HN Explorer

Ask HN: How did the CFTC and SEC miss FTX and Alameda?

28 points by boppo1 ↗ HN
I remember all this stuff about Gary Gensler/ the SEC/ CFTC working hand in hand with SBF to craft "crypto regulations". SBF was going on and on about "embracing regulations" and "regulations are good for us" in interviews. Hell I was almost sold on investing in FTX because it seemed like they would be the juggernaut that plays ball with the US government. It was a big deal.

And now this clear, textbook fraud with FTX and Alameda. What are regulators good for? How could they play so nice with a 'villainous' firm? I dread to think of what those regulations would have been like. It seems like they're either unbelievably incompetent or complicit.

EDIT: My point here isn't about whether or not I think crypto should be regulated. My point is if crypto is going to be regulated, shouldn't regulators be able to sniff out a bad actor? Imagine if Madoff had started working with the SEC to help consult on policy. Wouldn't people have been upset with the SEC when he went bust since he was rubbing shoulders with them?

26 comments

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PaulHoule
Most of FTX was outside the US and outside the US jurisdiction

https://www.cryptovantage.com/best-crypto-exchanges/ftx-vs-f...

orionion
> Trust and Security

> FTX and FTX US follow the same security standards and neither site has ever been hacked. Both platforms encourage two-factor authentication (2FA), and both practice cold storage of user funds.

> The only difference is that FTX has an insurance fund for users that is funded through their trading fees. If a hack were to occur, FTX can reimburse affected users. FTX US doesn’t have insurance in that manner, crypto lost through a hack isn’t covered, but USD deposits are FDIC insured. Because the original FTX has a more comprehensive insurance fund for users, it gets the edge here.

Don't worry... He's going to jail...

matt_s
The SEC creates rules and has zero jurisdiction for criminal prosecution, they refer potential cases to DOJ. They probably lean on having air tight cases because their opponents are better financially prepared to spend their way around any lawsuit/action.

Also, the stock market cops are essentially FINRA (self policing non government company), SEC is the rule writer and hand slapper for the most part. I don't know how crypto regulations were supposed to be setup. If it was the same setup as SEC/FINRA where entities have to self-report data, then fraud would be somewhat easy.

boppo1
Sure, but SBF was palling around hard with these people. Even if the SEC isn't responsible, why not talk to their buddies at FINRA and say "hey these people smell like another Madoff"?
blitzar
Which one is it, pick one ffs ... crypto is unreglated or crypto is regulated?

Why does everyone bang on about how it is not trad finance and it shouldnt be regulated, tell you all about how they are genius tier traders who make tons of money BUT its the governments fault they lost it all for not regulating their unregulated financial "investments" hard enough.

boppo1
I think that's a case-by-case thing and we're finding out the answers to it now. I had no stake in FTX and keep almost all of my rather meager crypto in paper wallets.

My point here isn't about whether or not I think crypto should be regulated. My point is if crypto is going to be regulated, shouldn't regulators be able to sniff out a bad actor? Imagine if Madoff had started working with the SEC to help consult on policy. Wouldn't people have been upset with the SEC when he went bust since he was rubbing shoulders with them?

jdm2212
FTX is a Bahamas-based company. Why would US regulators be regulating a Bahamas company with no US presence?
kobalsky
FTX.US is a US company and it was included in the bankrupcy filings.
advisedwang
Hackernews is not one person, the people saying it should be regulated are different people fron the ones saying it should be unregulated. For better or worse, this is the "discourse"
blitzar
If you want to your crypto to be regulated, dont invest in it on an offshore unregulated exchange.

If you traded it on an offshore unregulated exchange, dont cry that it is unregulated.

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jdhn
I'm personally in the former (unregulated) category. The furthest regulation should go is KYC, and even that may be a bit too much (although I realize why .gov would force that). Does it suck that people lost a lot of money? Yes. Do I think the government should investigate this? No, because the flip side of having the government investigate this is government regulations, and I'd like to keep the crypto space as regulation free as possible even if it results in episodes like this.
streb-lo
So you think SBF should just walk away? And the same for the next exchange that blows up everyone's money? Say goodbye to crypto as you know it then. Crypto without on/off ramps to USD is just a cool hobbyist project for libertarians, the price floor is probably zero.
jdhn
>So you think SBF should just walk away? And the same for the next exchange that blows up everyone's money?

Yes. That's the flip side of the "no government interference" coin.

moralestapia
Fraud is still fraud, though, doesn't matter if you used funny money to carry it out.

SBF is an American, FTX US was an American company and for sure at some point he touched US dollars from American entities, uh oh, the guy's going to jail.

JamesianP
According to their website they take fiat currency. So yeah.

Also there's the VC funding, which presumably was mainly USD. Though not many people probably care about their losses.

dpweb
You simply cannot have a financial system without indemnification. This is the value provided by a central authority. Peers could provide this, in a decentralized system I would think, but you don't hear much about it.
kasey_junk
The cftc has ~700 employees total, not just investigators, total employees.

They do not typically proactively investigate firms, they do so when there is evidence of a violation, usually after complaints of losses are made.

Also, due to resource constraints they tend to prioritize investigations by the number of people impacted.

FTX frankly doesn’t meet either of those bars. By the time people would complain about losses the whole thing unravelled and as big a topic it is on hn not many people are actually impacted by it. At least compared to some of the big gold grifts that are out there.

JamesianP
I think this is the most important point. When everyone seems to be making money it's hard for agencies to make much headway in investigating them. Who will blow the whistle besides some cantankerous contrarians with no inside info? And presumably the company leadership were savvy enough to make up plausible storied for how everything was legit (hopefully it wasn't the "worthless box" explanation that the SEC way buying).
logicalmonster
Just wondering: why would the regulators (with whatever minimal regulation exists now) even want to catch any large-scale fraud?

It's to their greatest benefit to have a few good examples of crypto crashes in order to gain a casus belli to have full-scale crypto regulation.

barnabee
Madoff was absolutely working with and connected to regulators [0] in various capacities. The idea that the current regulatory framework really helps consumers or effectively polices the truly bad actors is unfortunately far from the truth.

So yes, people should be upset with the SEC and other regulators, and should demand more appropriate and effective regulation (and/or enforcement) that actually targets the worst behaviour and protects the most vulnerable, rather than policing access and providing incumbents with a regulatory moat for little or no benefit.

[0] https://en.wikipedia.org/wiki/Bernie_Madoff#Government_acces...

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fiat_fandango
It's called having influence over US officials just short of bribery.
norwalkbear
It's about incentives. FTX "donated" to the right people and Bankman/Ellison families were very politically connected to the democrats and Biden admin.