Is the FTX crash Gensler’s fault — or did it prove he’s right?

The SEC chair has been criticized for failing to offer regulatory clarity. But the crisis vindicates his approach to the controversial industry, others say.

A close-up of Gary Gensler sitting at a microphone during a Congressional hearing

Gensler and the SEC are facing a "can't-win situation."

Photo: Tom Williams/CQ-Roll Call, Inc via Getty Images

FTX’s controversial founder, Sam Bankman-Fried, has been tagged as the main culprit for the latest crypto meltdown. But crypto industry leaders are also pointing a finger at another surprising target: Gary Gensler.

The argument goes, the SEC, under Gensler’s leadership, has done such a terrible job in providing regulatory clarity to crypto companies in the U.S. that it forces companies such as FTX to set up shop in other countries known for loose regulations — which, in turn, encouraged SBF to do really bad things.

“Part of the reason FTX was able to do what it did was because it operates in the Bahamas, a tiny island country with very little regulatory oversight and ability to oversee financial services businesses,” Coinbase CEO Brian Armstrong said in an op-ed Friday.

“Did regulators force FTX to conduct itself in the way it did? No. But they did create a situation where FTX could take dangerous risks with no repercussions.”

One wild and sinister conspiracy theory being bandied about on crypto Twitter suggests that Gensler had secret dealings with now-disgraced Bankman-Fried. Minnesota Rep. Tom Emmer, who’s been critical of Gensler, said in a tweet that his office is looking into allegations that the SEC chair was “helping SBF and FTX work on legal loopholes to obtain regulatory monopoly.”

In a tweet tagging Gensler, Ripple general counsel Stuart Alderoty also asked if the SEC chair was “acting alone when meeting with SBF? Would SBF have ended up with even more consumer assets under his control?”

No evidence has been presented to back up these allegations. The SEC did not immediately respond to requests for comment.

But the attacks on Gensler have been met with intense pushback from other industry observers who stress a different argument: The FTX crash actually proves that Gensler’s approach to crypto was correct. By embracing what the crypto industry denounced as unreasonable and rigid policies, Gensler actually minimized the harm the FTX meltdown had on U.S. consumers, they argue.

John Reed Stark, a staunch crypto critic and founding chief of the SEC’s Office of Internet Enforcement, said Gensler “saved millions, perhaps even billions, in investor crypto-losses” by taking on the industry “despite mammoth political opposition and rogue defendants with infinite financial resources.”

Marc Fagel, former SEC regional director for San Francisco who has represented crypto companies in his private practice, downplayed speculation that the SEC colluded with FTX simply because Gensler’s staff had meetings with the company.

“Plenty of players in the crypto industry have met with various members of the SEC,” Fagel told Protocol. “Indeed, I would be a little worried if the SEC didn’t take meetings with players as large as this.”

And FTX was huge: The company ran the third-largest crypto exchange after Binance and Coinbase. Like Binance, FTX is not allowed to operate in the U.S. due to regulatory restrictions, though FTX has been in the crypto lobby in Washington.

FTX and Binance are also relatively new players in the crypto industry. Binance launched in 2017, while FTX began in 2019. But their growth rates have been astronomical. Binance outpaced Coinbase, which launched 10 years ago, to emerge as crypto’s largest marketplace. FTX became the third-largest crypto exchange in just three years.

Critics argue that the rapid growth was based on a key advantage: FTX didn’t have to worry about U.S. regulations, including strict disclosure requirements. And that, critics argue, was what led to the FTX debacle.

Jonah Crane, a partner at Klaros Group, told Protocol, “the issues that took down FTX vindicate Gensler’s focus on conflicts of interest and the risks of a vertically integrated model that exists across the crypto sector.”

In fact, the whole industry is so interconnected that the FTX meltdown has inevitably affected other crypto companies and investors, including several in the U.S.

Gensler last week described crypto as “a field that’s significantly non-compliant” featuring a “very interconnected world” with “a few concentrated players in the middle.” Like the Terra-luna crash earlier this year, the FTX meltdown involved a major player with “toxic combinations of lack of disclosure, customer money, a lot of leverage, and then trying to invest with that.”

Those interconnections have enabled the contagion triggered by the FTX crash to ripple across the industry, including companies in the U.S. That’s why “there has to be unified approaches to this around the world,” Circle CEO Jeremy Allaire said.

“These are common markets,” he told Protocol. “They're deeply interconnected.”

Allaire said the U.S. Congress’ failure to pass new laws for crypto led to the tough situation that U.S. crypto companies face in the wake of the FTX crash. But he also assigned some blame to the SEC under Gensler, who has stressed that crypto companies must be more transparent through disclosures.

“We can't just say we have the rules, follow them,” he said. “What is it? That's what a lot of people have been asking for. There has to be tailored rules.”

It’s a tough bind for the SEC, which Fagel said faces “a can’t-win situation.”

“The same people shouting about the SEC’s interference in crypto markets, which they contend should not be within the SEC’s jurisdiction, are now blaming the SEC for not doing more,” he said.

“The same people who have fought hardest to keep crypto unregulated, and who made the decision to trade unregistered cryptocurrencies on a Caribbean-based exchange, are now screaming at the SEC for not protecting them. I’m not sure if that’s irony or schadenfreude.”


Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep ReadingShow less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep ReadingShow less
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep ReadingShow less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep ReadingShow less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.


Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep ReadingShow less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories