The cryptocurrency market, along with its related intellectual property, has seen harsh growing pains in 2022. In May, the crypto coin Luna crashed into irrelevance when its blockchain known as Terra – which was ostensibly tied to the US dollar – became untethered and lost well over 99% of its prior value. Bored Apes, the rock stars of the burgeoning NFT market, has seen precipitous value losses this year as earlier widespread interest has waned. And just last week, the crypto exchange FTX experienced a devastating collapse when Binance, another prominent exchange, backed out of a buy-out deal at the 11th hour, triggering a run on FTX-held assets.
This latest setback for the cryptocurrency industry also comes with some rather ominous underpinnings as more puzzle pieces have revealed themselves, including mysterious transactions between FTX and sister company Alameda Research and a warning to the exchange by an agency based in Texas before FTX’s troubles were publicly uncovered.
No Subpoena, No Search Warrant, Just a Cell Phone
In mid-October, while the exchange was still considered an untroubled and presumably solid business, Texas State Securities Board (TSSB) Enforcement Director Joseph Rotunda set his sights on FTX. The TSSB is the governing agency in charge of granting security sale licenses to financial advisers in Texas and Rotunda suspected that the crypto exchange might be selling unregistered securities in the United States. It is currently a violation of Texas law to sell such securities in the form of yield-bearing accounts to American residents.
Rotunda downloaded the FTX app, filled in his Austin address, created an account, and transferred a small amount from his bank. The app dutifully noted that he was expected to earn a yield of 8% on his ‘investment’. Rotunda summarily began an investigation into the exchange and its principals. Although it might be a stretch to argue that Rotunda’s Texas investigation precipitated the collapse, his public announcement that the TSSB had begun looking into possible malfeasance on the part of FTX did garner a good deal of press. It was only a month later that the crypto exchange’s sale to Binance fell through and created a run on their digital coffers.
A Scramble for Answers
The FTX crash is another blow for the still-young cryptocurrency market and serves to arouse suspicion in a market that some investors swear is the next big thing and others dismiss as a mirage for strike-it-rich fantasists. On November 20, news broke that the exchange owes its top 50 creditors over $3 billion. It is estimated that FTX may have over 1 million total creditors in filed cases when all is said and done.
The loss of such a prominent crypto exchange has some legislators and concerned citizens calling for harsher regulations to rein in the volatile market, citing intellectual property value concerns amidst oft-confusing laws that have had difficulty keeping up with the fast-changing industry, along with insufficient consumer protections. During the November 18’s Texas Blockchain Summit in Austin, 2020 presidential candidate Andrew Yang said that such regulation would make it difficult for the United States to maintain its status as a blockchain innovator but acknowledged that some form of commonsense regulation is needed to make cryptocurrency more acceptable with ‘mainstream’ investors.
The Straw That Broke the Camel’s Back?
On the same day that Rotunda announced his FTX probe, the exchange’s founder Sam Bankman-Fried was busy deflecting questions regarding his pledge to donate $1 billion to crypto-friendly political candidates and causes. After donating in the neighborhood of $40 million, Bankman-Fried acknowledged it was a “dumb quote on [his] part” and that he had temporarily halted donations. Less than a month later, the bottom fell out of FTX.
For his part, Rotunda does not appear to have any misgivings over his initial FTX announcement, nor does he convey generalized anti-crypto sentiment. Said Rotunda in a statement released after FTX’s crash, “We want Texans to have the opportunity to invest in what they want to invest in. We want to make sure they’re protected… the entire goal is to protect Texas.”
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