With the recent collapse of BlockFi and FTX, the regulation-by-enforcement approach of the U.S. Securities and Exchange Commission (SEC) when it comes to crypto has been called into question by industry representatives, policymakers, and crypto consumers alike. The SEC continues to elevate its own quest for power over sound policy.
On the heels of another crypto bankruptcy, did the self-proclaimed "top crypto cop" make things better or worse? Congress has the authority—and, more importantly, the responsibility to oversee the SEC.
BlockFi, a New Jersey–based business that allowed customers to earn interest on their crypto deposits, has filed for bankruptcy. FTX, one of the world's largest cryptocurrency exchanges based in the Bahamas, had filed for bankruptcy two weeks earlier. These filings revealed BlockFi and FTX had significant financial exposure to each other. Federal prosecutors have now charged FTX’s former CEO with widespread fraud. While analyses of the events don’t suggest that BlockFi was complicit in whatever FTX was up to, how BlockFi and FTX ended up intertwined financially—and the role the SEC may have played—is worth examining.
BlockFi owes more than $1 billion to its largest creditors, including $30 million to the SEC as part of the balance due on its February $100 million settlement. The SEC trumpeted that settlement, claiming that BlockFi's platform needed to be registered with the SEC. While BlockFi has admitted no wrongdoing, it probably made the calculation that settling was the most expedient action to take. BlockFi then turned to FTX to shore up its finances.
Today, BlockFi is shut down while it reorganizes itself and owes the SEC tens of millions of dollars. BlockFi's finances are tangled up with scandal-ridden FTX, and, worst of all, consumers are in line in bankruptcy court while the SEC may have collected fines from BlockFi with money belonging to those consumers.
The SEC does not have free rein to make new laws and it does not have the expansive jurisdiction over crypto that it purports to have. Following the filing of criminal charges against FTX’s CEO by prosecutors, the SEC filed its own civil charges alleging that sophisticated equity investors in FTX were defrauded (that’s classic securities fraud), yet its press release continued to wrongly portray that it has broad authority over crypto.
At Ripple, where I serve as the General Counsel, we have just passed the two-year anniversary of our ongoing litigation with the SEC to resolve some fundamental questions about the limits of the SEC's jurisdiction.
The SEC can only exercise the authority expressly granted to it by Congress.
After the SEC was formed following the Great Depression, there were serious concerns that government agencies, like the SEC, were out of control. In response, Congress passed the Legislative Reorganization Act of 1946 to reaffirm its "continuous watchfulness" over these agencies.
As part of that oversight, Congress is entitled to information to ensure that unelected bureaucrats are not abusing their power and diminishing Congress' role in shaping national legislation.
Thankfully, Congress has begun to ask the right questions about why the SEC seems to have been more interested in chasing crypto headlines than bad actors.
Meanwhile, the U.S. crypto industry is stuck in limbo without regulatory clarity. This limbo is pushing consumers to offshore platforms that operate with no U.S. oversight. The U.S. should be leading by example and working with responsible companies to keep trusted players onshore. I'm hopeful Congress can take the lead in 2023 by providing much-needed clarity to the industry.
Stu Alderoty is Ripple’s general counsel.
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