US cryptocurrency entrepreneurs who have flouted the rules on investor protection should face jail sentences, a former regulator said yesterday.
Speaking at the Crypto Policy Symposium, John Reed Stark, former chief of internet enforcement at the US Securities and Exchange Commission (SEC), said that recent claims by some US cryptocurrency exchanges that client funds were protected by federal insurance were misleading and should trigger criminal prosecutions.
In August, the Federal Deposit Insurance Corporation (FDIC), which insures deposits at US banks up to an individual limit of $250k, issued ‘cease-and-desist’ letters against five cryptocurrency exchanges, including FTX.
These exchanges, said the FDIC, had wrongly suggested to investors that their accounts are insured through the government agency.
“Those to me are criminal cases,” said Stark.
“Anybody who represents that there’s FDIC insurance when there isn’t should go to prison, because that’s the kind of thing that misleads people.”
“People need to go to jail”
In an apparent swipe at Coinbase CEO Brian Armstrong, Stark said that cryptocurrency entrepreneurs should treat US law enforcement agencies with more respect.
In September last year Armstrong hit back at the SEC on Twitter, accusing the agency of ‘sketchy behaviour’ after the regulator had threatened legal action if Coinbase pursued a new cryptocurrency lending product.
Coinbase later backed down and scrapped its planned crypto lending programme.
According to Stark, this kind of response will not happen if and when the US Department of Justice gets involved.
“People need to go to jail,” said Stark.
“They’re not really afraid of the SEC. In fact, they’ll they’ll go online and call the SEC names. They won’t call the Department of Justice names when they’re behind bars. Trust me, I know that. I taught at the FBI Academy and most of the cases we brought had a joint criminal parallel prosecution to them. And when you go to jail or you’re under the threat of going to jail, you stop pointing fingers.”
During a panel discussion on regulation at the Crypto Policy Symposium, Stephen Diamond, a law professor at Santa Clara University, warned of the risks of regulatory capture as a result of the large volumes of lobbying money spent by cryptocurrency firms.
“We just learned in the last couple of days that Sam Bankman-Fried, the chief executive of FTX, led a team of advisers into the Biden White House in May and met for several days with advisors at the White House,” said Diamond.
“For better or worse, you’re seeing key figures in the regulatory industry now join forces,” said Diamond.
“We have the former chairman of the SEC Jay Clayton who’s just joined a venture fund dedicated to the crypto space. And we’ve seen Bill Hinman, the SEC’s former head of the division of corporation finance under the Trump administration, join Andreessen Horowitz, one of the largest venture capital funds pouring money into this space.”
“They’re turning their crypto into fiat dollars in order to pour that money into the lobbying effort that’s underway in Congress,” said Diamond.
Earlier during the symposium, Brad Sherman, a democratic congressman from California, warned of the extent of lobbying by cryptocurrency magnates.
“Anybody familiar with the role of money and power and politics would see that the money and power that crypto has conferred on its oligarchs should not be underestimated,” said Sherman.
“And that is why our governments have not taken adequate action. Here in the United States cryptocurrency oligarchs have spent tens of millions of dollars on lobbying, and many, many millions more on their candidates,” said Sherman.
“The crypto bros are spending those millions to make sure that the industry is regulated as lightly as possible,” said Sherman.
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