Last year, we watched FTX join a long list of crypto-asset companies that shuttered during the “crypto winter” of 2022, underscoring the urgent need to protect our economy from harmful practices by the crypto industry. These collapses have cost investors trillions and have disproportionately harmed low-income, Latino, Black, and first-time investors. In FTX’s bankruptcy filing, the company’s interim CEO James Ray, tasked with cleaning up the mess created by disgraced founder Sam Bankman-Fried, said that he had never “seen such a complete failure of corporate controls” like he saw at FTX. Unfortunately, the lack of corporate controls is not a problem isolated to FTX, and it is indicative of an industry that refuses to comply with existing regulation.
To prevent another collapse, companies that issue cryptocurrencies, crypto exchanges, and other relevant companies must come into compliance with existing securities laws, which include time-tested provisions that ensure investors and markets are protected from bad actors.
According to the SEC Chair Gary Gensler and recent court decisions, the vast majority of crypto assets are securities because they meet the Howey Test, or a framework set by the U.S. Supreme Court. According to the Howey Test, an entity is a security when an investment contract exists. An investment contract exists when money is invested in a common enterprise with the expectation of profit resulting from the work of others. We agree with Chair Gensler that “nothing about the crypto markets is incompatible with the securities laws” and “investor protection is just as relevant, regardless of underlying technologies.” If crypto-asset companies complied with existing laws, they would not be able to engage in damaging practices like misusing customer funds, giving sweetheart deals to friends, and laundering money.
The crypto industry is notorious for attempting to obscure the law by using the courts to challenge attempts at regulation and lobbying for regulatory carve outs that benefit them at the expense of everyday people. Most recently, Binance, the largest cryptocurrency exchange in the world, reportedly lobbied the Department of Justice (DOJ) to stop it from taking action against the company. Some crypto companies have also used celebrity endorsements, philanthropic endeavors, political donations, and claims around innovation to escape scrutiny, curry favor with the public, and frame the industry as trustworthy.
There is nothing innovative about the way that FTX and other crypto actors have replicated the worst tendencies of Wall Street and Big Tech. They have recreated many elements of the 2008 financial crisis, concentrated wealth and power at the very top, subjected investors to incredible volatility, and preyed on consumers. True innovation must promote financial stability and inclusion.
The American people cannot afford another economic collapse driven by greed and corporate malfeasance. Policymakers must protect our economy from bad actors by urging the crypto industry to comply with existing laws, invest in solutions that are truly innovative, and create a more inclusive financial system.
Jesús “Chuy” García represents the 4th District of Illinois. Stephen F. Lynch represents the 8th District of Massachusetts. Both serve in the Committee on Financial Services in the US House of Representatives.