SEC order attempts to assess health of crypto industry after FTX exchange fallout

• The Securities and Exchange Commission has flagged the need for firms to disclose potential crypto damages from FTX’s collapse. 
• The US financial regulator is warning public companies to disclose their stake in the crypto industry’s recent liquidity crisis.
• SEC has asked companies whether there is a risk of excessive redemptions, or suspension of withdrawals on the horizon. 

The Securities and Exchange Commission (SEC), the US financial regulator, has warned firms to disclose potential threats to their business from the fallout of the FTX exchange. The FTX exchange contagion spread, wiping out holdings of users and driving firms to bankruptcy in November 2022. The financial regulator has taken this initiative to ascertain the damage caused to securities firms in the crisis that has hit the crypto market. 

Also read: Crypto lender Genesis struggles to enable withdrawals for users amid spreading FTX contagion

SEC warns public companies to reveal damages from crypto fallout

SEC, a US financial regulator, has warned public companies to shed light on the damages suffered by them in the recent fallout of the FTX exchange. Samuel Bankman-Fried’s FTX exchange and trading firm Alameda Research collapsed and filed for bankruptcy after suffering a massive liquidity crisis. 

Several firms like BlockFi, Genesis and Voyager suffered from FTX exchange’s collapse. The SEC’s Division of Corporate Finance advised public companies to disclose the disruption caused by crypto to their firm. 

Companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact of crypto events on their business. The SEC’s corporation finance division believes that companies should evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the potential impact on investors. 

The regulator has asked companies with ongoing reporting obligations to consider whether their disclosures need to be updated. The SEC shared an illustrative letter that contains sample comments that the corporate finance division may issue to companies depending on their particular facts and circumstances.

Sample letter to companies 

What does this mean for US-based customers and investors of publicly traded companies?

SEC Chair Gary Gensler reiterated his views that the agency holds a clear stance on what crypto companies should do. Gensler told a reporter that “the rules are there” and that “law firms know how to advise their clients to comply.” 

The sample questions’ list is not exhaustive and companies are expected to evaluate their own specific risks and concerns. Throughout 2022, the crypto industry has faced a number of high-profile failures and bankruptcies. This has raised concerns among investors regarding security of their funds. 

The regulator reiterated that securities firms and crypto companies tied to traditional financial institutions are under the SEC’s scrutiny. US Senators Elizabeth Warren and Tina Smith wrote a letter to bank regulators on December 7, asking them to examine the ties between traditional finance companies and crypto firms. The senators pointed to Moonstone Bank, a firm FTX invested in, as an example.

The regulator is hoping its new initiatives will help protect investors by flagging the need of firms to disclose potential threats and impacts to their business from the crypto mayhem.