Samuel Bankman-Fried, a young entrepreneur who founded FTX Trading Ltd., an international cryptocurrency exchange platform valued at 32 billion dollars, now goes bankrupt. He awaits trial at his parent's home after posting a 250-million-dollar bail. On December 13th, 2022, the Securities and Exchange Commission (SEC) charged Samuel Bankman-Fried with conspiracy to commit wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the Federal Election Commission and commit campaign finance violations. Allegedly, Samuel Bankman-Fried conspired to defraud customers of FTX by misappropriating billions of dollars in funds. The sports and entertainment industry felt the aftershock of this scandal when a class action lawsuit was filed against celebrities like Tom Brady, Gisele Bundchen, Steph Curry, David Ortiz, and Shaquille O'Neal, who endorsed FTX and encouraged market participation. Samuel Bankman-Fried pled not guilty to all criminal charges in a New York Federal Court. If found guilty, he faces over 100 years of jail time. The explosion of FTX and concern over the growth of crypto crime led the White House to urge Congress to take some action in cryptocurrency regulation.
Digital Asset Anti-Money Laundering Act of 2022
The new legislation: the Digital Assets Anti-Money Laundering Act of 2022, drafted by Senator Elizabeth Warren and Senator Roger Marshall, seeks to police the cryptocurrency exchange platform. Senator Warren believes this new act will “crackdown on the ways rogue nations, oligarchs, and drug lord use crypto to launder billions, evade sanctions, and finance terrorism.” Rogue Nations, like Iran, Russia, and North Korea, have stolen at least 1 billion dollars in digital assists.
To bring the digital asset ecosystem into compliance, the responsibilities of the Bank Secrecy Act would now extend to money service businesses (MSBs). The Bank Secrecy Act is a series of laws enacted to combat money laundering and financing terrorism (AML/CFT). First, the MSBs responsible for complying with the act include asset wallet providers, miners, validators, and other network participants. Second, the new bill would require banks and MSBs to verify customer and counterparty identities, keep records, and file reports concerning certain digital asset transactions involving un-hosted wallets or wallets hosted in non-BSA-compliant jurisdictions. An un-hosted wallet gives users complete control of their funds rather than requiring permission from a third party like MSBs. Also, an un-hosted wallet allows the user to hold their private key, which is the only way to access their crypto, but if lost or stolen, it becomes inaccessible. The problem with un-hosted wallets and the reason they are being directly attacked is that the user's identity can easily be hidden, making it impossible to track transactions. By passing this bill, the Financial Crimes Enforcement Network (FinCEN) can execute and oversee BSA complaints. FinCEN argues that the name and address of each party involved in the transaction are necessary because they will allow law enforcement agencies to track down and prevent cybercrime, human trafficking, and terrorist attacks. Although FinCEN's argument is valid, their method of enforcement threatens users’ privacy rights.
The bill also gives authority to the Treasury Department to establish AML/CFT compliance examination and review process for MSBs, and the Securities and Exchange Commission (SEC) will be required to regulate it. Enforcing MSBs to go through the examination processes allows FinCEN to monitor and track all user transactions. In addition, ATM owners and administrators must also regularly submit and update the physical addresses of the kiosks they own or operate and verify customer identity.
The public response to the new bill has been nothing but outrage. Jerry Brito, Coin Center’s executive director, tweeted: "the bipartisan digital asset anti-money laundering act, introduced today by Senator Warren and Marshall, is the most direct attack on the personal freedom and privacy of cryptocurrency users and developers we've yet seen." The regulations mentioned above leave users with no privacy and would expose them to revealing their private information to third-party businesses.
Fight for the Future, a non-profit digital rights advocacy group, expressed their concerns over the new bill by urging Legislature to create a bill that still protects individual privacy. Lia Holland, the campaign and communications director for Fight for the Future, says, “lawmakers have failed to protect our digital privacy for far too long, leaving market solutions as the only practical defense anyone has against unreasonable and constraint digital surveillance.” The advocacy group published an open letter in coalition with other cryptocurrency platforms to encourage Congress to pass a bill to combat the growth of crypto crime and protect users' privacy. This bill carries a high risk of exposing users to cybersecurity threats by requiring them to reveal personal and confidential information.
The collapse of FTX left the nation in a state of panic, and to recover from that, there needs to be some sort of regulation. For example, in FTX, when users went to withdraw their funds after the prices in their coins dropped, FTX halted withdrawal requests once they hit 6 million. There just were not enough funds for the investors to withdraw, which led to the investigation of Samuel Bankman-Fried because he misappropriated the funds for his own personal use. Currently, Samuel Bankman-Fried awaits trial, and the effects of the new bipartisan bill remain in dispute.
The collapse of a financial institution can lead to a loss of confidence in the financial system and significant economic consequences. As such, regulators and institutions need to have measures in place to prevent such events and manage the fallout if they do. It is also vital for the public to be aware of the risks associated with investing and with taking steps to protect their assets. This includes diversifying investments and conducting thorough research before investing in any financial product or institution. In summary, the collapse of a major financial institution such as FTX will have severe consequences for the public and the broader financial system. It is essential to take steps to prevent such events from occurring and to address and manage the fallout appropriately when they do.
*The views expressed in this article do not represent the views of Santa Clara University.