What Regulations Will Rise From The Ashes of FTX: Stablecoin Transparency Act
What Regulations Will Rise From The Ashes of FTX: Stablecoin Transparency Act
With the recent collapse of FTX and the ensuing fallout, the calls for crypto regulation are as loud as ever. In an attempt to quell these calls, there will certainly be some reaction from officials in the US. Although additional crypto regulation and clarity has been discussed by the US government for some time, this current fiasco will likely result in the process being expedited with some measure of regulation being passed in the near term.
Background on FTX Collapse
For those of you who are not familiar with the FTX collapse, here is a short overview. In early November, 2022 CoinDesk reported that FTX was using customer assets to prop-up Alameda Research. Alameda Research is owned by FTX’s CEO Sam Bankman-Fried. The report further suggested that Alameda Research was in trouble as its largest asset was billions of dollars worth of FTX’s token FTT.
This co-mingling of funds led Binance, a rival crypto exchange platform, to sell $500 million of FTT. This caused FTX customers to: i) worry if FTX would have the requisite liquidity; and ii) withdraw assets en masse. The result was a liquidity crunch for FTX and a crash of the FTT token. On November 11, 2022 FTX and its approximately 130 affiliated companies filed for bankruptcy protection, with a billion dollars vanishing from the exchange.
This contagion has led many crypto CEOs, politicians and investors to call for stricter regulation of crypto in the US. But, what does this even mean?
Potential Regulations
It is all well and good for politicians to call for action to try and pacify crypto investors, but what are some actual regulations that we could see in the short term?
When people talk about regulation in crypto, they are usually referencing the regulation of either: i) specific crypto tokens and projects; or ii) third party intermediaries, such a centralized crypto exchanges like FTX.
Recently, the calls for regulation and clarity have focused on specific tokens or projects and whether they are securities. A prime example of this is the SEC’s legal action against Ripple Labs and its token XRP. Although clarity on whether tokens are securities or commodities is needed, I doubt the FTX fall-out will see officials put additional focus on this issue. First, with the issue already before the courts, a knee jerk reaction to regulate this issue seems unlikely. Second, I think regulators will now focus on the regulation of centralized exchanges as the contagion effect when a centralized exchange fails is vast in comparison to that of a specific token.
Centralized exchanges hold an interesting place in crypto. The original purpose of crypto was to facilitate the peer to peer transfer of money without the need for an intermediary, like a central exchange. However, the entrance for many people into crypto is now through a central exchange. These central exchanges have become a key piece in the crypto puzzle as they allow investors to easily buy, sell, trade and send crypto. Accordingly, these exchanges hold vast amounts of investor wealth. In fact, it was recently reported that Binance holds $74.7 billion worth of the tokens (link here). Of this, $23 billion are in the BUSD stablecoin and another $6.4 billion is in its own Binance Coin. It is because of the wealth that centralized exchanges hold, and because of the key role that they play in the crypto ecosystem, that regulators will likely focus on them.
In the fallout of FTX, regulators will be focused on trying to ensure that other centralized exchanges do not collapse and, like with FTX, lose a billion dollars of investor money.
Stablecoin Transparency Act
One way the government may try to regulate centralized exchanges is through the Stablecoin Transparency Act (the “STA”). The STA was introduced to the Senate in March, 2022 and, although it has not been passed, would require stablecoins to be fully backed by a non-digital currency or government securities. Further, the stablecoin issuer would be required to publish monthly audited reports detailing their reserve holdings. Although the STA may not have prevented the collapse of FTX, it would help to prevent the crash of algorithmic stablecoins and the associated contagion — like we saw with the Terra Luna and Celsius collapse.
Further, the STA could be used as a first step to legislating that centralized exchanges be required to show proof of reserve or proof of backing. In fact, in the wake of FTX collapsing, many major crypto exchanges are voluntarily providing proof of reserve by providing lists of their wallets and promising full audits. Accordingly, it would not be hard to see the government capitalizing on this momentum and legislate something that the industry is already doing. At minimum, by legislating proof of reserve, consumers could better understand the risks they are taking on by using these centralized exchanges.
Final Thoughts
There is no doubt that the crypto industry has been shaken by the FXT contagion (especially so soon after the Celsius collapse), but hopefully this is not for naught and the collapse will push forward regulations that will make the space safer and allow for it to become more mainstream.
This article is for entertainment purposes only and is not financial or legal advice.
