The swift collapse of the cryptocurrency empire FTX is prompting urgent calls in Washington for legislation to rein in the digital asset industry.
But after two top executives tied to FTX pleaded guilty to fraud charges on Wednesday, Gary Gensler, the chair of the Securities and Exchange Commission, is pushing back on calls for new laws, arguing that existing S.E.C. rules and Supreme Court decisions suffice and that crypto issuers and exchanges simply need to come into compliance.
“The roadway is getting shorter,” Mr. Gensler said in an interview on Thursday, warning other crypto issuers and exchanges that are not registered with the agency that they could soon find themselves facing enforcement actions.
On Wednesday, the S.E.C. announced that it had settled civil fraud charges with two former top executives of the FTX empire, Gary Wang, a co-founder of the exchange, and Caroline Ellison, who was the chief executive of FTX’s trading arm, Alameda Research, which used billions in FTX customer funds to back its very risky bets.
The former executives pleaded guilty to criminal fraud charges filed by federal prosecutors in Manhattan, and they are cooperating with the authorities in their investigations of FTX and its founder, Sam Bankman-Fried, who was extradited from the Bahamas on Wednesday night. On Thursday, a federal judge in Manhattan approved a restrictive bail package for Mr. Bankman-Fried.
What to Know About the Collapse of FTX
What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.
Among other offenses, the complaint states that Ms. Ellison conspired with Alameda and Mr. Bankman-Fried to prop up the value of FTT, a cryptocurrency that the exchange issued and Alameda used as collateral for its trading activities.
Many other crypto exchanges also issue their own tokens, including the world’s largest, Binance, which issues BNB. Separately, thousands of start-ups issue digital currencies to generate capital for their ventures, and these are traded on exchanges, or “storefronts.”
But only about six in 10,000 or so of the crypto tokens in circulation at any given moment are registered with the S.E.C., Mr. Gensler estimated, which means that investors don’t get the same kinds of disclosures they would get with investments in stocks.
So the public shouldn’t take confidence in the numbers reported about the volumes traded or the tokens’ values, Mr. Gensler said.
“Financial history would tell you that most of these tokens will fail,” he said, because most entrepreneurial ventures do. And “micro-currencies,” or currencies that have very limited acceptance, have not been adopted because they are simply not useful, he added.
The Aftermath of FTX’s Downfall
The sudden collapse of the crypto exchange has left the industry stunned.
Many of those thousands of cryptocurrencies listed on exchanges and websites that track digital asset markets are thinly traded cryptocurrencies, Mr. Gensler said, and are subject to the same kind of manipulation as micro-cap companies, or stocks of small publicly traded companies with a market capitalization of about $50 million to $300 million.
Insiders on these projects can “sell the public on an idea while they’re potentially fraudulently pumping up the stock,” Mr. Gensler said.
“This leads to distorted incentives and puts the public further at risk of the token not being properly registered and having proper disclosures and complying with the various provisions of the securities law about anti-fraud and anti-manipulation,” he added.
Mr. Gensler said he hoped that the civil fraud charges against Mr. Bankman-Fried and charges with Ms. Ellison and Mr. Wang would show the crypto community that their operations must comply with existing securities laws.
Mr. Gensler said he would support legislation to regulate certain crypto sectors, like stablecoins — digital assets ostensibly pegged to the value of a stable asset like the dollar that often serve as a bridge between the worlds of traditional and futuristic finance. There is clearly investor interest in such assets, he said, and some of those involved in traditional finance are intrigued by the prospects. But he is wary of bills that could undermine the S.E.C.’s authority.
“I believe that securities law is quite robust and covers much of the activity,” Mr. Gensler concluded, “not only of the tokens but particularly the intermediaries in crypto securities.”