Crypto regulation ‘is massively overdue,’ expert says

Liz Hoffman, Semafor business and finance editor, joins Yahoo Finance Live to discuss the demise of FTX, crypto regulation, and the outlook for the crypto market.

Video Transcript

- So when we think about the companies-- and we should note that FTX was an investor in Semafor. When we think about the other companies that the FTX collapse takes with it as well and some of the other issues on the number of lenders that it had reached out to, that it had partnered with, where else does this have broader ranging implications as well across crypto?

LIZ HOFFMAN: I want to say upfront it's Sam Bankman-Fried is personally invested in Semafor.

- Personally, yes.

LIZ HOFFMAN: I think this is potentially, at least in the short run, pretty existential for crypto. The reports that have emerged paint this just incredibly interwoven, tangled web of finances that now is going to be the job of the bankruptcy court to figure out. I do think there's been a lot of questions-- is this a Lehman moment for the broader financial system? And I do not think so.

I think sort of by design the disdain that crypto had for the traditional financial system just means they're not that plugged into it. So I think this will be pretty self-contained within that market. But we've heard a lot of talk about a crypto winter. I would expect this to be something of an Ice Age.

- We've also heard a lot of talk about-- I just heard Gary Gensler there talking about regulation. Everybody in this industry wants to see regulation. How heavy handed do you think that regulation could be?

LIZ HOFFMAN: Well, I think it's going to be more heavy handed now than had it been done on a clear day. This was a little bit of a regulatory jump ball, right, in the same way that no one really has understood what crypto is. Is it a currency? Is it a security? Is it a commodity? It ultimately landed with the commodity regulator, the CFTC, which I think is probably the right place for it.

But the SEC certainly under its former chair Jay Clayton very much believed that these were securities, just like a stock and bond, and should be regulated with the same disclosures and the same sort of capital requirements for exchanges. I think it's massively overdue. It is a little hard to get your arms around as a regulator because you don't know quite what it is.

But I think if you think of these-- setting aside that it's a crypto or a token or a wallet, it's a brokerage. And there's a reason that they are, A, not allowed to invest customer assets and, B, have to maintain minimum capital requirements and disclose their balance sheet.

- You throw on top of that SBF had actually worked on some of the regulatory language with SEC Chair Gary Gensler as well. And so how much further out does that perhaps push actual regulation? And what does that mean for some of the public equity companies, but even some of the newer projects that are just looking to retain or establish confidence as well?

LIZ HOFFMAN: The thing about financial regulation is that there's always this knowledge gap. In general, people in the industry are smarter and better informed than the regulators trying to regulate them. That gap is particularly wide in crypto because no one really understands it. And remember when you saw Congress interviewing the-- questioning the tech CEOs. It was just like a real lack of understanding of a technology gap, to be fair.

I think the right way to look at this is as an exchange, right, when you buy and sell a share of stock, you're not trading with the New York Stock Exchange. They put your order in a queue. And they find someone who wants it. And that did not happen. It's been harder in crypto because there's this sort of chicken and egg, which is that you want a lot of liquidity so that people feel comfortable trading. But without the liquidity, it's hard to get there.

And so exchanges have basically taken the other side themselves. And that's just an incredibly risky proposition because they are holding customers' cas. And the other thing here-- there's been plenty of talk of potential criminality. And that will be someone else's call. But very clearly against the terms of service that FTX offered its clients. So right out of the gate, it's a problem.

- How long before trust comes back into this industry? Are we talking years? Does it ever come back?

LIZ HOFFMAN: I think years. I mean, I think it's kind of like if you go back to the boom, right, now seems objectively silly looking back, there was a necessary reset. Those can happen violently, as here and in 2001 or 2008. They can happen more gradually. But people would not touch dotcom stocks for years.

The other thing, though, is that a lot of the infrastructure that was built to support that dotcom bubble has been hugely valuable. It really helped usher in the technological age that we're in now. And so I think that'll be a question about what's the infrastructure, what's the sort of fiber optic cable of this crypto that does actually stay in the financial system.