Companies are now re-evaluating crypto services ‘outside regulatory environments’: Former FDIC CIO
Former FDIC CIO Sultan Meghji sits down with Yahoo Finance Live to talk about how the collapse of crypto exchange FTX will impact congressional regulation on digital assets moving forward.
Video Transcript
- --the regulatory fallout from the collapse of FTX, we want to bring in Sultan Meghji, a former FDIC chief innovation officer. Sultan, it's great to have you here. So we talked about what this means from an investor perspective. Now let's take a look at what this means from a regulatory perspective because up until this point, we haven't seen regulation within this space. Because of the fallout from FTX, do you think we'll finally see some regulation come to the crypto industry?
SULTAN MEGHJI: Well, there have been-- there has been regulation. And it's mostly regulation by examination. So the SEC in particular has used its existing authorities to examine and enforce certain actions in and around crypto. You've seen it from the banking regulators as well within the chartered banks of the United States.
But to answer your question, it would be fantastic if we actually got some regulatory clarity here. There are a lot of places where there just isn't a clear roadmap or rules of the road as to what anyone should or should not be doing. It's like driving down the street and not knowing what the speed limit is.
- And it's ironic that SPF was one of the people that a lot of regulators were looking to in terms of helping them to shape regulation in this space. What sort of a wake-up call is this? And where should regulators be looking to try and chart this path forward?
SULTAN MEGHJI: Well, speaking on the other side of the United States, there are a variety of different potential laws that Congress has been working through for a while. And hopefully this accelerates some of them. One that FTX has been very excited about is around consumer protection.
But there have been others that talk about where we can actually custody crypto in the banking system. And there's a push and pull back and forth between the various agencies. So first we'd be looking for Congress to draw some clarity because that's really where that should land. And then the second is I think we all need to pay a little bit more attention to who's lobbying for what here in DC.
- Sultan, when you take into account, I guess-- because you're saying that you saw this coming now for quite some time. With that in mind, are you worried about similar scenarios with other exchanges in the future? And I guess to the regulatory question of this, could regulation potentially stop that realistically?
SULTAN MEGHJI: The answer to both questions is yes. There are a lot of other players out there that are operating if not exactly the same way that FTX had been, but that are in a similar space. Sam's tweets today very clearly showed that he thought he wasn't levered, but he was, in fact, levered. And there are a lot of organizations that are probably having to look at their balance sheet and look at their operating model in the exact same way.
But if we had some thoughtful regulation in this space, that would absolutely be helpful here. And it would absolutely keep things like FTX happening again. Just like in 2008, when Lehman Brothers and others collapsed, new regulations were put in place that have stopped other things, other actions like that from happening. And we need that exact same kind of thing now.
- And Sultan, as you have the different agencies vying to see who's going to be overseeing this, what do those two different paths, what do those outcomes look like for the crypto industry?
SULTAN MEGHJI: Well, there's really three options ahead of them. Option number one is status quo, which just will lead us down the exact same path we've been down with potentially the same kind of disasters happening again, potentially with broader ripple effects across the average consumer base. That's option one.
Option two is a ramp-up of this regulation by examination and by enforcement by the existing agencies using their existing authorities, which will really push crypto as much out of the system as possible.
And then the third option is to create pathways through the legislative process that allow there to be rules of the road so people can act in the space. There are a lot of us, including myself, who see the technologies that sit underneath cryptocurrency as critical to the evolution of our financial system and other markets. And we need to make sure there's a space for that. And certainly selfishly, as an American, I want to see that innovation done here in the United States, inside of the most stable regulatory environment in the world.
- Sultan, I want to bring up a tweet that we got from the Senate Banking and Housing Committee, the Democrats involved in that committee earlier today. And it said in part, "The recent collapse of FTX is a loud warning bell that cryptocurrencies can fail. And just like we saw with over-the-counter derivatives that led to a financial crisis, these failures can have a ripple effect on consumers and other parts of our financial system." Focusing on that ripple effect, what do you think that potential fallout could mean if nothing is done?
SULTAN MEGHJI: Well, we're seeing a couple of things already. Certainly we're seeing a lot of new actions around the prices of various cryptocurrencies. And we're seeing more variability in that. So that's number one.
Number two is we're also seeing, I think, a lot of organizations now having to take a step back and think about what their policies and products and services as it relates to crypto are, especially those that sit outside of the regulatory environment. These ripples can and will occur.
And the third is for those that are operating inside of the regulatory environment or that are trying to operate inside the regulatory environment, I see this as a huge win for those. And so there are a variety of organizations that are doing all the right things and helping the regulatory community figure out what to do here. And I think for those organizations that are working with their regulatory partners, whether it's on the market side or whether it's on the banking side, this is a great opportunity for those organizations to really help lead us into a place where this doesn't have those ripple effects.
- And Sultan, when you look at this web of what we saw with FTX International, obviously offshore, but then you have FTX US and how they feed into each other, how much of this is going to be about global regulation as well, given how interconnected this all is?
SULTAN MEGHJI: That is a fascinating comment and a really important one to make because so many organizations around the world right now are using jurisdictional arbitrage to navigate this. And this is just a great clarion call for us to see far more international collaboration in this space. The Bretton Woods Committee even is working on a future finance initiative right now to help foster some of this. The BIS crowd out of Europe is trying to do the same thing. And it would be fantastic to see far more international collaboration around this.
- Well, certainly might get more of that with all this being highlighted. Sultan Meghji, thank you so much for joining us this afternoon.
