Sam Bankman-Fried's FTX brought us crypto's Madoff moment. SEC should use its power to protect consumers

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It feels like 2008 all over again as Bernie Madoff’s playbook has resurfaced—only this time it’s in crypto. In the wake of the FTX debacle, pressure is now mounting on Congress to protect investors from scams in the crypto market. But Congress doesn’t have to act – the U.S. Securities and Exchange Commission (SEC) already has ample power to protect investors and should use it.

Just last month, customers of the crypto exchange FTX faced an eerily similar situation to the victims of Madoff’s Ponzi scheme, when they found out millions of dollars of their money was gone. Like Madoff, FTX allegedly misappropriated customer money instead of protecting it. As a result, hardworking Americans lost their retirement savings, emergency funds, and money to send their kids to college. And Washington’s inaction is to blame.

To date, the SEC has taken an extremely skeptical view of the cryptocurrency market even comparing it to the "wild west." But instead of taking action to hold the industry accountable, it chose to pass the buck and call on Congress to pass legislation. That decision is remarkable given the agency already has the legal authority it needs to protect American investors from fraud. 

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When customers invest money with broker-dealers – including at the many financial services firms in the American Securities Association, which I lead – they are protected by what’s known as the SEC’s Customer Protection Rule. This rule requires registered broker-dealers to safeguard the investment assets of their customers. Meaning, customer money cannot be used for anything other than what the customer wants. This principle of investing is sacrosanct.

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And it’s not a new idea—this rule has been on the books for decades to ensure broker-dealers keep customer funds separate from their own and available to customers at all times.

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While applying this rule to crypto seems obvious, other agendas have distracted Washington policymakers. In particular, the crypto industry spent an enormous amount of money in Washington to drive an all-consuming debate around whether cryptocurrency should be defined as a security or a commodity. This intentionally masked the real issue of customer protection and worked to paralyze the SEC, slow legislation in Congress, and allow much of the industry to remain unregulated. It’s time for that to end.

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As Ron Kruszewski, the President & CEO of Stifel, Nicolaus & Company recently said, "I don't care what it is. I don't care if it's a tulip, I don't care if it's crypto, I don't care if it's a stock. What I do care about is, if you take customer funds, you cannot use those customer funds in your business."

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The American people need to know their money is safe and protected when they invest in any market overseen by U.S. regulators. To protect crypto investors from bad actors, the SEC must apply the Customer Protection Rule to every crypto exchange that holds customer funds because it’s the only way to restore trust and confidence among market participants in this market.

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And, if the SEC doesn’t think it can extend this rule to crypto exchanges, then Congress must explicitly remind the agency it has this power.

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Registered broker-dealers across the country work hard every day to protect their customers and play by the rules, there’s no reason crypto exchanges can’t do the same. Had the SEC applied the Customer Protection Rule to crypto, FTX would have been prohibited from using customer funds to cover losses in other areas of its business, as has been widely reported. And investors across the country may still have access to the millions of dollars they will presumably never see again.

As the FTX debacle morphs into the crypto industry’s "Madoff moment," Washington can either act to protect American investors who choose to participate in this market or do nothing and continue to watch their money disappear.

Christopher Iacovella is CEO of the American Securities Association.

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