- Crypto isn’t fixing finance’s flaws, it’s making them worse, SEC Commissioner Jaime Lizárraga said.
- On Wednesday at Brooklyn Law School, he referenced crypto’s “troubling” week without naming FTX.
- Investors told Insider that they welcome regulation and more guidance at the federal level.
Jaime Lizárraga, a commissioner of the US Securities and Exchange Commission, did not mention the cryptocurrency exchange FTX by name while speaking about digital assets on Wednesday evening at an event at the Brooklyn Law School.
But with several references to what he called the “troubling digital asset market events of this past week,” Lizárraga’s speech made it clear that he’s paying attention to the impacts the FTX meltdown had on the industry.
The remarks came less than a week after FTX filed for bankruptcy on Friday. Concerns about FTX’s financial position, sparked by a report by the crypto publication CoinDesk, prompted customers to withdraw assets from their accounts, which sent the exchange into a liquidity crisis. The bankruptcy brought fresh perspective to the tension between regulators and crypto enthusiasts, as both sides navigate how the new currency fits in with traditional banking rules. And investors, founders, and regulators alike are revisiting their stances on how to govern crypto.
In Lizárraga’s view, many crypto companies have not only replicated the flaws of the traditional finance industry, but they’ve made them worse by operating in a regulatory gray area. Instead, crypto companies can protect both themselves and their customers by embracing regulation rather than seeking to sidestep it, he said.
Yet while not every crypto company is opposed to higher regulatory scrutiny, the specifics of how to go about that are still up for debate, founders and investors told Insider.
Some founders and investors are ready for more clarity on crypto regulation
Zoë Barry, the founder and CEO of the trading platform Zingeroo, told Insider that she sought to work with regulators from the outset, before her company began offering crypto products. Early on, her team consulted with FINRA, the industry organization that regulates brokers, she said. She decided to partner with the fintech company Apex for Zingeroo’s crypto offering rather than a pure-play crypto exchange because she felt more confident that Apex would follow proper compliance.
“A lot of people feel that compliance and regulatory are unsexy,” Barry told Insider. “But I think regulation is good for business.” After FTX’s collapse, she anticipates that retail investors will look more closely at companies’ compliance practices before deciding where to put their money, she said.
But others, including some venture capitalists, have suggested that federal regulators have not provided enough clarity to crypto companies.
“No one still knows what the heck is happening,” Jordan Nof, the cofounder and managing partner of Tusk Ventures, told Insider. “There’s no guidance coming at the federal level.”
Lizárraga disputed that notion.
“The reality is that there’s an abundance of guidance,” he said in his speech. “It’s not a matter of a lack of guidance but more that the existing guidance may not be what many market participants want to hear.”
Crypto promises decentralized assets, but a lack of regulation could be holding it back from delivering
Crypto has become an appealing alternative to stocks, bonds, and other investments to groups like low income people who haven’t been well-served by the traditional finance system, Lizárraga, who was sworn in as an SEC commissioner in July, said. But despite the optimistic predictions of crypto enthusiasts, it largely hasn’t addressed the big issues it claims to fix, in his view.
Foremost among those is the promise of decentralizing assets, or not having them concentrated among a small group of giant institutions, according to Lizárraga. Without naming FTX, he summarized the circumstances that plague the now-bankrupt exchange, such as the lack of strict separation between customers’ assets and those of the company and its affiliated entities, which means that customers may not be able to recover their losses.
Lizárraga also said he agreed with SEC Chair Gary Gensler’s view that most crypto tokens are likely securities, because they are investment contracts, as defined by a set of four criteria known as the Howey test. As a result, many crypto companies that have issued tokens, as well as the exchanges that allow people to buy and sell them, are operating outside of US securities laws, Lizárraga said.
“Frankly, the problems in the digital asset market are worse than those in the traditional finance system, because they occur in a largely unregulated space,” Lizárraga said.
Not everyone agrees that the FTX meltdown indicates a larger regulatory crisis
FTX’s cofounder, Sam Bankman-Fried, was once among the crypto industry leaders expressing openness toward regulation. But he has since said that those statements were “just PR.”
“They make everything worse,” he said in a series of direct messages on Twitter to Vox reporter Kelsey Piper. “They don’t protect customers at all.”
But some investors defended current regulation of the crypto space, instead blaming FTX as a single bad bet. The venture capitalists Katie Haun and Fred Wilson wrote a joint blog post on Tuesday in which they contrasted FTX with US-based crypto exchanges such as Coinbase, in which they both invested, and Kraken.
“You will see that the companies that have followed the rules and behaved properly have weathered these storms,” they wrote.
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