SEC Issues New Crypto Guidance in Wake of FTX Mess

This year, cryptocurrency exchange FTX joined companies like Enron and Lehman Brothers on the list of infamous corporate implosions. As Wall Street and legal authorities continue to sort through the rubble, the Securities and Exchange Commission wants to know more about how the FTX flameout and resulting dislocation in the crypto market might affect other companies.

To recap: news broke earlier this year that a crypto investment fund run by FTX founder Sam Bankman-Fried, Alameda Research, was taking out cash from FTX’s customer deposits. A subsequent flurry of withdrawals by FTX customers revealed a gap of $8 billion in the exchange’s accounts, leading to FTX’s bankruptcy filing on November 11. The collapse of one of crypto’s most prominent brands triggered the equivalent of an existential crisis across the industry.

The FTX fallout may extend beyond the borders of the crypto sector. Hence the sample comment letter issued by the SEC Division of Corporation Finance last week. “The Division of Corporation Finance believes that companies should evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the potential impact on investors,” the guidance reads.

As to what the SEC actually wants disclosed, the sample letter approaches the impact of the crypto meltdown in general terms. However, it includes a laundry list of 16 comments that might need to be addressed by issuers.

For example, the letter asks for companies to disclose how developments in the crypto market are material to their businesses or financial positions. The letter also requests that issuers explain how the fallout from bankruptcies of specific crypto companies might affect their own customers and counterparties: “Clarify whether you have material assets that may not be recovered due to the bankruptcies or may otherwise be lost or misappropriated.” Additionally, the letter instructs companies to “discuss any steps you take to safeguard your customers’ crypto assets and describe any policies and procedures that are in place to prevent self-dealing and other potential conflicts of interest” and how recent events may have changed those best practices.

So what kinds of companies might find themselves subject to crypto-related inquiries from the Wall Street regulator? If signals from Congress are any indication, banks need to gear up for instructions to provide more detailed disclosures. Democratic Senators Tina Smith of Minnesota and Elizabeth Warren of Massachusetts wrote to the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency last week warning that “crypto firms may have closer ties to the banking system than previously understood.”

Considering all the new scrutiny of the sector, you can’t fault anyone who takes a bearish outlook on crypto’s viability going forward. Ultimately, though, crypto will likely live on, and the FTX debacle will go down as the event that forced agencies like the SEC to develop a more robust regulatory framework around it.

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