Former SEC Official Explains the Reasons Behind the Crypto Market’s ‘Collapse’

With a lack of market oversight in the cryptocurrency space, transparency, consumer protection, insurance, licensing, and net capital requirements, investors have little chance from the outset. This was stated by former SEC lawyer John Reed Stark.

Having worked as a lawyer in the SEC Enforcement Division for 18 years, below are some objective and independent thoughts on crypto’s failures. I’ve no stake in the crypto game, and am a frequent SEC critic, so please don’t shoot the messenger.

Crypto fails as an «investment»…

— John Reed Stark (@JohnReedStark) April 29, 2023

The expert spent 18 years in the agency’s Enforcement Division.

Citing various studies, he described his conclusions as “objective and independent”. The expert added that he regards himself as a critic of the Commission and is not invested in the “crypto game”.

According to John Reed Stark, for the reasons above, the digital-asset market is rife with market manipulation, insider trading and fraud.

In particular, the argument that cryptocurrency serves as a store of value does not withstand criticism due to a lack of utility and intrinsic value. The asset has no value as a store of value; its price is based solely on Greater Fool Theory.

Similar is the positioning as a “panacea for those without bank access.” In the expert’s view, this is merely another example of affinity fraud used to dupe the poor and discontented.

Cryptocurrency is not a “safe-haven asset,” because there is no state oversight or protections that would provide any semblance of security.

Stark urged not to view recent collapses of financial institutions as a problem for TradFi in the United States overall, and not to fall for the crypto promoters’ pitches.

The expert called this a classic fraud tactic he frequently encountered during his time at the SEC.

«In rare cases of bank failures there are legally established protections and aid for depositors, such as insurance and federal ownership and takeovers. The U.S. government acts quickly and responsibly. But when a crypto platform collapses (FTX, BlockFi, Voyager, Celsius), there is no protection, client access to assets is suddenly blocked or frozen», — he explained.

According to the expert, Bitcoin exchanges may look like traditional brokerage apps for ordinary users, but they lack the oversight and investor protections built into traditional financial services.

The expert cited Coinbase’s filing with the SEC, in which the platform stated that cryptocurrency stored on behalf of users may not actually belong to them if “the case goes to court” — “because it could be considered property of the bankruptcy estate, and the clients themselves would become unsecured creditors on general terms.”

Stark noted that in the event of bankruptcy of traditional brokers, client accounts are segregated and will not be part of the debt-resolution process. Moreover, they are protected by the Securities Investor Protection Corporation up to $500,000.

«Fraud is not merely a commonplace phenomenon in the crypto industry. It is a modus operandi and an inherent criminal characteristic deeply rooted in the DNA of this ecosystem for all time. What is the result? Victims become perpetrators, contagion spreads, the titans become fugitives, whistleblowers and defendants — and fiat disappears» — the expert concluded.

Back in March, Senator Cynthia Lummis and Congressman Patrick McHenry drew attention to the increased risks of customer funds loss arising from the collapse of crypto custodians in the implementation of SAB 121 from the SEC.

Earlier, the agency head Gary Gensler warned crypto exchanges about the mismatch in the custodians’ status.