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Regulators cracking down on US crypto firms after FTX's liquidity meltdown "makes no sense," since most crypto trading activity takes place offshore, according to Brian Armstrong.
"The problem is that the SEC failed to create regulatory clarity here in the US, so many American investors (and 95% of trading activity) went offshore," the Coinbase CEO said in a tweet on Wednesday, responding to a call from US Senator Elizabeth Warren for more aggressive regulation on crypto.
"Punishing US companies for this makes no sense," he added.
Crypto markets have been shaken since the announcement that Sam Bankman-Fried's FTX was suffering from "significant" liquidity issues and spoke to Binance about a possible acquisition to rescue the exchange from insolvency. Binance has since walked away, with the troubled crypto exchange now facing probes by regulators on its handling of client funds.
But Armstrong suggested regulatory action may be limited, due to the fact that FTX, which now faces possible bankruptcy, was an offshore crypto exchange not regulated by the Securities and Exchange Commission. Instead, US traders operated on its subsidiary, FTX US, and regulators are currently looking into the relationship between those two firms, as well as FTX's ties with Sam Bankman-Fried's crypto trading firm.
Still, the extreme market volatility prompted by FTX's downfall has highlighted major issues lurking in the crypto ecosystem, market commentators say. Top economist Mohamed El-Erian said that FTX's downfall would keep crypto regulators up at night playing "catch-up". Tether co-founder William Quigley added that the liquidity crisis makes it clear that massive amount of leverage accumulated within the space has been "toxic" to crypto.
