If you’ve been online the past month, you have likely become well acquainted with the ongoing FTX scandal. The industry has watched crypto’s golden boy tumble from grace almost overnight as the empire he created crumbled alongside investor accounts. It seems that every day we wake to a new revelation about the crypto exchange’s fraudulent practices, and the litigation following the fallout of this crash will likely continue for months or even years as this bankruptcy has now been dubbed as one of the biggest financial frauds in American history.
In an industry that is as young as crypto, this type of activity is projected to alter the market as we know it. This uncertain environment will undoubtedly ignite an influx of litigation, prompting those in the space to create game plans for potential conflict. Engaging with experts early in this process can help law firms understand the complexities of the crypto industry and assist in determining the full picture of what happened at the FTX exchange and why, allowing them to prepare for what’s to come in crypto.
But what, exactly, is to come? And what does the FTX fallout mean for other industry players counting on crypto’s success?
The Legal Landscape
Amid the current bombardment of updates surrounding FTX bankruptcy, criminal charges, and fraudulent activity, it’s important to recognize three potential points of inflection as these proceedings move forward.
- Will these proceedings ACTUALLY impact the regulatory environment of the crypto industry?
- Absolutely- but not without continued conflict between regulatory bodies over who should be in charge. And it likely won’t be made any time soon. For the past year, federal agencies like the SEC and CFTC have been battling over who exactly should oversee crypto industry regulation as conversations over whether the coins should be considered securities or commodities complicate their governance. This definition will not only decide who will regulate the tokens, but how. It will also likely take months for Congress to come to an agreement on what is the proper action to take concerning FTX and the future of crypto as their efforts have already been slowed by Speaker elections.
- The charges presented against SBF directly are relatively narrow and only aim to prosecute his fraudulent activity. But this doesn’t cover fraudulent activity in the entire industry, and simply focuses on the actions completed under FTX. As new revelations are made, the proceedings involving SBF could span decades, pushing regulatory action further into the future as new precedents are created.
2. How will start-ups in the space be affected as conflicts continue?
- Despite the industry’s present state, there are still many ways for cryptocurrency and digital asset players to grow and thrive in the fintech industry. We are likely to see more mergers and acquisitions, especially as the industry attempts to stabilize itself in the wake of FTX’s collapse. M&As have already played a major role in propelling the industry forward (and keeping some floundering fintechs afloat), and many of crypto’s main players have been acquiring or overtaking start-ups in the space that haven’t been able to take the heat.
3. How will this debacle affect evolution in the crypto industry?
- Though the FTX scandal seemed to eclipse any other current conflicts in the crypto space, it was far from the only industry implosion last year, being preceded by other collapses involving Terra coin, Three Arrows Capital, Voyager Digital, and more. And in 2023, this momentum is likely to continue, meaning that more start-ups and seemingly stable companies will be negatively impacted by the volatile market.
- As consumers increasingly become weary of these unregulated tokens, those in the industry will have to take a hard look at their user privacy and consumer protection practices. Risk management will be key in creating a compliant crypto strategy, and will include robust cybersecurity, the hiring of reliable financial officers, the proper storing of private keys, and most importantly, the assurance that assets are not being spread among related entities.
What’s to Come in Crypto as Conflicts Continue to Spur
After SBF’s not-guilty claim last week, it has become increasingly evident that this is only the start of crypto’s reckoning as more cases come to the courts. Other disputes that have arisen since the FTX implosion include:
- The Winklevoss twins (aka the college nemeses of Meta’s Zuckerberg) were early adopters of cryptocurrency, and even launched their own exchange, dubbed Gemini, in 2014. Gemini became wildly popular, but then came the crypto winter; now, they have found themselves in a public battle with crypto billionaire Barry Silbert over what will happen to frozen funds from Gemini’s Earn platform. According to Cameron Winklevoss, more than 340,000 users have close to a billion dollars trapped in Silbert’s Genesis Global Capital, and he owes Gemini more than $1.5 billion. Now, users are suing both Silbert and the twins over breach of contract claims, alleging that Silbert paused redemption and the twins sold interest-bearing accounts without proper registration. The CFTC also sued the twins for misrepresenting Gemini operations when seeking regulatory approval in 2017.
- After the massive class action brought against FTX and its celebrity promoters made headlines, other disheartened digital asset investors took note. Justin Bieber, Paris Hilton, Jimmy Fallon, and 34 others are being sued in a class action suit alleging that Yuga Labs (the creator of Bored Ape Yacht Club) NFTs were “misleadingly promoted” and resulted in financial damages.
The lack of regulatory oversight and governance surrounding FTX should be a warning to players in the crypto space that corporate compliance and preparation are essential in remaining afloat amid this tidal wave of litigation. And with the legal risks in the digital assets market increasing at such a fast pace, experts can help companies and executives avoid criminal and civil litigation exposure before it’s too late. We expect to see disputes in the space to hit the courts regarding fraud claims; breach of contracts; mergers, acquisitions, and impending partnerships; bankruptcies; intellectual property; and more.
No matter the issue, WIT has teams of fintech experts prepared to address incoming disputes in the space. Our expert teams were created to address what we expect to be the key areas of litigation in emerging financial technologies, digital assets, and cryptocurrencies and exchanges.