To understand the state of regulation of the volatile cryptocurrency industry, advisors need look no further than the Security and Exchange Commission's complaint against disgraced FTX founder Samuel Bankman-Fried.
That's what Dan Kolber, the CEO and founder of the crypto broker and advisor Intellivest Securities, told fellow panelists during a discussion Dec. 13 on digital asset regulation at Financial Planning's
The case centers on accusations that Bankman-Fried lied about internal controls and risks to large institutional investors including Sequoia Capital, which put $200 million into FTX. The lesson for advisors who want to stay on the right side of regulators when dealing with digital assets is plain, said Kolber: "When in doubt, disclose, disclose, disclose."
"These are things every financial planner has to be attuned to and has to obey," Kolber said.
Bankman-Fried's case might seem far outside what most advisors deal with from day to day. But odds are strong they have at least a few clients with investments in crypto. A
And despite the current "crypto winter," advisors are likely to encounter only more questions about digital assets in coming years. That's especially for clients who fall into the coveted "millenial millionaires" group.
Bankman-Fried was arrested on Dec. 12 in the Bahamas and sued the following day for fraud by the SEC and other regulators and charged by U.S. prosecutors in New York with eight counts of criminal fraud and conspiracy. The mounting evidence of his mismanagement of FTX and its affiliated trading firm, Alameda Research, has led to redoubled calls for better oversight of the
Regulation was top of mind for lawmakers who spoke at a U.S. House Financial Services Committee hearing the same day. Bankman-Fried was scheduled to testify virtually but then prevented from appearing by his arrest. The star witness instead was John J. Ray III, the chief executive brought in to oversee FTX following its bankruptcy on Nov. 11.
Ray, who was installed as CEO of Enron during its bankruptcy, declined to give specific advice on what regulatory steps the government should take, saying only that, "My basic observation is you need records. You need controls, and you need to segregate people's money. It's simple."
Among other things, the SEC's complaint against Bankman-Fried accuses him of accepting investors' money without disclosing that much of it would be used to make speculative trades through Alameda Research. It also states that Bankman-Fried downplayed the risks that those bets posed to FTX and its affiliated companies.
Ray, who has previously said standard corporate controls were almost non-existent at FTX, told lawmakers at the finance hearing that the "collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people's money or assets."
Others at the hearing pointed their fingers at regulators. U.S. Rep. Kevin McCarthy, a North Carolina Republican whose position as ranking member of the finance committee when his party assumes control of the House in January, said he thought the SEC in particular could have done more to prevent FTX's downfall.
McHenry said that when he becomes leader of the finance committee next year, he'll call on SEC Chairman Gary Gensler "early and often." He said he expects Gensler to show leadership in regulating digital assets, "which he has failed to do."
Gensler has said that the SEC has been aggressive in cracking down on crypto abuses and lacks the
Debate, meanwhile, is taking place over a bill before Congress that would give the Commodity Futures Trading Commission the authority to regulate bitcoin and other cryptocurrencies as commodities. Rather than a regulatory power struggle with the SEC, CFTC Chairman Rostin Behnam told a
Speakers at Financial Planning's "U.S. Government regulation of Cryptocurrency: Where does it stand, where is it going?" panel agreed that clients — young ones in particular — may put off temporarly from crypto by the recent scandals. But their interest isn't likely to go away for long.
To give both investors and advisors something they can feel good about putting money in, the panelists agreed that more regulation is long overdue. Christopher Warren, the managing partner at New York-based Warren Law Group and a lawyer with experience in crypto fraud cases, said that the decentralized and unregulated state of digital assets has always been part of the appeal.
The FTX collapse, he added, "is a fine example of why that's not a good idea."
At the same time, Warren said, too many entrepreneurs underestimate the extent of existing regulation. Warren said he has worked with clients who started a company dealing with digital assets only to learn later that their product would be treated as a security by the SEC, given how it is structured. Such a discovery usually leads to a lot of backtracking, he said.
"These are amateurs who have just started a business," he said. "They don't understand the complexities of the regulations."
Deniz Applebaum, a professor of accounting and finance at Montclair State University in New Jersey, said she expects to see crypto exchanges regulated some day much like broker-dealers, who buy and sell stocks and other securities on behalf of investors. She also wants to see regulators take steps to ensure that firms offering digital assets and related products to the public are making the same sorts of disclosures they would have to if they were dealing in any other listed asset.
"I'm arguing you need full financial transparency," Applebaum said.
