Legal crypto expert on FTX: 'This really is a fraud first'

With calls to regulate crypto in the wake of FTX’s meltdown increasing, one legal expert says those demands are misplaced.

“When it just comes to regulation of the space in general, I know a lot of people are calling for it,” Cathy Yoon, chief legal officer at MPCH, told Yahoo Finance Live (video above). “They want immediate action, but I think at the heart of things we really have to remember this really is a fraud first, and not necessarily something that touches all of the crypto space in general.”

Yoon’s comments come as court filings made by Bahamas liquidators late Wednesday said there are signs that “serious fraud and mismanagement” occurred at FTX.

On Thursday, the newly installed FTX CEO also slammed the company's "complete failure of corporate controls" and "complete absence of trustworthy financial information" in a document filed with U.S. bankruptcy court.

Yoon doesn’t think a lot of the legislation former FTX CEO Sam Bankman-Fried backed will survive.

Bankman-Fried was vigorously lobbying the Commodities Futures Trading Commission for an automated collateral system to be used for digital assets in futures markets. The proposal would require customers to deposit collateral and have enough funds to cover margin requirements that would be calculated automatically. If the margin fell too low, an automatic selling process for the investment would start. Since the bankruptcy, FTX pulled its application from the CFTC.

“There are a ton of other bills in Congress,” Yoon said. “I don't think we're going to see them moving forward quickly right now. There are a lot of question where people want answers.”

Yoon said people want to see their funds and assets recovered. “So it really is kind of balancing that line between thoughtful regulation and legislation and trying to protect consumers.”

“I would love to hope that there's not going to be a knee-jerk reaction here that, we're not going to get overly burdensome legislation to try to deal with this,” said Yoon. “We definitely do not want to see innovation being quashed, squashed in the United States.”

Sen. Cynthia Lummis (R-WY) told Yahoo Finance Live this week that she doesn't think lawmakers need to do some sort of “near-jerk reaction,” but rather examine things in a careful and deliberative manner next year. Lummis has co-authored a comprehensive bill with Sen. Kirsten Gillibrand (D-NY) to regulate crypto, which she is re-examining in light of FTX’s collapse.

Ranking member of the Senate Agriculture Committee, Sen. John Boozman (R-AR) said he and Sen. Debbie Stabenow (D-MI) are also taking another look at their bill to regulate crypto, which would make the CFTC the primary regulator for crypto. That's something industry favors because it could offer a lighter regulatory touch given that it’s a smaller agency than the Securities and Exchange Commission with a smaller budget.

Jennifer covers the Federal Reserve, cryptocurrencies, and the intersection of business and politics. Follow her on Twitter @Jenniferisms.

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