When the Securities and Exchange Commission announced charges against FTX CEO Sam Bankman-Fried this week, it ended a nearly 2-month-long drama.

Bankman-Fried’s unethical business setup between his hedge fund Alameda Research and crypto exchange FTX (including the 130 related companies now in bankruptcy) were enough of a worry for the broader cryptocurrency economy and devotees of decentralization. But as we’ve come to learn, the abuse of customer money was far worse.

There were billion-dollar loans to Alameda Research and FTX executives and staff, comingling of customer and company assets between the various entities, and seemingly invisible liquidity printed up on one company’s balance sheet while it was actually on another. These meet the classic definitions of fraudulent behavior.

Many perceive the FTX collapse as a novel crypto affair, dealing with digital assets and cryptocurrencies. But FTX’s downfall is best described as a typical financial fraud found on Wall Street.

FTX ran a fractional reserve bank using printed money as collateral, gambling away customer money in risky products while paying out clients using money from other investors.

Bernie Madoff could not have designed it better.

While many will claim that more regulation or oversight is necessary for the crypto industry in the aftermath, the case of FTX seems more like a failure of existing systems than a loophole.

Regulators at the Securities and Exchange Commission, the Commodity Futures Trading Commission and members of Congress regularly met with FTX’s team, lavishing praise on their meteoric rise.

Celebrity endorsements, Super Bowl ads and stadium sponsorship deals gave the offshore exchange clout with mega investors such as Kevin O’Leary and Bill Ackman, who still defend Bankman-Fried. Highly regarded banks and investment funds similarly poured billions of dollars into the company’s pockets while doing limited due diligence.

Whatever failure that may be, it is not one of unclear regulation or the speculative nature of digital currencies.

Bitcoin — as a decentralized digital currency — did not cause each of the player in the FTX saga to look the other way.

A prudent approach would be to apply cautious regulation that recognizes the revolution of cryptocurrencies and enforces existing laws.

The answer to preventing the next FTX lies less in creating convoluted regulatory environments stricter than the banking system, as some propose, and more in applying existing laws while promoting a pathway for legitimate entrepreneurship.

Self-dealing, fraud and market manipulation remain illegal and should be prosecuted.

These are basic principles that we have all agreed to follow, and one we hope our public officials recognize, no matter the asset.

Published in DC Journal/Inside Sources (archive link).

Syndicated in the Boston Herald, Lowell Sun, Lima News, Nashua Telegraph, and Jacksonville Journal-Courier.