Crypto exchanges

FTX collapsed because it mixed several activities in one place, according to a key figure at the Financial Conduct Authority.

Despite not being registered in Britain, 80,000 people lost investments when the cryptocurrency exchange – through which people can buy, hold and sell tokens – went bankrupt.

Matthew Long, director of the FCA’s digital assets unit, told parliament’s Treasury Select Committee that alongside trading FTX also issued tokens, featured wholesale market activity and carried out safeguarding of funds.

“In our view, [that is] extremely dangerous because you can have interaction between each of those things,” he said. “In other regulated areas, they would be separate legal entities or have ‘sterile’ corridors – so they couldn’t effectively influence each other.

“We need a regulation that deals with those sterile corridors [to avoid this happening again].”

IOSCO, an umbrella group for securities watchdogs, is expected to recommend how best to regulate in this way by mid-2023.

Despite this, Long added that regulators’ response to the collapse of FTX would be “pacy”, with the UK’s financial services and markets bill to begin a public consultation imminently.

In the US, Securities and Exchange Commission chair Gary Gensler said cryptocurrency firms should have to comply with existing rules.

“[They are like] casinos wherein the investing public is looking for a better future,” he said. “And because most of these tokens are securities, the casinos need to come into compliance with our time-tested laws.

“Their business model right now is offering the public, they say, an interest return in crypto… and then possibly trading against their customers, trading ahead of their customers, lending that out. Anywhere else in finance, these conflicts are not allowed and they’re separated out.”