Binance-FTX Deal Will Bring Regulatory 'Scrutiny’ on Crypto Exchanges: Blockchain Association’s Kristin Smith

The FTX crypto exchange’s fall from grace could be the catalyst that spurs the U.S. Congress to act on passing more stringent regulation, said Kristin Smith, executive director of the Blockchain Association.

Smith told CoinDesk TV on Wednesday that “lawmakers are very much paying attention” to what happens next with the FTX exchange founded by Sam Bankman-Fried. A CoinDesk scoop revealed the exchange’s corporate sibling, Alameda Research, had substantial amounts of FTT tokens (FTX’s native token) on its balance sheet. The rival Binance exchange started selling its holdings of FTX's tokens. That sparked a panic that has led to a proposed Binance takeover of most of FTX's operations.

“It’s going to invite a lot of scrutiny into how centralized exchanges should be regulated,” Smith said during an appearance on CoinDesk TV’s “First Mover.” However, she added, “what happened with FTX may not be able to be addressed by U.S. regulation” because units Binance.US and FTX.US are “not part of this deal.”

Read more: Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet

Bahamas-based FTX’s survival is likely to depend on whether Binance, the largest exchange in the world by volume, follows through with its letter of intent to buy it. FTX was once the fourth-largest exchange by volume, according to CoinMarketCap data.

Still, if the deal were to happen (though it now appears unlikely), it would mean Binance would dominate upwards of 80% of the global crypto market, raising anti-trust concerns of a foreign-based company owning an exchange with a substantial amount of U.S. retail users.

Smith said FTX’s unsteady future only highlights what has been seen in the past. “Congress is very interested” in finding a way to “regulate the spot markets” by having exchanges register with the Commodities Futures trading Commission (CFTC) or the Securities and Exchange Commission (SEC), she said.

“As part of that, you could have some sort of proof of reserves and guidelines around what you’re supposed to do with customer deposits,” Smith said, referring to the idea that when users place their crypto on an exchange “there’s an expectation … that it’s not being taken and lent out.”

Read more: Binance Is Strongly Leaning Toward Scrapping FTX Rescue Takeover After First Glance at Books: Source

“This is going to open up a more robust debate around exchange regulation,” Smith said.

Smith’s views on regulations were echoed by Rep. Jim Himes (D-Conn.), who was reelected to Congress in Tuesday's elections. Himes told CoinDesk TV that one thing is clear: The government needs to speed up its work on establishing a clear regulatory playing field.

Himes noted, as did Smith, that the acquisition of an exchange with a substantial number of U.S. retailer users by a foreign player raises antitrust concerns.

“Whenever there's a question of Chinese investment in a technologically innovative business, a lot of antennas go up,” said Himes, who was a former banker during the late 1990s. (Binance CEO Changpeng Zhao is Chinese.)

Read more: Sam Bankman-Fried No Longer a Billionaire After $14.6B Wipeout: Bloomberg

Despite crypto playing almost “no role” in how Americans voted, Himes said that “there are plenty of Republicans [and] Democrats who are excited to put forward a regulatory framework that will create a lot of certainty.”

He added that as the FTX-Binance debacle unravels, “Investors in this [crypto] space need to understand that it is an immature and volatile market and they need to be careful.”