Last week the world’s second largest cryptocurrency exchange collapsed and has now filed for Chapter 11 bankruptcy in Delaware, USA. In the UK, regulation of cryptoassets is limited to registering of UK-based crypto-asset exchanges for anti-money laundering purposes. As a result, FTX was not authorised, regulated or registered by the FCA. An investigation is already underway in relation to FTX and the alleged misappropriation of client funds and investors will now be seeking to recover their FTX assets.
Details of FTX’s finances and messy bookkeeping have been revealed this week and as a result, the focus of the investigations is now on the gaps in the balance sheet, and notably the $8bn of missing customer deposits. Interviews with close associates and former employees, including some who were still at the company in its final days, described an organisation that lacked basic security measures and financial controls.
Sam Bankman-Fried, the now former CEO of FTX, utilised the crypto-exchange to send customer money to Alameda Research (‘Alameda’), which is a private trading firm that he also controlled. It is suspected that the gap in FTX’s balance sheet was largely money shifted to Alameda, but that the move took place “accidentally”. FTX and Alameda were incorporated as separate entities to avoid conflicts of interest however, the exchange and the trading firm were closely attached. A person who regularly visited the group’s Nassau offices said the Chinese walls were ‘non-existent’, and that staff from the two companies would sit and work together in an environment they stated to be “mayhem”. If it can be established that customers’ investments have been used to support Alameda then this will most likely amount to fraudulent conduct; for FTX and its directors this is likely to result in a high volume of legal claims against FTX.
The Bank of England’s deputy governor, Sir Jon Cunliffe noted that the UK’s financial regulator, the Financial Conduct Authority, had been warning consumers for several weeks before FTX’s collapse that “this firm may be providing financial services or products in the UK without our authorisation… you are unlikely to get your money back if things go wrong”. Nevertheless, these warnings were not enough and in the wake of FTX’s collapse, the need for regulation of cryptocurrency and digital assets has been called into question once again. The newly introduced Financial Services and Markets Bill will hopefully address some of these concerns surrounding the regulation of cryptocurrency in the near future.
Despite the controversies that have been going on in the crypto world, Sir Jon said the need for a UK digital currency was still being considered by the Bank of England.
He said that work on a digital pound is being driven by “the reducing role of cash, and more generally in the increasing digitalisation of daily life”. Sir Jon said the Bank planned to issue a consultative report around the end of the year setting out the possible next steps.
