Make rules apply to crypto financial firms

Out of nowhere, 30-year-old Sam BankmanFried became a billionaire mover and shaker in the world of cryptocurrency.

Careful to make friends of powerful Democrats and media columnists alike, he threw money around the halls of Congress — and everywhere else he went — while threatening to disrupt Chicago’s financial futures industry. Known by his initials, “SBF” is a billionaire no more. The house of cards he built over the past several years came crashing down in a matter of days.

His FTX crypto exchange and the entangled Alameda Research hedge fund are in bankruptcy, amid reports that customer funds are missing. As many as a million of SBF’s customers may have lost whatever they had in their trading accounts, which, unlike traditional bank and brokerage accounts, are not guaranteed by the federal government against a company’s failure.

Media reports are drawing comparisons to the fall of Enron Corp. or the Bernie Madoff Ponzi scheme. Everyone is demanding answers from SBF, who sent a series of tweets saying, among other things, he wants to make his customers whole.

Don’t count on it.

It’s too soon to know exactly what happened. The insolvency expert appointed to shepherd SBF’s businesses through bankruptcy says he’s never seen such a complete failure of corporate controls and that a substantial portion of the billions held at FTX may be missing or stolen.

After a failure like this, no reasonable person should place their confidence in cryptocurrency trading operations. SBF had become the face of crypto, an innovator who supposedly had the money and brains to professionalize an upstart financial industry, which even before this fiasco was having a terrible year.

We believe stronger rules and greater participation from mainstream financial firms will help this promising marketplace achieve its potential, minus the shady conduct that is giving it a bad name.

Cryptocurrencies are digital files that can be used as money and traded via blockchain, a digital ledger that permanently records transactions.

The technology behind crypto is proven. It has the potential to reduce costs, speed up transactions and, yes, improve the security of financial operations around the world. So far, however, crypto markets have been used mainly for speculation.

SBF was angling to remake crucial parts of American finance. He wanted to do away with checks and balances established over generations. The “rules-are-for-everybody-else” attitude may have discouraged large mainstream firms from taking big risks with involvement in SBF’s operation.

As of today, there is no evidence that crypto’s latest failure is leading to a systemic financial crisis. With any luck the collapse of FTX will mainly be confined to those directly involved with FTX.

For now, the crucial responsibility of regulating crypto in the U.S. remains a jump ball among different agencies. Commodity Futures Trading Commission Chairman Rostin Behnam said he’s hopeful this latest collapse will push Congress into action. Legislation has been stalled for months.

No doubt, clarity is needed about which federal regulator should take on crypto. Beyond that, we’re not even sure new rules are needed. If existing rules governing exchanges and public offerings had been applied and enforced in this case, customer funds would likely have been protected.

Whether it’s the CFTC, the Securities and Exchange Commission or some other regulator isn’t as important as resolving who’s on point and giving their staffs the opportunity to close the knowledge gap with crypto entrepreneurs — who seem to come up with new gambits by the day.

To the extent that it is resisting oversight, the crypto industry is hurting itself.

Crypto platforms operating in the U.S. should be welcoming the scrutiny needed to make their industry safe for the public to invest. That’s the path to future growth, and the wise course to follow for whoever’s left in this troubled business after the dust clears from the latest crypto bloodbath.