Whistleblower Tips Critical for Regulators Seeking to Minimize Misconduct in Opaque Cryptocurrency Markets11/21/2022
The crypto space has seen a lot of publicity these days. The catastrophe which is the FTX bankruptcy highlights the cryptocurrency market’s susceptibility to fraud given its unregulated nature, and the fact that much of it is ostensibly overseas and otherwise opaque in its mechanics. In the face of this, investors are susceptible to exploitation and losses. In the case of FTX, investors and creditors are owed billions of dollars according to initial filings in the bankruptcy proceedings. FTX may be just the start of things.
How can regulators get insight into the crypto space and into the FTX situation in particular? In a word, whistleblowers. One regulator, the Commodity Futures Trading Commission recognizes as much. According to Bloomberg, the CFTC commissioner Kristin Johnson has said whistleblower tips could be critical for regulators to identify misconduct. She noted that the crypto world is not one easily understood from the outside.
The inability of regulators to easily oversee this market is demonstrated by their unprecedented public request for whistleblowers to help. To incentivize these whistleblowers, Ms. Johnson notes that they would be entitled to a significant percentage of any fine or levy based on any helpful information that the whistleblowers provided. These incentives are codified in the Dodd-Frank whistleblower laws brought into effect in 2010, which allow a whistleblower to receive 10 to 30% of the fines or levies that the regulators obtain. The CFTC alone has received an estimated $3 billion in fines and levies because of whistleblower tips and has paid out approximately $300 million to whistleblowers since the beginning of the CFTC’s whistleblower program.
The incentives work and the regulators are advertising in order to get ahead of a problem in the crypto space that they are currently chasing.
An important additional dynamic in the case of this sort of fraud is that whistleblowers can do more than just help regulators. They can help investors too. In the bankruptcy of FTX, whistleblowers who have information about the location of assets can add to the money available to creditors who now appear to be looking at losses of nearly their entire investments.
Another way to put this is that the contribution of whistleblowers is salutary to investors as well regulators. This could be especially true in the case of FTX.
David Kovel has extensive experience in commodities litigation and whistleblower representation, and has represented investors seeking recoveries in bankruptcies. In July of 2022, Mr. Kovel spoke to the podcast Fair and Square about the threat market manipulation on cryptocurrency exchanges poses to consumers (Decentralized vs. Regulated: what is the cost to Bitcoin investors?).