By Francis Lew, CEO
The world of cryptocurrencies can appear to be a wild and often unpredictable environment for investors.
While it has delivered substantial gains to some, it has also been marred by controversies, scams, and regulatory uncertainty, not to mention disproportionate negativity from the mainstream media.
The recently concluded case against SBF, the founder and majority owner of the cryptocurrency exchange FTX and its sister trading arm, Almeda Research, provides a stark reminder of why ethics, compliance, trust and effective oversight are crucial components for crypto investors.
The SBF Case in short
In November 2022, the U.S. Commodity Futures Trading Commission (CFTC) and the Office of the United States Attorney for the Southern New York district investigated SBF and some notable entities he owned, FTX, FTX US, and Almeda Research, for potential market manipulation after these entities filed for bankruptcy.
In November 2023, he was found guilty of wire fraud and conspiracy to commit wire fraud against FTX customers and against Alameda Research lenders, conspiracy to commit securities fraud and conspiracy to commit commodities fraud against FTX investors, and conspiracy to commit money laundering.
The fallout associated with the case encumbered big crypto and traditional names alike, with the list including Gemini, Digital Currency Group, BlockFi, Tiger Global Management, the Ontario Teachers’ Pension Plan, SoftBank Group, BlackRock, Lightspeed Venture Partners, Temasek, and Sequoia Capital.
Additionally, several public figures also invested in FTX or received compensation for promoting the company. These include former Tom Brady, Gisele Bundchen, Shaquille O’Neal, Stephen Curry, and Kevin O’Leary, most of whom are named in a class action lawsuit filed in Miami on November 2022.
We will not get into details of the case but highlight the need for integrity, independent custody, risk management, and coherent regulatory oversight in the crypto industry.
Why It Matters
Investor Protection: Cryptocurrency markets may appear to lack the same level of investor protection as traditional financial markets. However, if there was a conscious effort on the part of industry participants to do the right thing, investors would be safeguarded from fraudulent activities, market manipulation, and other risks.
Market Stability: The crypto market is notorious for its extreme volatility. There are a myriad of factors for such wild price swings, but we’ll go out on a limb here and categorise th&is as normal behaviour in a nascent industry. However, a mix of things need to happen to move towards market stability as we know it from a traditional angle, such as, investor education, coherent regulations, ethical behaviour, and credible underwriters. It is a tall order to fill, and while most seek to do right, there will always be bad actors that ruin an industry.
Legitimacy: Coherent regulations will add more legitimacy to the cryptocurrency space. It attracts institutional investors, who are often hesitant to enter an unregulated environment. Their anticipated participation can bring more liquidity and credibility to the market, which, in turn, benefits retail investors.
The Importance of Compliance
Transparency: Transparent and compliant institutions are more likely to provide accurate information about trading volumes and user funds. This transparency is essential for investors to make informed decisions and trust the platform they use.
Accountability: Compliance measures hold institutions accountable for their actions. When institutions adopt and follow these rules, they are less likely to engage in risky practices that could harm their users.
Long-Term Viability: Institutions that prioritise compliance are more likely to have a longer and healthier life span.
The Role of Trust and a Trust
Trust is the foundation of any financial system, and the world of cryptocurrencies is no exception. Without trust, investors are less likely to participate, and the market remains volatile and fragmented.
Trust in the Institutions: Users need to trust that their funds are secure and that they can execute trades fairly. Trustworthy institutions with strong compliance measures are more likely to deliver on these expectations.
Trust in the Market: Trust in the overall crypto market is vital for its long-term success. When investors have confidence in the market’s integrity and stability, they are more likely to invest and hold assets, driving broader adoption.
Statutory Trust: Safekeep customer assets with a reputable digital asset infrastructure provider to segregate assets and safeguard against bad actors.
The case of SBF serves as a valuable lesson for the crypto industry and investors alike.
It highlights the importance of ethical behaviour, compliance, and designs implemented to instil trust in the cryptocurrency industry.
While the decentralised nature of cryptocurrencies is one of their most attractive features, it doesn’t negate the need for a certain level of accountability.
Investors should seek out platforms that prioritise these principles to ensure a safer and more reliable crypto investment experience.
In the end, a trustworthy crypto ecosystem benefits everyone involved.