Sam Bankman-Fried Is in Handcuffs, But No Crypto Crackdown in Sight

The feds dropped the hammer on FTX founder Sam Bankman-Fried, arresting him in the Bahamas on Monday night as part of an eight-count indictment that includes wire fraud, securities fraud, and money laundering. Then, more hammer-strokes fell. The Securities and Exchange Commission (SEC), which regulates financial markets, filed civil charges alleging he defrauded his investors and his customers. The Commodity Futures Trading Commission (CFTC), which Bankman-Fried (nicknamed “SBF”) had once lobbied to regulate FTX and the crypto industry, followed suit with allegations of its own.

After weeks of speculation over when—or even if—the 30-year-old former multi-billionaire would be charged, he now faces the possibility of a lengthy prison sentence and years of litigation with an alphabet soup of federal regulators. But the charges against SBF so far are narrowly focused—and leave the broader cryptocurrency industry largely unscathed in terms of new regulatory oversight.

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The SEC, in its complaint, passed up the opportunity to try to seize control over a much larger swath of the crypto market by declaring certain cryptocurrencies as “securities”—which would subject them to much more intense federal rules, experts note. And the heightened public interest around Bankman-Fried could actually slow Congress’s effort to pass crypto legislation, industry experts say.

The result is that crypto’s chaotic status quo remains in place for now. Any crypto critics who hoped that SBF’s fall would lead to the swift crackdown upon the entire industry will have to wait.

“I’m happy to see the way they were framed,” says Kristin Smith, the executive director of the Blockchain Association, a D.C.-based crypto lobby, referring to the SEC and DSNY complaints. “I don’t see them as having much of a ripple effect on other parts of the industry.”

The SEC stays the course

For the last year, various federal agencies have been jockeying for crypto oversight, including the SEC and the CFTC. Early Tuesday, the SEC appeared to go on the offensive. It was the first federal regulator to publicly release a complaint against Bankman-Fried. (The U.S. Attorney’s Office for the Southern District of New York—which handles many of the biggest financial prosecutions in the country— filed the original indictment Dec. 9. It was not made public until later Tuesday.)

SEC Chair Gary Gensler used harsh language against crypto in his accompanying statement, writing that the action against Bankman-Fried was “a clarion call to crypto platforms that they need to come into compliance with our laws… To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”

Crypto critics cheered the statement. “My next prediction is that the SEC will file a sweep of cases against crypto-exchanges,” John Reed Stark, a former SEC enforcement lawyer, tweeted. “Fail not at your peril @Coinbase, @SECGov has got you in its sights.”

But crypto lawyers soon noted that the actual complaint against Bankman-Fried did not attempt to expand the SEC’s purview. For months, Gensler has tried to argue that many cryptocurrencies are securities as opposed to commodities, which would give him oversight of them as opposed to the CFTC—a smaller regulatory agency that is often perceived as more crypto-friendly. However, the SEC’s path to actually gaining that control is either through the passage of a congressional bill, or by filing a legal claim that is upheld by a judge.

However, the second route is risky for the SEC, says Orlando Cosme, a securities attorney. If the SEC files charges against SBF that defines a cryptocurrency as a security, a judge could rule against that claim—which would limit the SEC’s ability to regulate cryptocurrency in the future.

In this case, the SEC had the opportunity to claim that FTX gave investors the opportunity to trade securities. But the agency chose not to do so, with the word “security” never appearing in the complaint. Instead, they focused on allegations that SBF defrauded FTX’s equity investors, who are more clearly under the purview of securities laws.

“They are going for sort of the clearest cut arguments, and I think they’re appropriately focused on FTX,” says Smith.

Cosme, who is also the co-founder of the web 3 startup StackerDAO Labs, said that any attempts by the SEC to set precedents about crypto could have imperiled their central claims against Bankman-Fried. “I think their main concern is bringing SBF to justice. It makes more sense that they would go after him lying to FTX investors, because that’s low-hanging fruit,” he says. “You don’t have to get into this major battle about whether there were certain securities being traded on his platform, when you can go for the layup here and get him on all these other violations.”

SBF has yet to enter a plea, and has repeatedly told the press he was unaware of the extent of FTX’s financial problems.

However, Mark Kornfeld, an attorney at Buchanan Ingersoll & Rooney PC, says that even if no regulatory precedents are set by the complaint itself, the SEC’s involvement could bring change down the road. Kornfield was involved in asset recovery following Bernie Madoff’s pyramid scheme, and says “post-Madoff, federal prosecutors and regulators modernized their tools to investigate financial crimes by improving access to key data. “I think you’ll see some parallels in crypto as this evolves in the coming years,” he says.

Congressional confusion

While federal agencies appear to be chasing the man instead of tackling the entire ecosystem, Congress appears no closer to coalescing on a regulatory approach than it was before the FTX debacle. There are many crypto-related bills floating around the House and the Senate, and some members have used the debacle to stump for the prioritization of their own bills. Senators John Boozman and Debbie Stabenow, for example, used a recent Senate hearing to talk up their bill, the Digital Commodities Consumer Protection Act (DCCPA), which was actively supported by Bankman-Fried himself.

But Miller Whitehouse-Levine, policy director of The DeFi Education Fund, told TIME in a phone interview two weeks ago that “I don’t think this hearing is indicative of momentum behind the DCCPA. If anything, I think it has added much more to think about in the next few months.”

Read More: Sam Bankman-Fried’s Shadow Loomed Over Congress’ First Crypto Hearing Post-FTX Collapse

Smith offered a similar prognosis. “The fact that we have so many policymakers that are paying attention to these issues now may actually end up having the effect of slowing the process down a little bit as they get up to speed and start to vet the different options,” she said.

While some senators are hoping to crack down on crypto, others are turning their focus to Genlser himself, adding to the confusion. Representative Tom Emmer, a Minnesota Republican and noted crypto supporter, called on Gensler to testify before Congress on the “cost of his regulatory failures.” And Ritchie Torres, a New York Democrat, demanded that Congress’s Government Accountability Office investigate the SEC’s inability in protecting the public from FTX’s downfall. Torres wrote that Gensler was “singularly responsible for the regulatory failures surrounding the collapse of FTX.”