FTX and Crypto. Is Regulation Really The Answer?


Back to work. Kinda sort of, anyway. Thanksgiving is over and the holiday week is in the rear view mirror. It is tough to return to “normalcy” and reality, though. So what was the main focus and topic of conversations during this week of family and friends? Probably NOT politics. Catching up on “all things family (boy, those grandkids sure have grown, you look great, Aunt Frieda, etc. etc.) for sure. And, of course, football (Michigan, Georgia, USC, Ohio State, TCU? Duh TCU…Go Frogs). I’ll bet crypto regulation and the FTX collapse didn’t come up much at the dinner table. But, now that we’re back……..

FTX and its founder Sam Bankman-Fried have been monopolizing the headlines after a spectacular corporate collapse. To be just a wee bit compassionate toward SBF, it has to be really hard to go from “crypto savior” and multi-billionaire to number one villain and criminal mastermind in a matter of weeks.  Tsk tsk. Oh well, enough compassion. Screams for crypto regulation are everywhere. But, would regulation have actually prevented the FTX collapse? Probably not. (But maybe some mandatory ethics classes would have helped?)

Even the strictest and tightest regulations would not have (or could not have) prevented the FTX debacle. Remember Bernie Madoff? He ran a  $60 billion Ponzi scheme for years, even while being Chairman of Nasdaq and having SEC watchdogs camped in his offices. Remember Enron? The huge former energy company was a total fraud complete with ‘fake’ energy trading rooms. WorldCom? It was the USA’s second-largest long-distance telephone company at the time. Accounting scandal sealed their doom. Lehman Brothers? Bear Stearns? What is the common link? All heavily regulated by the SEC and publicly traded (except Bernie) on regulated exchanges, who previously RAN ONE.

So it seems that if investors lose money in something regulated it doesn’t matter, but if investors lose money in an unregulated entity/market, it’s JUST UNACCEPTABLE. Really?

The truth is there are “bad actors” out there. Always have been, always will be. Even the most stringent regulations will not stop another FTX, Madoff, etc. In the case of FTX, it appears that using customer funds to fund risky proprietary trades and using clients’ investments for personal use was the “norm.” There are already rules against that. No new regulations needed there.

Regulating crypto sounds great but is it really the answer? Greedy “bad actors” will almost certainly find ways to “beat” the regulators. You can’t regulate human behavior.