The Sam Bankman-Fried Trial Will Lead To More Crypto Regulation. That's A Good Thing.

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Most investors probably remember where they were when they learned that FTX had collapsed. I know I certainly do. When the iconic CoinDesk story on the deep problems with the leading crypto exchange broke, it wasn’t hard to see that it would change everything. Almost a year after the story devastated crypto markets, the man behind one of the biggest financial frauds in history is preparing to take the stand.

The Sam Bankman-Fried trial will decide, as The New York Times puts it if he “Lied to the World’ or Acted in ‘Good Faith.” But regardless of what the jury decides, this historic event is likely to have consequences reaching far beyond the fallen entrepreneur’s fate. When the dust settles, investors can expect more crypto regulation. It’s been a highly volatile year for most cryptocurrencies, and it may not be over yet.

Sam Bankman-Fried Trial: A Closer Look

As it centers on one of the most high-profile figures in the crypto world, the Sam Bankman-Fried trial has the eyes of the world watching closely. The event is a key reminder of how quickly and how hard the mighty can fall. In August 2022, Fortune published a cover story comparing the young crypto tycoon to Warren Buffett. “His counterintuitive investment strategy will either build him an empire—or end in disaster,” the author stated. A few months later, the world learned which one was correct.

More recently, Bankman-Fried has drawn comparisons to Bernie Madoff. As he gets ready for his day in court, prosecutors are alleging that he stole millions of dollars from investors through affiliate trading firm Alameda Research. SBF’s defense will hinge on convincing jurors that his company’s massive losses are due to simple negligence rather than malicious intent. However, the trend of company insiders turning on their former leader calls the credibility of his innocent claims into question.

I’m not an attorney, but this seems questionable at best as the trial kicks off. What seems more likely is that more crypto regulation will be coming, regardless of the trial’s results. After all, the collapse of FTX thrust crypto into the national spotlight for all the wrong reasons, severely undermining public trust. There’s never been a better time for politicians to push for stricter legal standards.

The Changing Tides of Crypto

There’s no question that when Bankman-Fried’s empire fell, everything changed for crypto markets. In the wake of the collapse, Kevin Werbach of the Wharton School of the University of Pennsylvania made the case that a stronger regulatory framework would be necessary. Now, it seems that such a scenario is about to play out.

Wanting to understand the likelihood of more crypto regulation stemming from the Sam Bankman-Fried trial, I spoke to several experts about it. The consensus was clear: investors should prepare for policymakers to zero in on digital assets, specifically on crypto.

One legal expert weighed in on the matter. Jonathan E. Groth is a partner at Florida-based firm DGIM Law. He noted that the focus from legislators on imposing further crypto regulations did not start with FTX. However, he believes it will compel these lawmakers to continue moving this agenda forward. As he sees it, there is good reason for such action. In his words:

“Regulators believe that registration and regulation of cryptocurrency would better protect investors and consumers and the outcome of those proceedings will have an immediate and significant impact on the future of cryptocurrency in this country. In the wake of FTX and similar issues with exchanges and lenders like Terraform Labs, Voyager, and Celsius, Congress is very likely to continue their crusade to impose stricter regulations on the cryptocurrency industry.”

What More Crypto Regulation Means

If this prediction proves correct, it could ultimately end up benefiting crypto investors, at least according to other experts.

Shane Rogers of PDX GlobalPay, a digital asset platform, spoke to InvestorPlace about what he sees as a lack of regulatory oversight when it comes to crypto. For this reason, Rogers believes that further regulation would be beneficial to the industry.

“We can only hope that the collapse of FTX and the trial of its founder, now underway, together with other notable collapses such as Terra / Luna, Celsius, and others will finally spur all regulators globally to adopt suitable and tough regulatory standards, particularly governing the exchanges, as part of the industry’s march to maturity and mass adoption,” he states. “It is abundantly clear that the keys to mass global consumer / retail adoption of this asset class are clear and sensible regulations, supported by rigorous enforcement, and clear and obvious use cases.”

Both experts raise an important point: FTX is by no means the only troubling downfall that the crypto world has seen recently. In May 2022, the Terra ecosystem collapsed, taking a $50 billion valuation down with it. Two months later, former crypto lender Celsius Network declared bankruptcy. Its own former CEO is set to stand trial in September 2024.

The crypto market has been compared to the “Wild West” because of its lack of regulation. But the trend of crypto exchanges collapsing should highlight that this system isn’t sustainable. For that reason, it seems that the best-case scenario for investors is that the Sam Bankman-Fried trial leads to more regulation, ultimately helping turn the Wild West of crypto into something more stable that is easier to trust and stake money on.

On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Samuel O’Brient has been covering financial markets and analyzing economic policy for three-plus years. His areas of expertise involve electric vehicle (EV) stocks, green energy and NFTs. O’Brient loves helping everyone understand the complexities of economics. He is ranked in the top 15% of stock pickers on TipRanks.

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