TradFi Fights for Tougher Crypto Rulebook in Wake of FTX Collapse
Traditional finance players want new international rules to stop FTX-style conflicts of interest, but the crypto industry warns of crimping blockchain benefits
International plans to break up major crypto conglomerates appear to have been given a boost by the collapse of FTX, with allegations of misuse of funds revealing regulators’ worst fears to be true.
Now major traditional finance (TradFi) players are egging on international standard setters to be yet bolder in tackling perceived excesses by the crypto sector – despite warnings from Binance and Coinbase that they could end up limiting the benefits of blockchain technology, documents published Wednesday reveal.
The companies were responding to a consultation opened in October 2022 in which the Financial Stability Board (FSB) proposed a “comprehensive” international crypto rulebook covering financial stability and consumer protection – just as the standard-setter sought to do for TradFi in the wake of the 2008 crisis.
The Financial Stability Board seems to have been prescient when, last year, it warned that major crypto companies face conflicts of interest – saying that, for example, a crypto exchange could block out competition from rival market makers operating on its platform.
Just a few weeks later, CoinDesk revealed a blurring of lines between FTX and its supposedly separate trading arm Alameda Research. That snowballed into allegations of a misuse of customer funds, and that Alameda enjoyed an unlimited line of credit.
The company has now filed for bankruptcy protection, and former chief executive Sam Bankman-Fried on Tuesday pleaded not guilty to charges of money laundering and wire fraud in a New York courtroom.
Coming after the collapse of crypto lender Celsius Network, stablecoin issuer Terra and hedge fund Three Arrows Capital, the turbulent year in crypto has only given extra grist to the mill of TradFi players who want crypto actors to play by the same rules.
“The case for extending the regulatory perimeter is now clear-cut … the regulatory approach must be comprehensive,” said U.K. bank Standard Chartered in its response to the FSB consultation.
The “egregious examples of the FTX collapse and others” show the need to clarify how to segregate and protect customer assets, TradFi lobby group the Institute for International Finance told the FSB.
“Given recent market developments in the crypto-asset ecosystem and the uncertainty brought by the collapse of key market players, we support global regulators and standard setters in their mission to bring order and financial stability to crypto-asset markets,” said the Global Financial Markets Association, which represents capital market players such as investment banks.
According to the World Federation of Exchanges, whose members include Nasdaq, the Intercontinental Exchange and the London Stock Exchange Group, the FSB should even “strengthen its stance in requiring separation of activities,” ensuring the same standards apply as would for TradFi players, when crypto companies simultaneously operate platforms, execute trades, and hold or issue cryptocurrency.
Established crypto players, meanwhile, have warned the FSB not to throw the baby out with the bathwater – and to respond to crypto risks without impeding the benefits of its innovation.
Crypto risks “need to be considered properly, and therefore require tailoring and bespoke regulation,” said Binance in its response, adding that segregation of functions would need to proceed differently even if they are legally similar to TradFi services.
They are joined by rival crypto exchange Coinbase, which said it “would be a mistake to call for the separation of activities” merely because that’s done for TradFi services that use “inferior technology.”
Combining exchange services with custody would allow the benefits of real-time settlement without meaningful extra risks, said the submission, introduced by Coinbase Chief Policy Officer Faryar Shirzad.
The FSB has said it wants to produce a final report in July, forming the kernel of a global system of crypto laws, and there seem to be scant indication that it will fully soften its position before then.
In December, the FSB, whose members include officials from ministries, central banks and regulators in 24 jurisdictions including the U.S., U.K. and European Union said it had drawn preliminary lessons from the FTX collapse, and reiterated the risks posed by major crypto conglomerates.
The Indian finance minister, set to chair the meeting of the world’s twenty largest economies that steers the FSB’s work, has also vowed to make new crypto laws a priority.
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