action against some cryptocurrency exchanges in the US and abroad. In 2021, a federal court ordered five companies operating the BitMEX offshore exchange to pay $100 million after the CFTC brought multiple charges of infringement.

At the same Senate committee hearing in February, CFTC Chairman Rostin Benham asked Congress to give his agency more control, saying he was “in a good position” to play a central role. But Werbach said that digital assets don’t always fit right into the commodity group, making the question of who has the power even more ambiguous.

“The regime we have for commodities is designed almost entirely to trade commodities, which are institutional markets,” Werbach said. Said. “[Є] There aren’t many individual retail investors actively trading commodities. [Є] many individual retail investors are actively trading Bitcoin and other digital assets. That’s why we need a clear legal regime that provides any regulator with the ability and tools to exercise oversight. We need mechanisms to ensure the transparency of companies and the disclosure of information.”

He also said that regulators will have to act aggressively because too much cryptocurrency activity involving US consumers takes place overseas.

The problem is beyond the border

Werbach expects the future to bring greater global cooperation in cryptocurrency regulation. There are two frameworks currently in place in the European Union, and since 2017 the professor has been holding workshops at Wharton with regulators around the world to facilitate informal dialogue. “There is also a real need for implementation coordination to ensure that countries are not safe havens and there is this level of global cooperation,” he said.

FTX’s rapid liquidation made headlines this month, but it’s not the only listed company accused of misleading investors. With so many opaque actors in the digital asset space, “we don’t know the extent of the contagion. “We don’t really know who has the gap on the balance sheet that they have closed due to FTX or previous explosions,” he said.