Bankman-Fried Fraud Trial’s Shadow Is the Sunshine Crypto Needs

Less than a year ago, Sam Bankman-Fried was the acceptable face of crypto. Yesterday, he was found guilty of seven counts of fraud and conspiracy and now faces the possibility of life in prison.

The one-time wunderkind’s rapid fall from grace highlights the perils of being part of a fledgling industry where the lack of rules made it easy for bad actors to hide in plain sight. But although the SBF case has hurt the crypto industry in the short term, it could be a stepping stone toward improved regulation and oversight in the long run.

The implosion of one of the biggest companies in the already controversial field and subsequent trial have put digital assets on probation. As one blockchain lobbyist (and D.C. insider) said, “We didn’t just poke the bear, we embarrassed the bear,” when describing the impact of the SBF case on regulators. Cue the ensuing crackdown we’ve seen this year.

And yet, the crimes for which Bankman-Fried was convicted had nothing to do with new technology—fraud is an age-old feature of human life. Rather, the trouble lied with a lack of oversight and enforcement. Bankman-Fried never hid his ties to Alameda—he actively contributed to building the “Legend of Sam,” which was also the genesis story of his empire.

In Bankman-Fried’s telling, his journey started with his trader days at Jane Street before he spotted a hugely lucrative arbitrage opportunity between Western and South Korean crypto markets. This so-called kimchi trade made Alameda one of the biggest trading firms in crypto markets and led Bankman-Fried to launch an exchange because, according to him, he couldn’t find one that lived up to his exacting standards.

Whatever his motivations were, the links were there for all to see. And the idea of having an “in-house” market maker wasn’t an arrangement that would fly in the boring old world of TradFi.

It’s been tried before. This February, two former executives of retail foreign exchange broker FXCM settled a class-action lawsuit for $6.5 million, six years after the Commodity Futures Trading Commission fined and banned both the company and its founder Dror Niv from US markets. The issue? Niv and co-founder William Ahdout ran not only a brokerage but also a secret trading company that had unfettered access to client trades, leading the CFTC to conclude they defrauded their customers.

Sound familiar?

There’s an old adage in finance that regulators only take steps after a scandal happens. And this might be the silver lining of the SBF case for the crypto industry. The long-awaited regulatory clarity about the treatment of digital assets and decentralized finance is finally on the way.

Regulators and authorities have worked hard in recent months to make amends. Major financial jurisdictions are actively engaged in bringing the digital asset industry under an umbrella where customers are protected, and basic rules about the segregation of responsibilities and assets can be enforced. The UK Treasury just days ago published reports on plans to regulate stablecoins and digital assets more broadly. Still, the pace at which this is happening on a global scale is glacial at best.

Technological advancements likely will accelerate in the future. The finance industry a decade from now could very well be unrecognizable from the one today. As the industry evolves, so must the regulations that govern it.

But there’s a danger that some of these well-intended regulations unnecessarily stifle growth and innovation. Bankman-Fried’s alleged actions and the ensuing embarrassment in high circles could be mistaken for a fault with the technology itself. And the case has done significant reputational damage to the digital asset industry.

It’s important to remember that decentralized finance and digital assets can lead to a future in which the world of finance is safer, more transparent, and traceable, with better outcomes and more control for individuals.

For now, those who chased the allure of quick profits in a high-risk environment cast a long shadow over the industry. But in the long run, sunshine will be the best disinfectant.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Francis Forde manages the development, implementation, and execution of Wert’s compliance program.

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