The Memo: An inside look at what FTX’s collapse means for crypto law

Isaac Hickford - 20 December 2022

If you’ve kept half an eye on the news in recent weeks, the name Sam Bankman-Fried might ring a few bells. The 30-year-old American was, up until very recently, the billionaire CEO of cryptocurrency exchange FTX. Cryptocurrency exchanges are, as the name suggests, online platforms that allow users to exchange one kind of currency for another. Whether that’s swapping what we call ‘fiat’ currencies (pounds, dollars, euros etc.) for cryptocurrencies, or one cryptocurrency for another. “Think of it like a currency exchange that you would use when you go on holiday,” Amalia Neenan, trainee and former commercial litigation and civil fraud legal researcher at Peters & Peters Solicitors LLP explains, “but in the crypto sphere, instead of getting the reciprocal fiat currency, you’re going to be getting something along the lines of Bitcoin.”

Founded in 2019, by mid-2021 FTX was valued at a whopping $32 billion, and used by over a million people. “Cryptocurrency exchanges are a very, very big industry at the moment,” Neenan tells us, “because they offer the most straightforward way for the majority of people to interact with the space.” While cryptocurrencies like Bitcoin can, in technical terms, be ‘mined’ (by solving complex mathematical problems on a computer), “not everyone has the computing power of a small country! Exchanges are the easiest way for you to get on a platform and start trading with people.” By November of this year however, FTX had filed for Chapter 11 bankruptcy protection (if you haven’t already, listen to our podcast on FTX’s downfall). “There’s no denying that the industry is completely shaken,” Neenan explains, “It has produced this domino effect. Immediately after the crash, bitcoin’s price plummeted to its lowest level since 2020, a time when we were dealing with an actual pandemic.”

At FTX’s peak, a big part of Bankman-Fried’s PR campaign was to promote “sustainable, workable and adaptable regulation” in the space. “He was billed as something of a wunderkind,” Neenan adds, “both the Democrats’ and the Republicans’ answer to sustainable, user-friendly cryptocurrency.” By December of this year however, Bankman-Fried had been arrested and charged in the US amid accusations of a range of fraudulent activities including wire fraud. All too quickly, a picture had begun to emerge of a company entirely without adequate accounting mechanisms and controls.

One of the great challenges facing lawyers in the space is navigating a regulatory framework that is inadequate for the task at hand. “It's really highlighted the fact that there are these massive regulatory gaps in the system,” Neenan points out, “the Financial Conduct Authority has a dedicated page for UK investors in FTX, explaining that it’s not possible to help because there is essentially no regulation here.” In fact, when money is fraudulently obtained, put into cryptocurrency and invested in crypto products, “it becomes, firstly, so much more difficult to trace, but also to recover, because once it’s in the system, prices can plummet.”

But things are changing. “What we're seeing now as a result of this is greater calls for regulation,” Neenan points out. The Financial Services and Markets Bill currently making its way through the House of Commons promises a shake up of the UK regulatory framework around cryptocurrency. “The extent of our regulation, or at least a big part of it, comes through the Financial Conduct Authority,” Neenan tells us, “existing legislation requires cryptocurrency businesses that want to work in the UK to register to comply with anti-money laundering provisions, but that’s essentially it. What they can’t currently regulate is these company’s activities towards you, or their dealings with you.” Yet crucially, the bill seeks to give the Treasury and, by proxy, the FCA, greater regulatory ambit, and the freedom to create new mechanisms to do it.

For many, these regulatory changes are coming too late, as governments struggle to keep pace with a rapidly evolving sector. But they offer a step in the right direction, a positive move towards a level of oversight that will better protect investments. “Ironically,” Neenan quips, “Sam Bankman-Fried’s message of love, unity, and tighter regulation has only come to fruition in the wake of his demise.”

Prior to beginning her training contract, Amalia Neenan graduated with a Master’s in International Business Law from LSE, specialising in cryptocurrency frauds and the intersection between law and technology. Having initially joined the firm as a commercial litigation & civil fraud legal researcher, she has co-authored a number of articles in the fields of cryptocurrency litigation and cybercrime.