On 2 November 2023, founder and former CEO of US cryptocurrency exchange, FTX, Sam Bankman-Fried was found guilty of orchestrating a multi-billion dollar fraud and of money laundering.
Earlier this year, we reported on Bankman-Fried's arrest, the insolvency of FTX and its potential impact on the regulation of crypto. Now that he has been convicted, this update considers what happened at the trial, FTX's creditor's attempts to recover their funds and the evolving regulatory landscape for crypto.
The Bankman-Fried trial
At the month-long criminal trial in New York, Bankman-Fried was accused of seven counts of fraud, money-laundering and conspiracy. The prosecution presented evidence that Bankman-Fried stole from FTX customers from the early days of the exchange to try and cover losses in FTX's sister company, Alameda Research, helping to bring about FTX's collapse.
Bankman-Fried pled not guilty, maintaining that, while he admitted he had made mistakes, he had acted in good faith. However, after deliberating for only five hours, the jury found Bankman-Fried guilty of all charges.
Bankman-Fried will be sentenced in March 2024 and could face a maximum sentence of up to 110 years. The judge may also order him to pay restitution to the victims of the fraud such as FTX's creditors at the sentencing in addition to the recovery exercise being undertaken as part of the FTX's bankruptcy proceedings.
Update on the bankruptcy of FTX
FTX was once valued at $32 billion, but when it filed for bankruptcy in the US in November last year, $8 billion in customer funds was missing. Documentation provided to the bankruptcy court in Delaware estimated that FTX and its associated entities may have more than one million creditors.
The conviction of Bankman-Fried will be a relief for these creditors as the finding of guilt (whilst not having a direct impact on whether payment should be made to creditors) will likely support FTX's liquidators with their legal recovery action. In more positive news for creditors, in April 2023, it was reported that $7.3 billion in assets had so far been identified by the FTX's liquidators. In addition, in September 2023, a bankruptcy judge granted permission to dissolve digital assets (such as e-currency Solana, Bitcoin and Ether) held by FTX to repay creditors. This process has now started but is expected to take some time to conclude and will be affected by any instability in the value of the digital currencies.
The process to recover all of the lost funds from FTX is still expected to take many more months, with the FTX legal team indicating that they hope the bankruptcy process may conclude in the second quarter of 2024. A detailed bankruptcy plan is due to be filed by FTX's liquidators in December this year.
Impact on the regulation of crypto
During his trial, Bankman-Fried's apparent disregard for those working to regulate the crypto sector was apparent. In one notable exchange much covered in the media, the US prosecutor on the case asserted that Bankman-Fried's previous congressional testimony in support of regulation of the crypto sector was “just for PR” and asked whether it was correct that, in private, Bankman-Fried had uttered the phrase "f*** regulators". Bankman-Fried admitted using the phrase.
Whatever Bankman-Fried's views, regulators and lawmakers globally seem to have taken a keen interest in FTX's collapse and some are now taking concerted action to increase regulation in the sector.
In the UK, in February 2023, the Government published a consultation and call for evidence on a future financial service regulatory regime for crypto assets which closed in April. In the foreword, Andrew Griffith MP (Economic Secretary to the Treasury) specifically referenced turbulence in crypto asset markets such as the collapse of FTX reinforcing the case for clear, effective, timely regulation and proactive engagement with industry.
In October 2023, the Treasury's response to the consultation was published. The document confirmed the Government's proposals for regulating the sector, including its intention to bring a number of crypto asset activities into the regulatory perimeter for financial services for the first time. In terms of a timescale for implementation, the response states that draft legislation is being worked on and will be laid 'subject to Parliamentary time' in 2024. It remains to be seen how quickly this will progress especially with a General Election likely to take place next year.
In addition, in between publishing the consultation in February and the response in October, Parliament passed the Financial Services and Markets Act 2023, enabling crypto to be treated like a regulated activity within the meaning of the Financial Services and Markets Act 2000. This will require crypto asset firms to be fully authorised by the FCA (or otherwise exempt by legislation), and subject to the extensive regulations set out in the FCA Handbook. This includes FCA restrictions on how crypto firms promote and market their business as discussed in further detail here.
These changes fall largely in line with developments in the EU which, in June this year, brought into force the Markets in Crypto-Assets (MiCA) Regulation which institutes uniform EU market rules for crypto-assets, including a licensing process for crypto firms. In addition, any company offering crypto assets to the public in the EU will also need to publish a white paper which is fair and clear, warning of risks without misleading potential buyers. MiCA comes into effect in January 2024.
In the US, initially there was some reaction to the fall of FTX, such as the setting up of a government subcommittee on digital assets, financial technology, and inclusion and the signing of an executive order on ensuring responsible development of digital assets. However, some commentators note that the US is far behind other tech leading nations such as the UK and EU when it comes to bringing about formal laws to regulate the industry. Reuters reported in June this year that despite government outrage over FTX last year, little viable regulatory progress has ensued, even as some firms in the crypto industry would welcome guardrails and the ability to participate fully in regulated markets.
Conclusion
As noted in our previous article on this topic, regulatory regimes for the crypto industry have historically been somewhat limited, with inconsistency across jurisdictions. However, the landscape is slowly evolving with new legislation passed both in the UK and the EU this year and more anticipated in 2024. This is likely to be good news for investors in the sector as, with greater regulation, investors can hopefully yield benefits without the substantial risks which have previously existed for those investing in the crypto sector as those who invested in FTX can testify to.
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