Wild West crypto faces crackdown as disgraced FTX boss is arrested and charged with fraud

The Bank of England issued a new warning about cryptocurrency risks yesterday as the founder of collapsed exchange FTX was accused of fraud.

Threadneedle Street officials said the demise of the high-profile company – led by Sam Bankman-Fried – which owed billions of dollars to investors showed that stricter regulations were needed.

And banking governor Andrew Bailey reiterated his long-held skepticism about crypto assets, the value of which has fallen from a peak of around £2.4 trillion a year ago to £650 billion.

“I have been very clear over the past four years: crypto has no intrinsic value and investors must be prepared to lose all their money,” he said.

The comments came as the head of the global regulatory body, the Financial Stability Board, signaled an impending crackdown on the Wild West industry, with watchdogs outlining steps to regulate crypto in early 2023 and quickly enacting them.

Dietrich Domanski, the outgoing secretary general of the global club of central banks, told the Financial Times that “recent events have reinforced the recognition that it is indeed urgent to address risk.”

The Bank of England, which released its biennial assessment of risks to financial stability yesterday, said the dangers of crypto in the UK are currently limited.

But recent events, including the collapse of the FTX, “highlighted how systemic risk could emerge.”

They also “further underline the need for improved regulatory and law enforcement frameworks to address developments in crypto markets and activities.”

The Bank highlighted the opaque nature of crypto companies and the ties between them, and a lack of safeguards against creditor scare, running out of cash or market swings, as well as the lack of protection for money companies hold on behalf of clients.

It pointed to the “high volatility” of so-called “unbacked” cryptoassets that are not linked to real assets.

These could carry “extreme” risk when used as collateral to raise more money, the report said.

The collapse of FTX in November, after investors tried to withdraw billions in funds out of fears for financial health, is the crypto industry’s biggest bust yet. About 1 million investors, including an estimated 80,000 in the UK, are at risk of losing money.

The 30-year-old founder of FTX has been praised by the likes of Tony Blair and Bill Clinton, and endorsed by stars like Gisele Bundchen and Larry David.

His company grew into the world’s second largest crypto exchange and his net worth reached £26 billion.

Bankman-Fried was arrested in the Bahamas on Monday and charged yesterday by the U.S. Securities and Exchange Commission with plotting to defraud investors.

It alleged that he had raised more than £1.4bn from equity investors since May 2019 by promoting FTX as a safe, responsible platform for trading crypto assets, but without telling them had diverted funds to Alameda Research, his private crypto fund.