We’re living in a post-FTX world, and regulatory agencies need to keep it that way.
That’s the present mindset of Ron Kruszewski, the chairman and CEO of Stifel, who joined PYMNTS’ Karen Webster to talk about the role of customer protection controls, and what can be done to restore confidence in the crypto ecosystem after the collapse of Sam Bankman-Fried’s FTX empire.
“Look, if I were running a crypto fund,” Kruszewski said, “I would be sitting in front of you saying we need to assure our customers that putting money in crypto is really no different than putting money in a bank, that we welcome the regulation — how can you have a payment system if you don’t trust that your money will get where it’s meant to be going?”
His blunt diagnosis of this nascent market comes at a time when calls have grown louder for more — and better — regulation of the cryptocurrency industry and ancillary businesses following FTX’s sudden and unexpected demise.
As it is, rival firms and industry peers of FTX are scrambling to put distance between themselves and their operations and the reported laissez-faire oversight failures that led to FTX’s implosion, including the hiring of outside auditors to provide proof of assets and, as well as plans from the world’s largest cryptocurrency exchange, Binance, which is reportedly looking to revamp its entire technical architecture.
“Let’s ask [these companies] the tough questions,” Kruszewski said. “These are the people building the ecosystem, they need to make sure everyone has confidence in it. I’d really like to see that.”
This is coming from the single longest serving chief executive of any of the major investment banks. When Kruszewski took over Stifel’s helm in 1997 from Bush family member George H. Walker III, he hadn’t even turned 40.
Does Crypto Have a Future?
“What I find amazing in all this,” Kruszewski remarked, “is that I’ve yet to see crypto leaders go out and say ‘we segregate our clients’ funds and our clients’ securities.’ Until they can say ‘yes’ to that, the industry will not move forward.”
To that point, Kruszewski believes the future of the industry has been set back by a number of years, even as much as a decade, as a result of FTX’s implosion and its subsequent knock-on effects.
“Until we put rules [in place], we will not encourage good innovation. You can’t really have destructive technology in the financial system,” he said. “The U.S. has the most sophisticated, deep and fair markets in the world because we put good rules and regulations in place, and we need to do that for crypto — and then crypto can flourish and [consumers can] enjoy its true business applications versus where it stands now, unregulated, just a casino.”
The Role of Customer Protection
The risks that need to be addressed, highlighted by FTX’s collapse, center around the role of customer protection and are not too dissimilar to those inherent within traditional finance. In some cases, they are nearly identical — and come with corresponding historical precedents.
“The concept of the customer protection role at its heart means you will not co-mingle your customer funds, and importantly you will also have what we call possession and control — if you give me your money or securities, I will know where they are and know that they are yours,” Kruszewski told PYMNTS’ Karen Webster. “It should be clear the SEC has the jurisdiction to protect U.S. investors.”
Co-mingling customer funds, as well as a total lack of accountability around possession and control, were the two primary factors that led to the demise of FTX and the evaporation of more than a million users’ investments.
“I believe a lot of investors don’t really understand whether or not these businesses are truly doing their business on the blockchain,” he said. “These companies get to say they’re on the blockchain, and everyone gives them a pass and they don’t need a balance sheet because it’s all being recorded on a ledger,” he added, noting that if FTX had truly been on the blockchain, we could look at every transaction and “unravel this yesterday.”
“Instead, there’s nothing,” he said.
Which Watchdog Will Lead?
A regulatory turf war is underway in Washington over the FTX case, with both the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) arguing for primary oversight of the emergent industry, as well as the accompanying budget and staffing increase.
“We shouldn’t be thinking about which fire department to call when there’s a fire raging, just come put the fire out,” said Kruszewski.
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