My story of telling SEC “I told you so” on FTX
I asked the SEC for public comments on issues relating to cryptocurrency custodians or intermediary conflicts. The SEC refused to accept my advice and FTX collapsed soon thereafter. Opinion “I hate saying I told you so” is a common phrase, but it’s rarely sincere. It’s a wonderful feeling to be credited for identifying a problem before it becomes a problem. I am taking this liberty with federal financial regulators at U.S Securities and Exchange Commission. In January, I filed a petition to the SEC. I was serving as a member on the SEC Investor Advisory Committee, which advises Chairman Gary Gensler on crypto and related matters. I asked them to open a public comment on the unique issues that crypto and other digital assets present. I cited crypto custody and intermediary conflicts as two key issues that the SEC should address. This new start was called a “Digital Asset Regulation Genesis Block”, which would allow the SEC to improve crypto regulation. I was ignored by the SEC. After my term ended on the SEC advisory committee, I took the opportunity to speak out against Chair Gensler’s abuse of digital assets. Gensler’s response is available. pic.twitter.com/3oa5xJU1Ch– J.W. Verret, JD (@JWVerret), March 15, 2022
The failure of the SEC and U.S. banks regulators to adapt rules for crypto intermediaries did not directly cause the FTX collapse. However, their failure to establish working rules for U.S. cryptocurrency intermediary exchanges to custody Crypto has allowed scammers like Sam Bankman Fried to thrive overseas. Crypto is not about creating a new product trade in the traditional financial system. Crypto is a revolutionized finance that empowers asset owners. Individuals have the same control as Goldman Sachs partners over their assets. They can transfer, lend, and exchange crypto in a decentralized financial network. This is a huge responsibility for new users. This requires knowledge of the smart contract code, cold storage wallets, and basic operational security to protect encryption keys. The revolution will take time. JPMorgan will not bring the revolution to you (so don’t buy JPMorgan Coin). Most new crypto users will enter the market through custodial intermediaries, which look a lot like traditional financial intermediaries. To protect their customers from conflicts of interests and custody shell games, intermediaries that custody crypto for retail users newbies need a rulebook. This is the FTX/Alameda guidebook. However, the standard application of existing rules for paper stock holdings under 1933/34 statutes is not enough. They insist that federal regulation is necessary to protect customers. Although crypto exchanges were able to navigate between the U.S. regulatory rock and hard place, FTX fraud flourished overseas. Crypto exchanges require well-designed custody rules. Although it wouldn’t have solved the problems at FTX’s overseas exchange, it would have allowed more international retail activity to flow into the U.S. Existing crypto exchanges have failed to get clarity from SEC regarding crypto custody. States like Wyoming have created a path for bank custody, but the Fed won’t give them access to Fed master accounts.Related article: 5 reasons 2023 will prove difficult for global markets. The Federal Deposit Insurance Corporation informed banks that any attempts to custody crypto will require the bank explaining themselves to their bank examiners. It’s regulator-speak for “don’t touch it.” Many crypto exchange lawyers have a similar story to tell about their application to the SEC to obtain an alternative trading system license. They were slow-walked to death. We will soon hear regulators complain about how they could protect customers from cryptocurrency. This illusionist misdirection is not unlike Bankman-Fried’s dodging diligence requests from investors. Crypto needs protection from regulators. Innovative crypto solutions such as multisignature wallets or Merkel tree root-based reserves proofing are light years ahead traditional banking and exchange custody protections. They aren’t fake just because Bankman-Fried didn’t use them. First, create the Digital Asset Regulation Genesis Block process. This should be done across all agencies. Listen to J.W. Verret is an associate professor in the George Mason Law School. He is a crypto forensic accountant who also practices securities law at Lawrence Law LLC. He is a member the Financial Accounting Standards Board’s Advisory Council, and a former member the SEC Investor Advisory Committee. He is also the leader of the Crypto Freedom Lab, which is a think tank advocating for policy change to protect privacy and freedom for crypto developers and users. These views, thoughts and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.