The dramatic collapse of Sam Bankman-Fried’s crypto exchange, FTX, may have come as a shock to the Miami Heat,
Twitter bots and financial-news talking heads. But crypto is following a well-worn path of financial innovations, such as subprime mortgages and credit-default swaps, that began with dazzling rewards and ended with crippling losses.
Proponents say crypto holds great promise for making the financial system more efficient and inclusive. Maybe. But we’ve heard that story before. History is littered with financial schemes promoted by criminals and charlatans who claimed that the latest and greatest tools had evolved beyond the need for regulation or a cop on the beat. During the 2008 collapse and every financial crisis before that, these claims have proved dangerously delusional. Crypto is no exception.
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FTX’s implosion should be a wake-up call. Regulators must enforce the law before more people get cheated, and Congress must plug the remaining holes in our regulatory structure—before the next crypto catastrophe takes down our economy.
Crypto executives who break the law are just like any other crooks, and the Justice Department should use its full range of tools, including criminal penalties, against them. If Mr. Bankman-Fried and FTX executives committed fraud, then federal prosecutors should send them to prison. But FTX’s fall, like the collapse of Lehman Brothers before it, isn’t limited to one out-of-control company.
That means the Securities and Exchange Commission needs to suit up as well. Market manipulation, theft, insider trading—the SEC has decades of experience in rulemaking and monitoring retail investment and knows how to root out fraud and hold cheaters accountable. The longstanding legal test defining securities gives the agency the power—but power is worthless if the cop on the beat won’t use it. The SEC has brought some enforcement actions related to fraudulent and unregistered crypto offerings over the past few years, but it has fallen far behind as the crypto industry has drawn in millions of new investors.
The Treasury Department has also moved, using existing law to impose sanctions on two crypto mixing services, Blender and Tornado Cash, which were used to launder billions of dollars worth of virtual currencies, including hundreds of millions stolen by hackers. Crypto lobbyists howled, but Treasury was right to use its authority to force these entities to comply with the law. A few cases are good, but Justice, SEC and Treasury are the frontline enforcers, and they need to act like it every single day. Federal agencies should use their expansive authority to crack down hard on crypto fraud. Congress should back up these law-enforcement agencies and financial regulators with more funding. Many crypto executives have armies of lawyers, PR advisers and paid celebrity supporters, and they seem to think they can escape the laws that apply to everyone else. If the financial cops are going to take on crypto criminals, they need adequate resources to fight and win.
Crypto, like the subprime mortgages of 2008 and the penny stocks of a century earlier, flourishes in the regulatory gaps. Crypto executives should never be allowed to create tokens to prop up their insolvent companies. Every crypto exchange should be barred from giving great deals to insiders and bad deals to customers. All crypto platforms should be required to implement the same kinds of cybersecurity and operations procedures that other financial companies must use. The SEC already has authority to do this across most of the crypto market, and where there is uncertainty about that, Congress should act quickly to erase any doubts.
Crypto has created new opportunities for money laundering. Terrorists, drug dealers, ransomware criminals, tax cheats and outlaw nations can hide their illegal activities by trading billions of dollars of cryptocurrencies with complete anonymity. The U.S., along with other nations, requires banks to comply with know-your-customer rules and track large transfers of money to prevent money laundering. This requirement extends to all other financial transactions, including dealings with stockbrokers, purchases on credit cards, transfers on Venmo and even use of
to send money to relatives in other countries. When banks violate the rules, they deserve sanctions, but many crypto transactions occur outside the reach of current know-your-customer rules. Congress should stitch up that loophole.
Finally, crypto-mining firms polluting and straining power grids should be required to disclose their emissions and energy consumption to the public. The Energy Department has the tools to require these disclosures, but if it’s unwilling to use them, Congress should step in.
Many say crypto is a scam. Crypto advocates tout the technology’s world-transforming potential and argue that naysayers just don’t understand. Either way, it is past time for crypto to be subjected to the same basic rules as other financial activities. If the crypto industry can succeed without stealing from investors or providing money-laundering services to terrorists and drug dealers, that’s great—but we won’t know that until the loopholes are closed and the laws are rigorously enforced.
Ms. Warren, a Democrat, is a U.S. senator from Massachusetts.
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