With the arrest yesterday of FTX CEO Sam Bankman-Fried now in the rear-view mirror, House Financial Service Committee members undertook a review of the cryptocurrency exchange’s implosion with its current CEO John J. Ray who is overseeing the company’s bankruptcy proceedings.
The hearing titled, “Investigating the Collapse of FTX, Part I,” was led by Chairwoman Rep. Maxine Waters (D, CA) and Ranking Member Rep. Patrick McHenry (R, NC). With Bankman-Fried’s appearance no longer possible due to his incarceration, there was some measure of disappointment identified by both Waters and McHenry in the hearing’s opening statements. See the hearing video below.
McHenry made clear that he expects to hear from SEC Chair Gary Gensler “early and often” as the Ranking Member becomes Chair of the Committee in the next Congress. McHenry’s criticism of Gensler’s regulation by enforcement policy toward crypto is well-known.
Enter the new CEO
John J. Ray jumped right in with his criticism of the poor management, corporate malfeasance and inadequate security controls typical of his predecessors at FTX and its trading group, Alameda Research.
Read his complete opening testimony here.
As he concluded, Ray said:
“I would like to especially say to regulators – in the U.S. and abroad – that I completely understand the depth of outrage and frustration with what happened. I have instructed my team to cooperate as comprehensively and completely as possible, and much of our time so far has been spent on the truly herculean task of gathering and organizing information responsive to the many requests we have received.”
Reiterating themes from his testimony in the Q&A with Chairwoman Waters, Ray stated, “The operations of the FTX Group were not separated” – this is one reason U.S. regulators are even more interested.
FTX.us was not carved out of the international company. They were operated as one unit which violated the regulatory requirements for a U.S.-based cryptocurrency exchange. Mr Ray added, “There were no internal controls. There was no separateness.”
Rep. McHenry took over the questioning next and asked for the four silos of business at FTX from Mr. Ray who outlined as follows:
- The U.S. silo – FTX.us
- International – FTX.com
- Alameda – a crypto hedge fund – “Alameda was a user of FTX.com”
- 4th entity – other investments made by Alameda or FTX, venture investments
Later in answer to a question from Committee member Rep. Ann Wagner (R, MO) on the extent of the accounting challenges at FTX, Mr. Ray noted that the company used Quickbooks which he believed was highly inappropriate for a multi-billion dollar company. As for risk management systems at FTX, he said there were none. The good news – if there was any – was that the LedgerX and Japanese businesses under the FTX were still operating successfully.
“Crypto is a garden of snakes”
Crypto critic and Congressman Rep. Brad Sherman (D, CA) was next up and he took the time to equate crypto with a snake or snakes in the Garden of Eden. There are no redeeming qualities with cryptocurrency other than benefiting “Silicon Valley Bros,” he said. “[SBF’s] one purpose was to keep the SEC out of crypto.”
Turning presumably to the Digital Commodity Consumer Protection Act (DCCPA) in the Senate, Sherman admonished, “Don’t trash Sam Bankman-Fried and then pass his bill.”
From Mr. Ray, Rep. Sherman requested a list of loans and bonuses of the FTX executives such as Ryan Salame. He wants to get to the bottom of campaign donations made by the FTX team.
Rep. Frank Lucas (R, OK) asked about what was not included in the FTX bankruptcy proceedings. FTX CEO Ray quickly identified LedgerX as one of those entities saying it’s a regulated entity, fully solvent with appropriate, separated custody of customer funds.
Rep. Al Green (D, TX) took his 5-minutes for questioning Mr. Ray to raise up physical copies of the indictments and ultimately ask almost rhetorically if “this is all one big mistake” and “sincere ignorance” on Mr. Bankman-Fried’s part. Mr. Ray answered dutifully, “Ultimately, others will judge him by actions.”
In answer to a question from Rep. Pete Sessions (R, TX) on what was the biggest account held by a U.S. investor, Mr. Ray said it was premature to offer that detail but “hundreds of millions, billions” had been lost. Regarding tax reporting by FTX, Ray revealed that Ernst & Young had been hired to look at tax returns dating back to 2020. Sessions wondered aloud if the tax reporting could indicate malfeasance. Ray suggested any information along those lines would be supplied to the appropriate authorities.
Next up, Rep. Emanuel Cleaver (D, MO) brought up Sam Bankman-Fried’s prepared testimony for the hearing which the Committee has seen but, as of yet, had not been released publicly (other than a leak via Reuters). Rep. Cleaver asked Chairwoman Waters if SBF’s testimony which he never presented could be entered into the record and she agreed. No timing was given on the public release of SBF’s testimony.
Rep. Blake Luetkemeyer (R, MO) asked Mr. Ray about the 10% stake of Farmington State Bank that FTX was allowed to acquire in the state of Washington at 20 times book value. Mr. Ray indicated he’s aware of the investment and his team will be looking into it.
Rep. Ed Perlmutter (D, CO) made the connection between the Madoff bankruptcy and the FTX bankruptcy proceedings. Rep. Perlmutter noted that distributions from the Madoff bankruptcy 14 years ago were just being made… i.e. Mr. Ray’s business with FTX is going to take a long time across many “preferences” of creditors and the like.
At this point in the hearing, Chairwoman Waters noted the separate filings of complaints against the SEC, CFTC and SDNY.
Next among the questioners was Rep. Bill Huizenga (R, MI) who asked about how many Americans were actually using FTX.com, the international exchange of FTX. Mr. Ray didn’t have exact figures but said it was small and “under 2%” of FTX’s overall customer number. Sam Bankman-Fried’s parents became a point of focus and Ray said the parents “received payments” from FTX. Huizenga recalled that SBF’s Dad accompanied him in a visit to Huizenga’s office a year ago. Huizenga suggestion was that the parents should be reviewed.
Rep. Joyce Beatty (D, OH) asked about the process around securing any remaining funds. Mr. Ray indicated his team was on it and it was their “#1 focus.” He also offered that his team is still getting team around customer numbers given the fact that many customers had multiple accounts. Asked about suggestions on possible regulatory fixes, separating customer funds and transparency were top of mind with Ray.
Rep. Andy Barr (R, KY) inquired about what has been done to create some corporate structure at the existing FTX entity. Ray talked about various roles he’s initiated in the company. Moreover, there was only audited financial statements at the U.S. entities according to Ray, but he couldn’t comment on their accuracy. He reiterated that $8 billion was lost and still needs to be found, so any existing paperwork is suspect.
Rep. Juan Vargas (D, CA) said, “I don’t get the point of cryptocurrency” and pointed at Republicans for being “quiet today” about crypto’s promise. He asked Mr. Ray about FTX’s lack of compliance and Ray reiterated that power was in the hands of a few at FTX. Rep. Vargas tried to press Mr. Ray on who should regulate crypto, and Mr. Ray demurred. Vargas stated he wants the SEC to regulate crypto.
Bringing up Mr. Ray’s experience on the Enron bankruptcy, Rep. Roger Williams (R, TX) asked about a comparison to FTX. Mr. Ray said FTX was “old-fashioned embezzlement” and lacked the sophistication of what occurred with Enron. Mr. Ray said he believed SBF should have “zero” involvement in the bankruptcy proceedings going forward. On the $1 billion recovered in crypto assets, it consists of coins and cash and is an ongoing effort.
Rep. Michael San Nicolas (D, Guam) asked about the specific cause or trigger point of the FTX collapse. Mr. Ray said it was what he had said before – unlimited use of customer funds which included the use of questionable margin trading practices.
Rep. French Hill (R, AR) brought up the U.S. accounting firm involved with FTX, Prager-Metis. Mr. Ray suggested that he will be using separate experts for understanding the taxes of FTX.
Beginning his 5-minutes with “Like it or not, we are moving into a crypto world,” Rep. Jim Himes (D, CT) asked about the use of wallets versus Mr. Ray’s experience with banks. Rep. Himes wondered what Congress needs to be aware of in terms of the difference. “Crypto assets have inherently some difficulties” and discussed the use of “hot” wallets versus “cold” wallets and indicated that there are “lots” of vulnerability to hacking. The lack of discipline of the control of wallets, the management of passwords and similar examples were places where lessons can be learned said Mr. Ray. On venture capital, Rep. Himes wondered aloud about due diligence by VC entities such as Greylock, Sequoia and others. Mr. Ray said he didn’t have an answer.
Next up, Rep. Tom Emmer (R, MN) asked a series of quick questions of Mr. Ray reiterating the lack of a board, the concentration of power, the lack of in-house accounting and HR department at FTX. Rep. Emmer said that SEC Chair Gensler had more meetings than anyone else with FTX regarding “preferential treatment” on a “newly-formed, bespoke exchange.” Rep. Emmer said that he wanted to see copies of any communication with the SEC. Mr. Ray agreed. Rep. Emmer noted the corruption which occurred with centralization – taking time to note the decentralized nature of cryptocurrency and that technology was not to blame in the case of FTX.
Rep. Sean Casten (D, IL) clarified with Mr. Ray that all of the FTX losses are dollar-dominated. Nevertheless, the company’s FTT token was part of the problem at FTX according to Mr. Ray. On “Commingling” versus “Open Margin Positions” (the phrase SBF used in interview), Mr. Ray said he had trouble understanding what SBF meant. On the $477 million hack that stole FTX funds in November, Mr Ray said, “We’re tracking it and we have all the help we need on that front.”
Rep. Lee Zeldin (R, NY) referenced SBF’s unreleased, prepared testimony for today’s hearing – in particular, the part had to do with how funds were used at FTX in coordination with Alameda. On Alameda’s current investments, some of those investments will be put up for sale, but crypto assets will be secured and moved “into cold storage” according to Mr. Ray. He worried that FTX may have had wallets that he and his team does not know about – yet. Sounding a positive note about FTX assets, Mr. Ray said that the transparency of crypto assets allow them to be traced.
Rep. Gregory Meeks (D, NY) began by noting crypto’s promise around financial inclusion and then asked for clarification about lack of internal controls and an independent board. Mr. Ray said a presumably skilled and independent board would have prevented what happened at FTX.
Rep. Barry Loudermilk (R, GA) clarified with Mr. Ray that FTX.us is definitely not solvent as SBF had indicated in his prepared testimony before he was arrested.
Rep. Josh Gottheimer (D, NJ) raised concerns about the SEC and its Chair Gary Gensler in regards to “rules of the road” for cryptocurrency. Rep. Gottheimer said he wants clear guardrails for crypto as do other congresspersons which would prevent “snake oil” salesmen from running wild. He asked Mr. Ray if regulators would have been satisified with FTX’s compliance in regards to its international unit. Mr. Ray went back to his earlier answer which hesitated to make a judgment about what regulators should think. “At the end of the day, we’re not going to be able to recover all the assets,” admitted Mr. Ray suggesting it would take “months not weeks.”
In questioning Mr. Ray, Rep. Warren Davidson (R, OH) noted that Alameda had access to cash deposited by FTX customers -and, sometimes funds were deposited directly with Alameda. “No control, no custody” but customers who did self-custody were lucky and did not lose money said Rep. Davidson – as were the Bahamian customers who got their money out added Mr. Ray.
Rep. Ted Budd (R, NC) stated during his questioning of Mr. Ray that “what happened at FTX was fraud” and carefully differentiated between the fraud and the innovation that he believed blockchain technology and cryptocurrency represented.
Rep. Ritchie Torres (D, NY) brought up the FTT token and the fact FTX’s own asset was counted on its own balance sheet suggesting the risk involved with that strategy. Changing subjects, Rep. Torres asked about Robinhood stock what FTX had purchased in the past. Mr. Ray said the Robinhood shares were an asset of the company today, not SBF.
Rep. Anthony Gonzalez (R, OH) inquired about whether SBF and FTX’s senior executives would not know about any secret backdoor to funds at the cryptocurrency exchange. Mr. Ray was “unequivocal” and said “no.” He added that there were certain forms of communications which instantly disappear and can’t be recovered. When Rep. Gonzalez brought up the $100 million that was moved to 1,500 Bahamian customers just prior to the bankruptcy, Mr. Ray said he and his team were continuing to look at this.
Rep. Rashida Tlaib (D, MI) stated that she believed crypto was bullshit and wasn’t worthy of a discussion around its potential to help with financial inclusion.
Rep. John Rose (R, TN) began by considering aloud why the decision to arrest SBF was made right before SBF’s appearance at the House Financial Services Committee hearing. He insinuated the involvement of the SEC and its Chair Gary Gensler.
Rep. Alma Adams (D, NC) asked if Mr. Ray genuinely believed FTX customers will get their money back. “It’s too early to tell,” said Mr. Ray. On the question about whether this was risk-taking or fraud, Mr. Ray seemed to say it was risk-taking if one believes that not having controls was risky.
Rep. Bryan Steil (R, WI) started by raising up what could have been the reason for basing FTX in the Bahamas. Rep. Steil went further and asked about how the hacking of FTX as well as the idea that Bahamian authorities may have taken unauthorized funds – unauthorized given the bankruptcy proceedings. Mr. Ray said Bahamian authorities refuse to comply with requests for information regarding the withdrawals. He added, “The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy.” Rep. Steil made the point that this sort of malfeasance is a function of not being able to onshore companies to the United States without regulatory clarity.
Referencing the Southern District of New York’s charges against SBF including violating campaign finance laws, Rep. Stephen Lynch (D, MA) asked if there was any way that SBF may have tried to comply with U.S. securities laws. Mr. Ray answered only that his team is making regulators aware of everything that had transpired.
Rep. Madeleine Dean (D, PA) wanted to focus on the 11th and 12th of November -right around Mr. Ray’s hiring – in particular the hacking of crypto assets and the Bahamian Commission asking for the minting and transference of new FTT tokens to the Bahamian authorities to the tune of $300 million. Mr. Ray noted that this “minting” was post-bankruptcy and should not have happened. He said it was due to the control of the company being in the hands of a few people.
Rep. Alexandra Ocasio-Cortez (D, NY) began her questions by walking through the timeline for FTX’s implosion beginning with revelations about Alameda’s balance sheet via CoinDesk on November 2. Rep. Ocasio-Cortez made clear she believed it was important to understand the extradition timeline for SBF given the lack of transparency by the Bahamian government to date.
Rep. Sylvia Garcia (D, TX) questioned who really is harmed – “how many real people?” Mr. Ray didn’t have any information on consumers versus institutions. He just assumes there is a large number of consumers.
Rep. William Timmons (R, SC) wanted to know if it would have been helpful if Enron executives had appeared in front of Congress before they were arrested. Mr. Ray said yes. When asked about why SBF wasn’t allowed to testify and was arrested instead, Mr. Ray didn’t have an answer. Rep. Timmons inferred that someone at the Department of Justice made a decision to make sure SBF didn’t appear at the House Financial Services hearing.
Rep. Jesus “Chuy” Garcia (D, IL) expressed his distaste for cryptocurrency and that it takes advantage of underserved communities. He also raised up the Bahamian government’s request for minting of tokens and transference to the Bahamian government.
Rep. Jake Auchincloss (D, MA), a member of the Congressional Blockchain Caucus, jokingly noted that Mr. Ray did not play any video games while answering Congress’ questions. SBF had been notorious for playing video games while being interviewed. Referencing SBF claims that he could make customers whole if he were still in charge, Mr. Ray said it was unbelievable. Rep. Auchincloss reiterated the timeline and asked that Mr. Ray make Congress aware in the future of any collusion with FTX and governmental authorities. Rep. Auchincloss closed by calling on the crypto community to “achieve product market fit at scale” and “build things that matter or lose more credibility.”
At the end, Rep. McHenry said that “Part II” of this hearing will occur next year and will continue the work of Chairwoman Waters this year.