In recent years, cryptocurrencies have gained growing significance in the global financial landscape, challenging traditional notions of currency, investment, and financial transactions. Bitcoin, Ethereum, and countless other digital assets have not only captured the imagination of tech enthusiasts and investors but have also gained widespread acceptance as a legitimate form of financial asset.
The world finds itself concerned with regulating cryptocurrencies and its profound implications for the future of digital finance. While cryptocurrencies provide unique opportunities for innovation and financial inclusion, their decentralized nature also brings challenges like fraud, money laundering, and market manipulation. The effectiveness of regulation on cryptocurrency will determine whether these digital assets can seamlessly integrate into the broader financial system or remain on the fringes of global finances as a niche and speculative market.
Who is Sam Bankman - Fried (SBF)?
Sam Bankman-Fried, widely known as SBF, has undergone a dramatic fall from grace as the founder and former CEO of FTX, as he has just been found guilty of defrauding customers of his cryptocurrency exchange out of billions of dollars.
Born on March 6, 1992, in California, the son of two Stanford law professors, SBF graduated from MIT in 2014 with a degree in physics. After a brief period at Jane Street Capital, he explored the world of cryptocurrency, founding Alameda Research in 2017, followed by FTX in 2019, a cryptocurrency exchange that allowed users to buy and sell cryptocurrencies. FTX soon became one of the world’s largest cryptocurrency exchanges at its peak, with SBF's net worth reaching over $26 billion.
The downfall of SBF reportedly started in 2019, when FTX deposited a significant portion of its customer funds into the bank account of Alameda. This violated FTX's terms and conditions, which prohibited the use of customer funds. However, customers were effectively allowed to use each other’s funds as long as there was enough collateral.
During the crypto crash in spring 2022, Alameda, which had borrowed from FTX customer funds, faced large loan recalls from third-party lenders. Recognizing the severity of the situation, SBF, expressed concern and urged Alameda to cover its assets and repay the recalled loans. However, in November 2022, the value of Alameda's collateral declined, which caused FTX to face a liquidity crisis, exposing FTX's vulnerabilities. In response, FTX called in Alameda's borrows, but unfortunately, Alameda defaulted. This default left FTX unable to overcome the crisis, its customer funds were drained. On November 11, 2022, FTX filed for Chapter 11 bankruptcy.
SBF after his arrest in the Bahamas
SBF's troubles deepened with his arrest in the Bahamas and deportation to the U.S. in December 2022. A New York jury delivered a verdict to SBF on November 3, 2023, finding him guilty on seven counts, including wire fraud, wire fraud conspiracy, and other conspiracy charges.
FTX's collapse resulted in a significant loss for the crypto market, with billions of dollars evaporating, and FTX's customers were faced with the grim possibility of not recovering their funds.
The SBF scandal shows how important it is to have rules for cryptocurrencies. It highlights the risks of when there's no control over how customer money is used and when conflicts of interest arise. SBF's actions show the difficulties regulators have in keeping the fast-changing crypto world in check.
The need for regulation:
Regulations can set the standards for the places where you buy and store your digital money, ensuring that it's safe and everyone gets treated fairly.
A primary reason for the need for regulation is market stability. The current volatility of Bitcoin, standing at around 1.18%, represents the unstable prices of cryptocurrencies. Such volatility, reflected in the 30-day average of 1.81% and the last 60-day estimate of 1.66%[1], emphasizes the inherent risks for investors. The constant fluctuations in cryptocurrency values highlight the unpredictable nature of these assets, posing potential risks for individuals investing their money. This volatility shows the critical need for regulations in preventing illegal activities and fraud, and maintaining the stability of the overall financial system.
Investors are the backbone of the financial world; the establishment of clear and well-defined regulations is vital in instilling confidence among investors, both institutional and retail. A regulatory framework assures that there are rules and oversight in place, creating an environment prone to attracting investors to engage in the cryptocurrency space. Investor confidence is crucial for the sustained growth and development of the digital asset market. When investors know there are rules and ‘someone is watching’, they are more likely to invest in digital money.
As seen below, as of 2022, the total illicit transactions in cryptocurrency have reached an all-time high of $20B[2]. This marks an 11.1% increase from the $18 billion reported in 2021, with sanctions accounting for 44% of the illicit transactions in 2022.
Total illicit transactions done with cryptocurrency
Greece’s approaches to regulation:
As of 2023, Greece has experienced a significant evolution in its approach to cryptocurrency regulation, reflecting both its economic situation and the global trend towards digital currencies. The country faced an interest in cryptocurrencies, particularly Bitcoin, during the debt crisis in 2015.
Greece has aligned with European standards by joining the European Blockchain Partnership (EBP) and adopting the EU's Fifth Anti-Money Laundering Directive (5AMLD) into Greek law. This represents a significant step in regulating crypto exchanges and wallet providers, introducing registration requirements and stringent anti-money laundering (AML), and countering the financing of terrorism (CFT) guidelines. Regarding taxation, Greece has not explicitly mentioned cryptocurrencies in its Income Tax Code, but guidelines from the Independent Authority for Public Revenue suggest that profits from cryptocurrency transactions are subject to income tax.
Overall, for cryptocurrencies to gain widespread acceptance and integration into traditional financial systems, regulatory clarity is vital. Financial institutions are more likely to engage with cryptocurrencies when operating within a well-defined regulatory framework. The establishment of such frameworks not only promotes integration but also maintains a harmonious relationship between digital assets, everyday customers, and conventional banking structures.
Bibliography:
CoinDCX Blog (2023). How often does Bitcoin fluctuate? [online] CoinDCX Blog. Available at: https://coindcx.com/blog/cryptocurrency/how-often-does-bitcoin-price-fluctuate/?__cf_chl_tk=SVnz9oFaCuo.1sCe5Ltped9DTusPCuJa504B1AymgPs-1701291376-0-gaNycGzNDHs#
Times, T.N.Y. (2022). Transcript of Sam Bankman-Fried’s Interview at the DealBook Summit. The New York Times. [online] 1 Dec. Available at:https://www.nytimes.com/2022/12/01/business/dealbook/sam-bankman-fried-dealbook-interview-transcript.html.
Rosenberg, E. (2023). Who Is Sam Bankman-Fried? [online] Investopedia. Available at: https://www.investopedia.com/who-is-sam-bankman-fried-6830274.
Sky News. (n.d.). Who is Sam Bankman-Fried, the former ‘King of Crypto’ found guilty of fraud? [online] Available at: https://news.sky.com/story/who-is-sam-bankman-fried-the-former-king-of-crypto-on-trial-for-fraud-12971519#:~:text=Sam%20Bankman%2DFried%2C%20also%20known [Accessed 30 Nov. 2023].
Greek City Times (2023). The Cryptocurrency Landscape in Greece: Regulations and Taxation. [online] Greek City Times. Available at:https://greekcitytimes.com/2023/11/28/the-cryptocurrency-landscape-in-greece-regulations-and-taxation/
Team, C. (2023). 2023 Crypto Crime Trends: Illicit Cryptocurrency Volumes Reach All-Time Highs Amid Surge in Sanctions Designations and Hacking. [online] Chainalysis. Available at: https://www.chainalysis.com/blog/2023-crypto-crime-report-introduction/.
[1] CoinDCX Blog (2023). How often does Bitcoin fluctuate? [online] CoinDCX Blog. Available at: https://coindcx.com/blog/cryptocurrency/how-often-does-bitcoin-price-fluctuate/?__cf_chl_tk=SVnz9oFaCuo.1sCe5Ltped9DTusPCuJa504B1AymgPs-1701291376-0-gaNycGzNDHs# [Accessed 29 Nov. 2023]. [2] Team, C. (2023). 2023 Crypto Crime Trends: Illicit Cryptocurrency Volumes Reach All-Time Highs Amid Surge in Sanctions Designations and Hacking. [online] Chainalysis. Available at: .https://www.chainalysis.com/blog/2023-crypto-crime-report-introduction/.