What will happen to crypto exchanges after the FTX collapse?

In the middle of this week, the US Securities and Exchange Commission announced charges against two key players in the FTX bankruptcy case – co-founder Gary Wang and former Alameda Research executive Caroline Allison. Both Wang and Allison have been actively cooperating with the court to clean up the mess and find the perpetrators, among other things, so they can significantly reduce their prison sentences.

The SEC indictment for the defendants is structured around alleged securities fraud. Commissioners accuse Wang and Ellison of manipulating the price of the FTT exchange’s native token. This is generally standard practice for the regulator in such cases, but this time the Commission is much more aggressive.

FTT exchange rate over time

The court documents filed by the regulator describe the FTT token as an “illiquid crypto-asset and security”. This is a hint that the Commission has already defined the token as a security regardless of the terms of its issuance. Furthermore, this week SEC head Gary Gensler also openly gave FTT similar wording.


Recall that a legal battle is currently underway between SEC officials and Ripple. The regulator is accusing the latter of "unregistered offerings of securities", with those actions estimated to be on the scale of $1.3 billion. Although the case has been going on for two years, the agency is failing to get results, and experts among others are allowing Ripple to win.


SEC chief Gary Gensler

The difference between bringing a case against a company for offering an asset as a security and recognising it as essentially a security in all contexts, while seemingly insignificant, marks a change in the Commission’s approach to securities regulation. That is, the regulator could already classify many cryptocurrencies as securities and announce stricter regulations on the industry.

In that case, developers of many blockchain projects would face fines. The same is potentially true for exchanges, which could be accused of trading in unregistered securities. According to analysts, in theory, this could be the basis for a shutdown of crypto exchanges in the US. Although such an outcome is unlikely, according to Decrypt's sources.

According to Decrypt’s sources, there is another important consequence for crypto investors. Let’s imagine that the Commission manages to get through multiple courts and reach a general consensus that crypto is indeed a subspecies of securities. In such a scenario, the body would be able to legally prosecute any intermediary that sells and distributes digital assets. That is, platforms like Coinbase, Kraken and Binance could face enormous pressure.

As a reminder, the bankruptcy of just one, albeit large, cryptocurrency exchange called FTX was a major blow to the market. If the SEC starts pushing all existing exchanges at all, this bearish trend could be unprecedented in the scale and duration of Bitcoin’s price volatility. It’s hard to predict here, as the crypto industry has never faced such a scenario before.

FTX founder Sam Bankman-Fried

Last month, the SEC won a federal court case against blockchain platform LBRY. The court ruled that its native LBC token was a security. However, the SEC’s victory over LBRY was won in the US District Court for the District of New Hampshire, a jurisdiction with little influence over federal jurisprudence. But the case against FTX is pending in the US District Court for the Southern District of New York. This institution is extremely important to the US financial system.

All of the above are just speculation and predictions so far. Fortunately, so far, the SEC is not openly announcing any changes to the crypto industry and is not taking any drastic action. But this is already a wake-up call – a sign that regulators could take a much more important place in the daily life of the cryptosphere in the future.


We believe that regulators are unlikely to seek a ban on cryptocurrency exchanges and are unlikely to achieve that goal. Still, as the Ripple case showed, the SEC's options are not limitless - especially if the defendant is also not sitting idly by. One way or another, in the worst-case scenario, it will end up restricting the operation of centralised exchanges in the US. But the decentralized platforms using VPN will certainly remain active for all comers.


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