Is everybody happy? U.S. District Judge Lewis Kaplan sentenced Sam Bankman-Fried to 25 years in prison after a jury convicted him of misappropriating client assets and misleading investors. I am dismayed by the apparent joy espoused by certain legal and compliance professionals who proclaim that Mr. Bankman-Fried received his comeuppance, as if he were a juvenile delinquent. The Wall Street Journal, the august publication of the financial markets, referred to him as “the moptop millennial” while others have called him less colorful, but more demeaning, names referring to his youth and arrogance. Many of these tsk-tsk-ers and finger-waggers, in their “I-told-you-so” commentaries, exclaim that crypto is a fraud, scam or ponzi scheme. Next follows the gratuitous criticisms of effective altruism, political influence peddling, and Silicon Valley politics.
Enough already.
We get it. Mr. Bankman-Fried did some really bad things. He “borrowed” client money without telling them. He misled his investors. He engaged in multiple conflicts of interest. He deserves a jail term to contemplate the impact of his actions and keep him out of the financial markets. I am completely unclear why his philosophy or politics are even relevant, but I guess those are the times in which we live. I am also unclear why his age matters, unless this is the revenge of the “Ok, Boomer” i.e. “We told you, Millennial.”
Aside from the ad hominem attacks on SBF, the pile-on crowd also wants to shut down crypto, a dangerous financial scheme in their estimation.
MY TAKE: The FTX collapse and the SBF conviction provide an opportunity to re-think regulation of crypto and digital currencies generally. Crypto has operated in the unregulated wild west region of the capital markets. FTX was an Antigua and Barbuda limited corporation operated out of the Bahamas and Hong Kong. Crypto firms have migrated to the unregulated island jurisdictions because the U.S. refuses to actively regulate the crypto markets, choosing instead to ban, bar, and prosecute with a broad brush. Many blame the Gensler SEC for not doing enough (and they could do more), but the real blame lies with Congress who needs to empower the SEC to regulate crypto like it regulates broker-dealers, investment advisers, exchanges, and mutual funds.
If FTX were regulated like a U.S. broker-dealer, it would have had to file quarterly financial statements, obtain customer insurance, and retain an auditor. If it were regulated like an investment adviser, FTX would have a compliance program and Chief Compliance Officer that would monitor conflicts of interest and disclosure. If it were regulated like a mutual fund, FTX would have had an independent board and audited financials.
Regulation of financial markets has been a tremendous success. We adopted regulatory safeguards back in the 1930s because frauds like FTX happened on our shores. They scared people away. We decided that we would rather become the center of financial markets instead of chasing schemers and fraudsters who operated out of sketchy regulatory jurisdictions. As a direct result of our regulatory regime, the vast majority of financial transactions occur through U.S. infrastructure. Our financial products draw the lion’s share of global investments.
Why are we forgetting our legacy when it comes to crypto? Let’s regulate crypto so that the world can rely on our reputation and history of running legitimate financial markets. If we keep banning it (or doing nothing), the crypto industry will continue to run to the offshore unregulated jurisdictions, thereby guaranteeing future frauds.
After the insider trading scandals of the late 1980s, Congress changed the securities laws, and the SEC heightened scrutiny of the junk bond market. After Enron collapsed, Congress adopted the Sarbanes-Oxley Act. It’s time that we take on the crypto challenge and adopt real regulation.