Washington policymakers are under growing pressure to write new rules for the cryptocurrency industry and crack down on fraud after the collapse of crypto exchange FTX.
The federal government’s failure to find common ground on cryptocurrency regulation blew up in its face last week with the downfall of one of the industry’s most prominent and politically connected firms. As regulators pick up the pieces of what happened, lawmakers are going back to the drawing board to find a path forward — and point fingers.
“We expect lawmaker outrage, especially on the Democratic side, to pick up this week as Congress starts its lame-duck session,” wrote Ian Katz, director at research firm Capital Alpha Partners, in a Monday analysis.
“We sense that many are viewing this as the collapse of a large crypto company. But this is more about lack of access to accounts, which is the sort of thing that angers politicians.”
FTX, one of the world’s biggest cryptocurrency exchanges, filed for bankruptcy on Friday after its affiliated trading firm Alameda Research blew through billions of dollars in user deposits on risky bets. While FTX was based in the Bahamas, untold thousands of Americans were able to buy, sell and trade crypto using the platform by using private internet connections.
Once worth roughly $32 billion, FTX’s value has been wiped out and its customers face a long, potentially fruitless road to getting their money back. While most banks and stock brokers have protections to ensure customers don’t lose money by no fault of their own, FTX and other major crypto firms are not federally supervised or insured.
Stock brokers are also obligated under federal law to take steps to make sure the firm can make its customers whole if the company collapses. But there is no one federal regulator in charge of supervising cryptocurrency companies, making it difficult to assess whether such firms are protecting their customers.
Treasury Secretary Janet Yellen called for “very careful regulation” of crypto in an interview with Bloomberg, pointing to FTX’s relationship with Alameda Research as an area to address.
“In other regulated exchanges, you would have segregation of customer assets. The notion you could use the deposits of customers of an exchange and lend them to a separate enterprise that you control to do leveraged, risky investments — that wouldn’t be something that’s allowed,” she said.
FTX’s collapse also raises the question of who Congress will turn to for insights on crypto legislation, and whether lawmakers can grant the same level of trust to industry voices.
FTC CEO Sam Bankman-Fried developed close connections with lawmakers — particularly Democrats, who are generally more crypto-skeptical — through frequent trips to Capitol Hill and prolific political donations. He was one of the top donors in this year’s midterms, donating nearly $40 million, much of which went toward boosting moderate Democrats in contested primaries. Ryan Salame, another top FTX executive, donated around $20 million to boost Republicans.
“Sam cultivated an image of someone who was responsible and took regulation seriously, and I think that’s part of why we’re seeing this reaction,” Lee Reiners, policy director at Duke University’s Global Financial Economics Center, said in a recent interview.
Bankman-Fried was a driving force behind the Digital Commodity Consumer Protection Act (DCCPA), lawmakers’ first comprehensive proposal to regulate crypto, which critics panned as being too lenient.
The bill would have given authority over supervising cryptocurrency firms to the Commodity Futures Trading Commission (CFTC). That agency and the Securities and Exchange Commission have jurisdiction over different aspects of the crypto space, but have jockeyed over who should take the lead on monitoring companies from top to bottom.
Bankman-Fried focused his visits specifically on members of the Senate Agriculture Committee, which is the Senate committee in charge of the CFTC. The prominence of the CFTC and the Agriculture Committee in the DCCPA raised questions among some crypto advocates about Bankman-Fried’s true intentions.
Ron Hammond, director of government relations for the Blockchain Association, said Bankman-Fried’s focus on just one of several committees in charge of crypto and FTX’s aggressive push to pass the DCCPA without changes alienated potential allies.
“They were trying to be the white knight of the industry without actually trying to consult the rest of the industry and then use that opportunity to say ‘We speak for the industry,’ and that’s not how it works in coalition-building,” Hammond said.
“We all support regulation, and you’re obviously just trying to find a way to carve yourself out here.”
Crypto’s biggest skeptics in Congress have touted FTX’s collapse as vindication for their concerns and have urged lawmakers to get much tougher on the industry.
Rep. Brad Sherman (D-Calif.), who chairs the House Financial Services subcommittee on investor protection, urged Congress over the weekend to “examine options” for crypto legislation without help from the industry.
“To date, efforts by billionaire crypto bros to deter meaningful legislation by flooding Washington with millions of dollars in campaign contributions and lobbying spending have been effective,” he said in a statement.
And even industry voices are holding up FTX as an example of why Washington must find common ground on crypto.
Coinbase CEO Brian Armstrong argued in a CNBC op-ed that the FTX disaster was brought on by U.S. policymakers’ failure to develop clear crypto guidelines.
“As a result, American consumers and advanced traders alike have been engaging with risky, offshore platforms outside the jurisdiction — and protection — of U.S. regulators,” he wrote.
It may be possible for lawmakers to find common ground on rules for “stablecoins,” or digital tokens meant to hold a fixed value, during the lame-duck session before a new Congress is sworn in next year.
Stablecoin oversight is one of few areas where Democrats and Republicans generally agree but have still been unable to come to terms on a compromise. Several crypto lenders, including Celsius and Voyager, declared bankruptcy earlier this year, while stablecoins meant to be tethered to fiat currency lost much of their value, sparking calls for consumer protections and additional transparency.
But broader changes to cryptocurrency regulations are unlikely to happen soon, especially as federal regulators and law enforcement investigate the fallout from FTX’s collapse.
“A lot of folks are just still asking, ‘What the hell happened?” Hammond said.