The sudden collapse of the cryptocurrency exchange FTX has heightened concerns over the lack of regulations for the cryptocurrency market. Commentators quickly compared FTX’s collapse to the Enron scandal and the 2008 collapse of Lehman Brothers. These events triggered major Wall Street reform. U.S. authorities are actively investigating FTX for fraud. One thing is clear: in the wake of FTX’s collapse, U.S. regulatory bodies must fully utilize whistleblower programs in regulating the cryptocurrency industry.
The comparison between FTX and Enron is notable because of the critical role a whistleblower, Sherron Watkins, played in exposing Enron’s accounting fraud. Insiders with direct knowledge of fraud are vital in exposing financial misconduct, holding fraudsters accountable, and protecting investors.
Luckily, strong whistleblower provisions already exist for individuals blowing the whistle on cryptocurrency fraud. Following the 2008 financial collapse, Congress passed the Dodd-Frank Act establishing whistleblower award programs at both the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), two agencies with jurisdiction over cryptocurrency fraud.
The SEC or CFTC may consider cryptocurrency a security or commodity if marketed as an investment by a particular company, such as an Initial Coin Offering (ICO). The SEC and CFTC have jurisdiction over fraudulent and manipulative activities in the virtual currency market. Such activities include market manipulation, insider trading, Ponzi schemes, money laundering, tax avoidance, and the bribery of foreign officials which violates the Foreign Corrupt Practice Act.
Under the Dodd-Frank Act, the SEC and CFTC must provide monetary awards to individuals who voluntarily provide high-quality, original, timely, and credible information that leads to an enforcement action that exceeds more than $ 1 million in sanctions. The award ranges from 10% and 30% of monetary sanctions collected. Whistleblowers do not need to be individuals that are insiders. Anyone with original information, such as victims of the schemes and misconduct, may be eligible for an award.
The SEC and CFTC whistleblower programs have been immense successes. Since becoming law in 2010, the Dodd-Frank Act has allowed the SEC to use whistleblower information to obtain over $5 billion from securities law violators. It has also awarded over $1.3 billion to whistleblowers for their acts. In the same timeframe, the CFTC has awarded $123 million to whistleblowers who have assisted the CFTC in recovering over $1 billion.
In addition to initiating large amounts of sanctions and rewarding whistleblowers, the SEC and CFTC whistleblower programs have been immensely successful in returning funds to harmed investors. The SEC has returned over $1.3 billion to investors thanks to whistleblowers. On October 31, the SEC awarded $10 million to a whistleblower whose disclosure resulted in the agency returning “a significant amount of money to harmed investors.”
FTX’s collapse has left customers and investors, including celebrities like NFL star Tom Brady, in limbo and unsure whether they will get their money back. As more and more Americans pour money into the cryptocurrency industry, whistleblowers will be a necessary tool in protecting their funds from fraud.
Cryptocurrency whistleblowers are already coming forward to U.S. authorities in high numbers. In its recent annual report to Congress, the CFTC Whistleblower Program reported that a majority of the whistleblower tips it received in the 2022 fiscal year “involved fraudulent misappropriation and fraudulent solicitation involving crypto/digital assets.”
The SEC and CFTC must fully utilize their whistleblower programs to be the best cops they can be on the cryptocurrency beat. By continuing to leverage insider information, the agencies can protect the American public as it continues to invest in the cryptocurrency industry.