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Auditors group latest to call for more crypto oversight in wake of FTX fiasco

The sports arena in Miami bore the FTX name until the cryptocurrency exchange filed for bankruptcy. (Photo by 350z33 via Wikipedia Commons)

Even before the FTX meltdown, cryptocurrency operations were in regulators' and legislators' sights. Now more, worldwide, are calling for added government attention to the sector.

European Central Bank (ECB) President Christine Lagarde has called regulation and supervision of crypto an "absolute necessity."

Gary Gensler, chair of the U.S. Securities and Exchange Commission (SEC), in a Yahoo Finance interview today said his agency already has the authority it needs to oversee the crypto industry. But he also noted that his "one goal" is that "these platforms, the exchanges, the lending platforms come into compliance. They can do that appropriately working with the SEC. Or we can continue on the course with more enforcement actions. And I would have to say that the runway is getting shorter."

Some in Congress are working on the size of that regulatory runway.

Hearings held, scheduled: Rostin Behnam, chair of the Commodity Futures Trading Commission, on Dec. 1 told members of the Senate Agriculture Committee there needs to be a regulatory framework for cryptocurrencies.

The House Financial Services Committee has scheduled a Dec. 13 hearing on the collapse of FTX. On the other side of Capitol Hill, three Senate bills on crypto regulation have been introduced.

The Digital Commodities Consumer Protection Act of 2022, a bipartisan effort from Sens. Debbie Stabenow (D-Michigan) and John Boozman (R-Arkansas), would give the Commodity Futures Trading Commission new tools and authorities to regulate digital commodities.

Another across the aisle measure is the Responsible Financial Innovation Act from Sens. Cynthia Lummis (R-Wyoming) and Kirsten Gillibrand (D-New York). It would create a sweeping regulatory framework for digital assets.

Sen. Elizabeth Warren (D-Massachusetts), who recently criticized the SEC in a Wall Street Journal opinion piece for what she sees as lagging enforcement efforts in inaction, also reportedly is working on a separate wide-ranging bill that would hand the SEC most of the regulatory authority over the market. It also is said to involve taxation, climate issues, and national security.

And now an auditors' professional organization has added its voice to the calls for more crypto oversight.

Auditors say more must be done: The Institute of Internal Auditors (IIA), an international professional association for the internal audit profession, has written to Congressional leaders calling for new federal requirements to bolster corporate governance at cryptocurrency exchanges operating in the United States.

The Dec. 5 letter went to the chairs and ranking members of Senate committees on Banking, Housing, and Urban Affairs, and the Agriculture, Nutrition, and Forestry, as well as to the House committees on Financial Services, and Agriculture.

The IIA letter was prompted by the FTX cryptocurrency exchange's Chapter 11 bankruptcy filing. That move, notes the group, was "an example of the devastating impact on American consumers when companies lack sufficient internal controls and fail to provide objective assurance over those controls."

Anthony Pugliese, IAA's president and CEO, noted in the letter that since FTX was a privately held company, it was not required to comply with certain provisions of the 20-year-old Sarbanes-Oxley Act (SOX) designed to promote sound internal controls over financial reporting.

"Unfortunately, since most cryptocurrency exchanges are not subject to SOX compliance, consumers were denied basic organizational transparency and did not possess relevant information to assess investment risk," Pugliese wrote.

Pugliese also cited the comments of John Ray III, the newly appointed CEO of FTX, in the company's bankruptcy court filing:

"Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented."

IIA recommendations: Based on what is known so far from the FTX situation, Pugliese offered the members of Congress some recommendations he and IIA say will promote transparency among cryptocurrency exchanges. They include requiring —

  • all cryptocurrency exchanges operating in the United States, as well as affiliated partners, to possess a sufficiently resourced and highly qualified internal audit function, independent from management and reporting to an audit committee of the board or directly to the full board of directors; and
  • the senior management of cryptocurrency exchanges operating in the United States to certify, annually, that their exchanges’ internal controls are adequate and appropriate based upon an independent internal audit assessment.

Such requirements, wrote Pugliese, would be a major step in establishing greater confidence in the cryptocurrency market.

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