The Senate Banking Committee convened another Congressional hearing today about the FTX implosion titled, “Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers”.
See the video of the hearing.
Yesterday’s House Financial Services Committee hearing on FTX was hard to top with the current CEO of FTX delivering an indictment of the past CEO Sam Bankman-Fried (SBF), his company’s past performance and even the Bahamian government.
Chair and Sen. Sherrod Brown’s (D, OH) opening statement did not hesitate to address his extreme skepticism of crypto with nothing redeeming to say about the digital currency industry and blockchain technology. He added, “Crypto doesn’t get a free pass because it’s shiny and bright.”
National security, Facebook’s Libra, terrorist financing and more were examples of crypto’s effects that had metastasized for Sen. Brown into a global blight.
Conversely, Ranking Member Sen. Toomey (R, PA) sought to differentiate between the alleged fraud of FTX and the software, code and innovation activating cryptocurrency today.
Sen. Toomey chided those who wanted to stop crypto saying that it cannot be and, in fact, represents a fundamental misunderstanding of the technology. He suggested that those who call for not addressing crypto with legislation at all are misguided. He promoted his own Stablecoin Transparency Act as an important step in providing guardrails for crypto’s growth, let alone the use of blockchain technology.
The lineup for today’s hearing was a mix of academia, media and curiosity:
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- Professor Hilary J. Allen, American University Washington College of Law (prepared testimony)
- Mr. Kevin O’Leary, Investor (testimony)
- Ms. Jennifer J. Schulp, Director Of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute (testimony)
- Mr. Ben McKenzie Schenkkan, Actor And Author (testimony)
Of the four witnesses, Shark Tank host Kevin O’Leary and Ms. Schulp provided perspectives that could be described as in support of the crypto industry. Professor Allen and Mr. Schenkkan saw crypto as a threat at best.
Notably, no one from the crypto industry spoke or was asked to speak – or both.
Professor Allen, who had appeared in front of the same committee a year ago, offered a sharp rebuke arguing against the need for cryptocurrency. In her 17-page opening testimony, she suggested that crypto should have its own silo of regulation separate from banking.
She rejected “the proposed Stablecoin TRUST Act (introduced by Sen. Toomey), the proposed Lummis-Gillibrand Responsible Financial Innovation Act, and the proposed House Financial Services Committee bill on stablecoins all seek to integrate banking and crypto.” And she said the same about Stabenow-Boozman’s Digital Commodity Consumer Protection (DCCPA).
Ms. Schulp of think tank Cato Institute brought an pro-crypto review of events and generally supported cultivating the smart growth of crypto with the help of appropriate regulation.
Finally, Mr. Schenkkan, who said it was fitting that he was at hearing because he said,”Americans have been sold a bill of goods” which depends on “misinformation, hype and fraud.” Mr. Schenkkan new book “Easy Money” apparently focuses on issues such as these. He concluded crypto was “the largest Ponzi scheme in history,” ten times the size of Bernard Madoff’s fraud.
With both Sen. Brown and Sen. Toomey clearly at odds on the issues of crypto and its regulation, it was impressive that the two interacted – at least publicly – in a respectful manner.
When Sen. Toomey asked Mr. O’Leary why SBF and FTX failed, Mr. O’Leary responded with a story.
Describing the moment he discovered that his own account had been cleaned out, Mr. O’Leary said he called SBF and asked, “Where is the money?” From there, according to Mr. O’Leary, SBF told him how Binance and its founder and CEO, CZ, effectively put FTX out of business via its ownership stake in FTX. SBF also told him how Binance thrived in unregulated environments, according to Mr. O’Leary.
As the Q&A section commenced, it appeared that most Senators saw FTX as a U.S. company that should have been regulated. This in spite of the fact the company was based in the Bahamas. Jurisdictional complexity for FTX would still appear to be an issue that is not fully understood.
Later, in a conversation with Sen. Jon Tester (D, MT), Professor Allen reinforced that she believes crypto needs to stay out of the banking system which contradicts Securities and Exchange Commission’s Chair Gary Gensler. Chair Gensler is encouraging crypto companies to abide by a pillar of the financial and securities system, the Howey Test, and has expressed his concern that by crypto receiving its own regulation would allow it to operate outside the regulated financial system so critical to the United States.
“good old-fashioned fraud”
Sen. Cynthia Lummis (R, PA) after thanking Sen. Toomey for his service – on what may have been the final hearing of his Senate career when his term ends in January – wanted to separate digital assets from “good old-fashioned fraud.”
Using the anecdote of FTX customers being sent deposit routing information that funneled funds to its trading group, Alameda Research. Sen. Lummis summarized, “It’s a failure of people, safeguards and regulation. It’s not a failure of the technology.”
Sen. Lummis used her time to question Cato’s Schulp who suggested that intermediary removal and speed of transactions were part of the benefits of cryptocurrency. At the end, Sen. Lummis promoted her Lummis-Gillibrand Responsible Financial Innovation Act (RFIA) as a solution.
It may or may not be noteworthy that Sen. Kirsten Gillibrand (D, NY), co-sponsor of RFIA, did not speak during the hearing.
Next, “Crypto is the preferred tool” of terrorists, criminals and rogue states began Sen. Elizabeth Warren’s (D, MA) Q&A.
At the conclusion of her time, Sen. Warren promoted her new, bipartisan money laundering bill with Sen. Roger Marshall (R, MD) which inserts significant KYC-AML rules for cryptocurrency and its exchanges. Called, “The Digital Asset Anti-Money Laundering Act,” and according to CNN, “Specifically, it would direct FinCEN to finalize and implement a rule proposed in 2020 that would require banks and money service businesses to verify customer and counterparty identifies..” Read more.
Sen. Tina Smith (D, MN) suggested that crypto firms gamble with their investors money and her view was affirmed by Professor Allen on the panel. With Mr. Schenkkan, Sen. Smith confirmed her belief that due to inefficient energy consumption of Bitcoin, in particular, the technology is inefficient, or “bad” as Mr. Schenkkan described it.
Sen. Kyrsten Sinema (I, AZ) wanted to address with the panel the “let it burn” idea which eliminates the possibility of any new regulation for the crypto industry.
Sen. Toomey offered the penultimate comment of the hearing and talked about his excitement over programmable money. Asking Ms. Schulp, he stated that he supported legislation where stablecoins would have 100% reserves and offered that the outline of his own Stablecoin Transparency Act would be helpful.
Sen. Brown concluded by raising the issue of “regulatory clarity” and whether it was needed.
The hearing was then adjourned.