by Yoon-Young Lee, Tiffany J. Smith, Matthew B. Kulkin, Michael Held, Susan Schroeder and Eliza Gonzalez.

One of the world’s largest cryptocurrency exchanges—FTX Trading Ltd.—and many of its affiliates filed for bankruptcy earlier this month. [1] While the full impact of the FTX bankruptcy is not yet clear, various responses from the executive branch and federal and state regulators indicate that, in the short term, agencies will continue to use their existing authorities to seek information about the practices of crypto market participants and to enforce existing rules to protect customers and avoid further market contagion. [2] The following statements may indicate what market participants should expect.

The Executive Branch Could Work With Other Countries on International Rules Governing Crypto. President Joe Biden, along with other leaders of the Group of 20 (G20) industrialized countries, published a statement on the White House website calling for international rules to govern the bitcoin and crypto space in order to mitigate potential risks to financial stability. [3] President Biden and the other G20 leaders signaled support for the proposed rules issued by the Financial Stability Board (FSB) last month. FSB’s proposed rules would subject crypto companies to the same rules that govern traditional finance based on the principle of “same activity, same risk, same regulation.” [4] Relatedly, Treasury Secretary Janet Yellen said that investors should receive the same protections in crypto assets that they do in the traditional financial markets, and that the collapse of FTX “demonstrate[s] the need for more effective oversight of cryptocurrency markets.” [5]

Commodity Futures Trading Commission (CFTC) Commissioners Indicate That the CFTC Will Continue to Use Its Existing Authorities While Urging Congress for Additional Authority. CFTC Chairman Rostin Behnam stated that the FTX bankruptcy demonstrates the need for Congress to establish regulatory controls over the crypto market quickly, and that the CFTC will continue to use its authority over fraud and manipulation in the direct trading of crypto commodities “to the full extent of the law.” [6] Commissioner Kristin N. Johnson also said that while the CFTC currently has “a number of options” to provide oversight to preserve market integrity, the agency needs direct authority from Congress to force market participants to come under its regulatory purview. [7] Both Behnam and Johnson credit the CFTC’s oversight of FTX’s US derivatives-trading facility and clearinghouse, LedgerX, as the reason LedgerX was excluded from FTX’s bankruptcy filing. [8]

Securities and Exchange Commission (SEC) Chair Gary Gensler Suggests That Enforcement Against Crypto Intermediaries May Be Forthcoming in the Short Term. Gensler reiterated his calls for crypto firms to voluntarily register with the SEC or face potential enforcement actions, stating that if firms do not register, the SEC will “certainly be doing what [it] need[s] to do, being a cop on the beat.” [9] Gensler indicated that the SEC has two paths for dealing with crypto companies: (1) working with the platforms to get them registered and (2) enforcement, but that “the runway is getting shorter” for companies to voluntarily come in to the SEC. [10]

Despite Gensler’s Statements Calling for Crypto Intermediaries to Register, It Remains Unclear Whether Crypto Market Participants Will Receive Additional Guidance From the SEC. The week after FTX filed for bankruptcy, Commissioner Jaime Lizárraga seemingly referenced the filing in a keynote speech at Brooklyn Law School and stated that “events this past week . . . revealed how volatile the digital asset market can be.” [11] Lizárraga pushed back against accusations that the SEC is engaging in “regulation by enforcement” with respect to crypto. [12] He stated, “The laws are well-established, and the cases brought to date have clear applications, as has been apparent in court rulings on these issues. This is not regulation by enforcement, but enforcement of our securities laws as Congress intended.” [13] Commissioner Hester Peirce, on the other hand, disagreed about whether the SEC has provided clear guidance on whether digital assets are securities. Peirce said that broad statements on the matter are not sufficient and called the FTX bankruptcy a “call to action” for the SEC to work on providing regulatory clarity regarding digital assets. [14]

Existing Authorities Over Regulated Entities Could Be Used to Seek Information About Practices of Affiliates in the Crypto Industry. The Financial Industry Regulatory Authority (FINRA), the self-regulatory organization (SRO) that oversees US broker-dealers, announced that it is conducting a targeted sweep of members for communications with retail customers about crypto products during the third quarter. [15] The sweep involves the examination of approximately 20 brokerage firms, which are being asked to respond to five questions. [16] The questions include a request for retail communications that were distributed or made available by the broker-dealer firm or its affiliates that relate to or concern a crypto asset or service, details about when the communications were made and whether the firm filed the communication with FINRA’s Advertising Regulation Department. [17] FINRA is targeting both written communications and communications posted to social media websites or through smartphone applications. [18] While the National Futures Association (NFA), the SRO for the derivatives industry, has not announced a similar sweep, it could potentially do so under NFA rules governing disclosure requirements for members engaging in cryptocurrency activities. [19]

The Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation Are Likely to Exert Supervisory Pressure on Regulated Institutions to Further Mitigate Risk of Contagion From the Crypto Industry. Recently, Acting Comptroller Michael Hsu reiterated his view that the OCC’s “careful and cautious” approach to crypto activities has helped mitigate the risk of contagion from the crypto industry to the banking system. Going forward, partnerships between federally regulated institutions and the industry are likely to be subject to even greater scrutiny and due diligence both from the regulators and from federally regulated institutions. Likewise, the regulators may redouble their efforts to extend their supervisory reach to those crypto firms that act as service providers to federally regulated institutions. Finally, promised regulatory clarity regarding banks’ permissibility to engage in crypto-related activities is likely to be subject to further assessment and deliberation in light of the FTX bankruptcy.

New York Department of Financial Services (DFS) Superintendent Indicates New Guidance for Crypto Companies in New York May Be Forthcoming. On November 16, DFS Superintendent Adrienne Harris spoke on the agency’s plans to issue new guidance for crypto companies operating under DFS licenses in New York, saying that the regulator is looking to “bolster and broaden” much of its regulation in the area. [20] Harris pointed to capitalization, consumer protection, disclosures, advertising and customer complaints as areas where DFS will be issuing new guidance. [21] Harris also indicated that much of the guidance would borrow from existing supervisory agreements between DFS and individual crypto companies. [22] While DFS has framed the guidance as part of its ongoing agenda rather than a direct response to the bankruptcy of FTX—which was not licensed by DFS and did not operate in New York—it could form a model for regulations to come from other state and federal regulators.

The above-referenced statements signal that the bankruptcy of FTX could have far-reaching implications for crypto market participants in the form of additional regulation, increased oversight and, potentially, enforcement actions. Crypto market participants should monitor these developments, be mindful of the increased regulatory scrutiny they will likely face and consider taking proactive steps to address the concerns of lawmakers and regulators.

[1] Kalley Huang, Why Did FTX Collapse? Here’s What to Know, NY Times (Nov. 18, 2022), https://www.nytimes.com/2022/11/10/technology/ftx-binance-crypto-explained.html.

[2] Congress is also holding hearings to investigate the collapse of FTX and related events. Both the US House Financial Services Committee and the US Senate Agricultural Committee are holding hearings in December. The Senate Banking Committee has also indicated that it is working to schedule a hearing. U.S. Senate to hold FTX hearing on Dec. 1, CFTC chairman to testify, Reuters (Nov. 21, 2022), https://www.reuters.com/technology/us-senate-hold-ftx-hearing-dec-1-cftc-chairman-testify-2022-11-21/; David Shepardson, U.S. House committee to hold hearing on collapse of FTX,Reuters (Nov. 16, 2022), https://www.reuters.com/technology/us-house-committee-hold-hearing-collapse-ftx-2022-11-16/.

[3] Id.

[4] Id.

[5] Billy Bambrough, Joe Biden Leads ‘Critical’ Call For Game-Changing, Global Bitcoin And Crypto Rules After Shock FTX Collapse, Forbes(Nov. 20, 2022), https://www.forbes.com/sites/billybambrough/2022/11/20/joe-biden-leads-critical-call-for-game-changing-global-bitcoin-and-crypto-rules-after-shock-ftx-collapse/?sh=36e377f1700e.

[6] Nick Baker & Jesse Hamilton, Health of FTX’s US Derivatives Arm Owed to Oversight, Says CFTC Chief Behnam, CoinDesk (Nov. 14, 2022), https://www.coindesk.com/policy/2022/11/14/health-of-ftxs-us-derivatives-arm-owed-to-oversight-says-cftc-chief-behnam/.

[7] Lavender Au, CFTC Has ‘Boots on the Ground’ at FTX Subsidiary LedgerX, CoinDesk (Nov. 17, 2022), https://www.coindesk.com/policy/2022/11/17/cftc-has-boots-on-the-ground-at-ftx-subsidiary-ledgerx/.

[8] Au, supra note 7; Baker, supra note 6.

[9] Jessica Corso, SEC Chair Presses Crypto Registration As FTX Crisis Deepens, Law360 (Nov. 9, 2022), https://www.law360.com/compliance/articles/1548371?nl_pk=aabf1cbe-d743-453e-b611-1dc80c240a09&utm_source=newsletter&utm_medium=email&utm_campaign=compliance&utm_content=2022-11-10&nlsidx=0&nlaidx=1?copied=1.

[10] SEC Chair Gary Gensler on FTX fallout: Investors need better protections in crypto, CNBC (Nov. 10, 2022), https://www.cnbc.com/video/2022/11/10/sec-chair-gary-gensler-on-ftx-fallout-investors-need-better-protections-in-crypto.html?&qsearchterm=gensler.

[11] Katryna Perera, SEC Official Says Attys Must ‘Be Clear’ With Crypto Clients, Law360 (Nov. 17, 2022), https://www.law360.com/assetmanagement/articles/1550777?utm_source=shared-articles&utm_medium=email&utm_campaign=shared-articles.

[12] Id.

[13] Id.

[14] FTX saga a call to action for us to work on regulatory clarity, says SEC commissioner, CNBC (Nov. 11, 2022), https://www.cnbc.com/video/2022/11/11/ftx-saga-a-call-to-action-for-us-to-work-on-regulatory-clarity-says-sec-commissioner.html; see also Fran Velasquez, SEC Commissioner Hester Peirce: FTX’s Collapse Could Finally Be ‘Catalyst’ for Regulation, CoinDesk (Nov. 11, 2022), https://www.coindesk.com/policy/2022/11/11/sec-commissioner-hester-peirce-ftxs-collapse-could-finally-be-catalyst-for-regulation/.

[15] Jessica Corso, FINRA Targets Brokers Hawking Crypto, Law360 (Nov. 17, 2022), https://www.law360.com/assetmanagement/articles/1550532?utm_source=shared-articles&utm_medium=email&utm_campaign=shared-articles.

[16] Id.

[17] Crypto Asset Communications, November 2022, https://www.finra.org/rules-guidance/guidance/targeted-examination-letters/crypto-asset-communications.

[18] Id.

[19] See NFA Rule 9073, available at https://www.nfa.futures.org/rulebook/rules.aspx?Section=9&RuleID=9073.

[20] Jon Hill, NY Regulator Plugs Tougher Crypto Approach Amid FTX Bust, Law360 (Nov. 17, 2022), https://www.law360.com/banking/articles/1550683?utm_source=shared-articles&utm_medium=email&utm_campaign=shared-articles.

[21] Id.

[22] Id.

Yoon-Young Lee, Tiffany J. Smith, Matthew B. Kulkin, Michael Held, and Susan Schroeder are partners and Eliza Gonzalez is an associate at WilmerHale.

The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of New York University School of Law. PCCE makes no representations as to the accuracy, completeness and validity of any statements made on this site and will not be liable for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with the author.