Bad actors are devastating crypto sector’s reputation, but weeding them out is good sign, experts say

Damage is done ...

There’s throwing cold water on a once red-hot trend in finance … and then there’s the absolute ice bath cryptocurrency experts said their industry has been plunged into.

That’s happening as attention shifts to the prominent trial of cryptocurrency exchange leader Sam Bankman-Fried, who is facing criminal counts for allegedly defrauding the customers and investors of his company, FTX.

Sean Stein Smith. (File photos)

Sean Stein Smith, who has served as a chairperson for the New Jersey Society of Certified Public Accountants’ Emerging Technologies Interest Group, said there’s no sugar-coating it: Those headlines, which he expects will be front-and-center for weeks and months to come, have done damage.

It’s hard for the crypto-focused accountant to envision a world where a business falling from a $30 billion-plus valuation doesn’t end up having a chilling effect.

“This is something that completely collapsed within a week’s time last November,” Smith said. “And you have to understand, (Bankman-Fried) was generally viewed as the reasonable, conservative face of cryptocurrency. He was on stage with the likes of Bill Clinton and Bill Gates. He was meeting with policymakers, testifying to Congress.”

The criminal trial and accusations of misappropriating as much as $10 billion now following the assumed by-the-books operator has certainly been a wakeup call for the sector, Smith said. And questions about FTX’s accounting on balance sheets proved to be an immediate momentum shift.

When ROI-NJ last checked in with Smith in 2021, he was bullish on the sector. Skepticism was receding. Crypto companies and their leaders were making what Smith believed were good faith efforts to connect with policymakers to establish common sense regulations on these digital assets.

NFTs as securities

If you haven’t learned by now what non-fungible tokens, or NFTs, are … federal regulators have found an easy shorthand to describe them: as investment securities.

Guillermo Artiles.

With the caveat that not all of these blockchain-backed assets, which garnered attention as digital art collectibles selling for eye-popping figures, could be looked at that way, federal regulators alleged in at least one enforcement action this year that NFTs were considered securities that have to be registered.

Guillermo Artiles, a cryptocurrency expert and McCarter & English LLP partner, said a lot of the policy around NFTs is in the process of evolution. Some of that is taking place on the federal level, and some at the state level.

New Jersey has been moving closer to passing its own set of NFT rules. State Sen. Nellie Pou (D-Paterson) and Assemblywoman Yvonne Lopez (D-Perth Amboy) have pushed for legislation that would require licenses to engage in NFT-related sales with the state’s Bureau of Securities.

“Lopez and Pou worked hard with industry advocates to make sure everyone is treated fairly,” he said. “As lame-duck legislation … there’s a world where this gets done.”

“There was a feeling in the marketplace that set the stage for even more productive conversations going forward on the rules that were on the books and how companies could offer services in this industry going forward, as well as how it would be taxed and, at the least, acknowledged,” he said. “That all stopped.”

Alongside a deterioration of values in cryptocurrency assets, federal regulators have been ramping up enforcement actions against individuals and companies in the cryptocurrency space — an answer to calls for more accountability in a space sometimes defined by Wild West analogies.

Although obviously an industry advocate, Smith, like other commentators, mentions that he appreciates the rooting out of bad actors in the industry. Still, he said, he’s sure the stalled talks regarding anything but the latest lawsuits have set regulation and policy back by at least a few years.

“On the other hand — quite tellingly — every large traditional finance institution all the while has been actively building out, developing or implementing their own blockchain-based products and services,” he said. “And, in at least two cases, with JP Morgan and Citi, they’re using tokenized payments already running on their in-house blockchains.”

At the same time, there have been at least eight new applications for crypto investment products, including an exchange-traded fund by major asset manager BlackRock, submitted to the U.S. Securities and Exchange Commission for approval.

There might not be a policy shift occurring. But, to have evidence of remaining interest in the crypto space from the established players in financial services … Smith marks that as a win.

Guillermo Artiles, partner and chair of government affairs for McCarter & English LLP, said interest from traditional corners of the financial world amid the industry’s turbulence is enough reason for him to stay bullish on these digital assets.

“There’s going to be an ebb and flow in any nascent industry,” he said. “Overall, folks are still bullish on the currency itself. … I know it might be hard to tell that with folks going to jail, creditors clamoring for there to be justice where they’ve been duped.

“But, in the long run, bad actors are being stamped out. That will, on the whole, make the industry more legitimate.”