Insolvency looms for FTX. Cryptocurrencies are plummeting.
Securities and Exchange Commission (SEC) Chair Gary Gensler’s comments to CNBC Thursday morning (Nov. 10) show that the great unraveling of an ecosystem that has been marked by a lack of transparency and oversight may well be underway.
What emerges next is anyone’s guess. But the SEC is drawing a bead well beyond the Kardashians when it comes to cryptos. During the interview, Gensler noted the crypto field, overall, is noncompliant — and there are two ways crypto companies and the SEC might hash it all out.
Two Paths Forward
One path is for the SEC to work with exchanges and lending platforms to get them properly registered.
“We have another path,” he added, “and that is enforcement.”
Observers expect to see some decisive movement along either path. As Gensler noted, “the runway is getting shorter.”
He said at another point that the crypto firms have been warned about their noncompliance.
“If we need to, we’re going to be the cop on the beat,” he said.
In the meantime, the Department of Justice (DOJ) and the SEC are, according to Thursday reports, probing just what happened this week, and whether customer funds were mishandled.
“When you mix together a bunch of customer money, non-disclosure and leverage … investors get hurt,” Gensler said Thursday. The platforms — which include everything from lending to trading to custodial accounts — are “all interconnected,” he said, “with a few concentrated players in the middle.”
While much of the media focus may be on retail trading, on the consumers who fell in lockstep with FTX “ambassadors,” such as football legend Tom Brady, there could be a significant chill on institutional activity in the crypto space. Reuters reported that FTX CEO Sam Bankman-Fried’s company saw a “giant withdrawal surge” as users rushed to withdraw $6 billion in crypto over a span of three days, and the volume has normally been tens of millions of dollars.
That kind of “run” on holdings could be enough to give institutions major pause about taking cryptos onto their balance sheets, and certainly in using them to conduct commercial activities. PYMNTS data has shown that more than half of multinational firms have been using cryptos, especially in cross-border activities.
Bitcoin has been, traditionally, the digital holding of choice, followed by stablecoins. It may not be all that surprising to see a bit of reversal here moving forward, as the latter have some sort of backstop to volatility. The debate still rages in regulatory circles as to whether the cryptos (and even some stablecoins) are securities or payment methods.
And now, if the platforms themselves are due for a shakeout, maybe some more consolidation and a reshaping by the SEC, enterprises and multinational firms would find it prudent to step back a bit.
No one wants to be on tenterhooks waiting to see, day by day, whether their exchanges will be up and running or solvent. Whether FTX is rescued, somehow, or fails, the platforms and exchanges look set for a regulatory reckoning.
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