US Senator Pat Toomey has blamed FTX’s collapse on the lack of clear regulations. Speaking during the Financial Regulators Hearing on November 15, the legislator took aim at the US Congress, suggesting that if the house had passed regulations on custody for the industry earlier, the FTX implosion could have been avoided.
“It certainly appears FTX committed an egregious failure in not treating customer assets as segregated assets,” Toomey said. “If people had access to regulated crypto custody services, they might sleep more comfortably knowing those assets were unlikely to be used for inappropriate purposes.
According to him, the collapse of FTX could not be blamed on the kind of assets that were held by the exchange but it was “about what individuals did with those assets.” The legislator further noted that the misappropriation of assets by FTX officials may have been caused by the presence of the tough crypto custody rules imposed by the US banking regulator.
“My understanding is that your office discourages banks from providing custody services among other services in the crypto space,” Toomey told Michael J. Hsu, the Acting Comptroller of the Currency. Asked if they discouraged banks from engaging in crypto custody services, Hsu replied that they only discouraged banks from “doing things that are not safe sound and fair.”
Hsu went on to note that the custody of crypto was different compared to traditional assets adding that they were yet to draw up rules on the same. “There are some underlying fundamental issues and questions regarding what it means to own crypto through custody that have not been fully worked out,” Hsu said.
Despite the Terra meltdown in May, US legislators have been painstakingly slow in coming up with regulatory guardrails for the crypto sector. This has been combined with the hostility and lack of transparency by the Securities and Exchange Commission (SEC) generating a debilitating amount of legal uncertainty. Recently, Toomey noted that the impact on Americans from the bankruptcy filing by FTX might have been mitigated if there were a sensible, legislatively authorized, American regulatory framework for digital assets
However, FTX’s epic collapse has been a renewed call for Congress to take a serious look at crypto exchanges and lending platforms. Thus, whereas the saga will likely give rise to several civil and criminal actions against the exchange and its executives, a set of actual regulatory changes are likely to emerge.