Overdue Diligence: Examining the Cryptocurrency Industry’s Billion-Dollar Scandal

by | Friday January 6, 2023
Overdue Diligence: Examining the Cryptocurrency Industry’s Billion-Dollar Scandal

What would happen if inexpensive flying cars hit the market tomorrow? Wouldn’t it be great if you could just fly right over stop signs and red lights on the ground or avoid traffic jams? But soon there would be a disastrous crash, and authorities would ground everyone while they figured out what to do. Meanwhile, flying car owners would quickly learn that new technologies don’t make them magically immune to liability in tort and criminal negligence. In this scenario, flying car owners and the companies that manufactured them should have looked into air traffic laws that have always applied.

 

Something like this has happened in the cryptocurrency industry. Because cryptocurrency is so new, many people have assumed they were not subject to the traditional rules, a rich new area to be quickly exploited before the authorities showed up to rein things in. But there have always been laws to regulate it, which have gone ignored by those treating crypto like a modern-day gold rush. Many people have entered this space without a financial background, uneducated on the financial and securities regulations that apply in the space. Those with a financial background have perpetuated the myth that there is some gray area in which crypto operates and that securities laws don’t apply.

 

Even still, cryptocurrency has come a long way since the early days of Bitcoin. It has opened the door to a new form of digital asset that can be used for trading and investing, as well as providing an alternative to traditional fiat currencies. Unfortunately, the industry is not without its share of scandals, and one of the biggest to date involves the crypto exchange FTX. The collapse of FTX has caused ripples throughout the private capital market and highlighted just how important it is for companies to comply with securities regulations and for investors to properly vet their investments. 

 

Despite the alleged fraud occurring at companies like FTX, there are many in the space striving to build companies based on legitimacy, trust, and transparency. These companies are working hand-in-hand with the SEC and other regulators to ensure that investors and customers are protected and crypto evolves. As a result, we believe that the future will be dependent on trust and compliance, and only those essential components will allow this space to grow. 

 

The History of FTX

 

To understand the downfall of FTX, we must first take a look at its meteoric rise.

 

FTX was created in 2021 by Sam Bankman-Fried and its CEO Michael McCaffrey as an investment platform that allowed users to buy and sell cryptocurrency. The company quickly grew in popularity and established itself as a leader in the cryptocurrency sector. And shortly after its creation, the company began to receive attention from major investors such as the Royal Bank of Canada, Goldman Sachs, and Jefferies Group, quickly becoming popular among traders for its low fees and wide selection of cryptocurrency derivatives. It also launched an initial coin offering that raised more than $11 billion from investors around the world.

 

In 2021, FTX was one of the major sponsors for Major League Baseball, having agreed on a deal with the league to place its logo on the uniforms of umpires. The company also secured naming rights for the Miami Heat’s basketball stadium, renaming it FTX Arena, and sponsored the first season of MLB Home Run Derby X. The company also paid for high-profile, celebrity endorsements like Tom Brady, Shaq, and Shark Tank star Kevin O’Leary. However, FTX’s success was short-lived. In November 2022, the company abruptly announced that it had gone bankrupt and its assets were frozen. This news sent shockwaves throughout the cryptocurrency sector and led to many of FTX’s sponsors, including Mercedes-AMG Petronas F1 Team, TSM, and the Miami Heat, ending their partnerships with the company.

 

The United States House Committee on Financial Services also announced plans to conduct hearings in December 2022 into the collapse of FTX, with committee leaders seeking to hear testimony from Bankman-Fried. From its beginnings as a thriving startup in the cryptocurrency sector, FTX’s fall from grace was swift and sudden. The bankruptcy of FTX is a cautionary tale for those looking to invest in cryptocurrencies, as well as a reminder of the risks associated with these investments. Although many companies have made their fortunes in this fast-growing industry, it’s important to approach such investments with caution and do your research before making any decisions. As the fate of FTX shows, even the most successful companies can suddenly go under and investors can find themselves left with nothing but losses in their wake.

 

What Was Different About FTX?

 

FTX was far from the first crypto exchange, but it was widely seen as a legitimate entity by investors having established a positive reputation for itself and offering a wide range of services like spot trading, derivatives trading, margin trading, stablecoins, and decentralized finance products. FTX also had an innovative design that made it easier to use and had a wide selection of coins available to trade. At its height, the company was valued at over $32 billion in January 2022.

 

Unfortunately, some crypto companies have become complacent about following securities regulations. These crypto companies believe that because they are dealing in digital assets, they don’t need to follow the same rules as traditional securities. There have only been three companies, KoreChain, INX, and Coinbase, who have worked directly with SEC regulators to ensure that they are acting compliantly in this evolving space. These legitimate companies can continue transacting because they have shown that compliance is essential. 

 

When Did Signs Start to Emerge Something Was Wrong?

 

The signs that all was not well at FTX started to emerge in late 2021 when a series of lawsuits were filed against the exchange. These lawsuits alleged that FTX had committed fraud, and market manipulation, was operating an unregistered securities exchange, and were followed by reports of insider trading and other questionable activities.

 

The SEC has since accused FTX and Bankman-Fried of securities fraud and operating an unregistered securities exchange. According to the complaint, Bankman-Fried allegedly misled investors by failing to disclose that he was receiving payments from certain issuers in exchange for listing their tokens on the exchange. The agency further alleged that he had made false statements about the exchange’s liquidity and trading volume.

 

Furthermore, FTX was accused of failing to implement an adequate system for preventing market manipulation. The SEC also claimed that Bankman-Fried had personally profited from these activities by engaging in “wash trades,” a form of market manipulation that involves placing orders to buy and sell the same asset for the sole purpose of artificially inflating its price.

 

Crypto and Blockchain, what is the Difference?

 

With everything happening in the crypto world, it’s understandable the uncertainty that could creep into people’s minds. However, despite cryptocurrencies and blockchain often being confused to be the same, they are completely different concepts. Cryptocurrencies are digital currency that runs on a distributed ledger technology called a blockchain. It is a form of payment that can be sent and received worldwide, with no need for a third-party intermediary. In contrast, blockchain is a technology that enables the secure and transparent storage of data, with each transaction stored in a tamper-proof digital ledger. The recent FTX collapse has caused distrust in the crypto market, as questions arise about whether investments were safe. 

 

The news of the scandal and its effects has brought to light the risks associated with investing in security tokens, making many investors hesitate when it comes to getting involved. By taking steps to be trustworthy, companies can help restore public confidence in crypto and blockchain technology. In this way, the industry can benefit from a more secure and stable future.

 

What Does This Mean for the Private Capital Market?

 

The collapse of FTX is a wake-up call for the private capital market. Companies need to be more diligent in ensuring they are compliant with securities regulations and investors need to do their due diligence when investing in crypto companies. Companies need to have proper protocols in place to prevent fraud, market manipulation, and insider trading. Companies affected by the FTX collapse may also face increased scrutiny when seeking investments, as investors may be wary about investing in crypto companies.

 

Binance, for example, is currently facing potential charges of operating an unregistered securities exchange. If the SEC finds them guilty, they could face fines and the possibility of having their assets frozen. This could have a major impact on Binance’s operations and reputation in the crypto world. It’s also possible that other crypto exchanges could be targeted by the SEC for similar violations, creating more issues for the industry.

 

How will the SEC address crypto and blockchain moving forward?

 

With everything that has transpired, the SEC continues to actively monitor the cryptocurrency and blockchain space, seeking to protect retail investors from fraudulent activities. They have already taken active steps to ensure that companies operating in this sector are compliant with their regulations and have set forth guidelines for any security tokens issued through ICOs or STOs. Going forward, the SEC is likely to continue enforcing stringent rules to protect investors and ensure that companies are in line with their regulations regarding security tokens. As a result, companies will need to continue taking steps to be trustworthy and compliant. This means ensuring that their products meet high standards of security and reliability, as well as providing audit trails for all financial transactions conducted on the blockchain. 

 

Companies in this space must continue to be proactive about building and maintaining trust with their customers and ensuring compliance with SEC regulations. By doing so, they can help restore public confidence in crypto and blockchain technology and create a more secure and stable future for the industry. While this collapse is leading to mistrust in crypto, the blockchain technology that powers it is still safe and relevant. Used in all manner of private capital-raising activities, the blockchain still offers a secure and reliable platform for companies to use. By focusing efforts on maintaining compliance with the SEC and building trust with their customers and investors, companies raising private capital in this space can create a more secure future for themselves and help restore public confidence in the industry.


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