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FTX Had No Controls Says CEO John Ray At House Financial Services Hearing

House Financial Services Committee

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.

Read all of McHenry’s opening statement.

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.”

The Q&A

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.”

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The Arrest of FTX CEO Sam Bankman-Fried (Updated)

Sam Bankman-Fried

What we know about FTX CEO Sam Bankman-Fried’s (SBF’s) arrest last night in the Bahamas following the implosion and bankruptcy of the cryptocurrency exchange he founded…

the arrest

    • Royal Bahamas Police Force announced SBF’s arrest shortly after 6p local time yesterday for what it said were offenses against the United States and The Bahamas. Read it. SBF had just said earlier in the day that he didn’t think he would be arrested.
    • Bahamas Attorney General says that it will continue its own “regulatory and criminal investigations” into SBF while the U.S. pursues its criminal charges. The release is here.
    • The State District Attorney’s office in New York State announced Bankman-Fried’s arrest in a tweet saying that it will reveal an indictment this morning. See the charges below.
    • The Securities Exchange Commission quoted its top enforcement official, Gurbir Grewal, who congratulated law enforcement on SBF’s arrest and announced his agency’s intent to pursue “separate charges for violations of securities laws violations.” Read the tweet. See the charges below.
    • More from The NY Times, WSJ and a wild story from Bloomberg on lawyer complaints about an exchange between the Bahamian government and SBF.

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Wishful Thinking? Regulating Crypto To Bring Offshore Onshore

Onshore Offshore

Amidst the most recent crypto cataclysm, hopeful narratives have emerged suggesting that the U.S. government and other jurisdictions could have prevented the implosion of offshore firms such as FTX.

The argument offers two similar threads related to regulatory guardrails:

    • Stay in the U.S. instead of leave: Better crypto-specific regulation in the United States would have encouraged companies to stay local and therefore discouraged unregulated development elsewhere to “infect” unsuspecting U.S. consumers.
    • Grow in the U.S. instead of nothing: Clear regulation in the U.S. presumably grows the crypto industry by inspiring entrepreneurship in the United States. Lack of clarity does not promote risk-taking for which U.S. entrepreneurship is known.

FTX’s international unit presumably would not be experiencing bankruptcy today if it was required to adhere to current United States banking laws let alone anything crypto-specific that may bubble up someday. Of course, a CFO might have helped, too.

It’s fair to ask, would FTX’s founders ever founded anything in the U.S.? Were they only interested in exploiting unregulated environments? Maybe so. And so… does that need to be “onshored”? Doesn’t seem like it.

The European Union (EU) is thinking about how to take a crack at regulating offshore entities but is still far from pulling the trigger. The European Securities and Markets Authority (ESMA) will be on the hook in the EU once Markets in Crypto-Assets (MiCA) regulation takes effect in 2024 or thereafter.

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Centralization Villain Gets More Hearings While Decentralization Watches

Hearings on FTX

With FTX continuing to burn like a sun that never sets, Congress is undertaking its review of the cryptocurrency exchange’s implosion with two hearings this week – one quotable,  the other that checks a box.

Hearing #1 – likely very quotable

On Tuesday, December 13 at 10:00a, Chairwoman Maxine Waters (D, CA), Ranking Member Patrick McHenry (R, NC) and the House Financial Services Committee convene a hearing titled  “Investigating the Collapse of FTX, Part I.” (Live stream)

The scheduled witness list for the House Financial Services hearing is exactly who you’d want, at a minimum, for a one-day hearing: the current CEO and the former one:

      • John J. Ray III, current Chief Executive Officer, FTX Group
      • Sam Bankman-Fried (SBF), Founder and Former CEO, FTX Group

Read the HFS Committee’s hearing memorandum here.

Mr. Ray is well-known for his work in corporate disasters such as Enron and Nortel where Mr. Ray led teams of lawyers to find the best way out possible for shareholders, creditors and customers alike. Read this profile from Ray’s hometown paper for more.

The ignominious FTX founder, SBF, created still more drama around “will he” or “won’t he” appear for the Committee in recent Twitter banter (1, 2, 3, 4) with Chairwoman Waters. As of this writing, he says he’ll appear -likely by video. Rumors had swirled whether Chairwoman Waters would use her subpoena powers to compel SBF to testify. Complicating matters was SBF’s Bahamian location.

It was only one year ago – almost to the day – that  SBF was throwing bouquets to House Financial Services after a Committee appearance and tweeting, “A huge thanks to @MaxineWaters, @PatrickMcHenry, and the whole House Financial Services Committee for having us today to talk about the future of digital assets. The meeting was productive and I’m really grateful for the engagement and thoughts from policymakers.”

With Chairwoman Waters and Ranking Member Rep. Patrick McHenry’s work on stablecoin legislation waiting in the wings, it would seem tough questions will be prepared for Mr. Bankman-Fried.

Top 10 questioners to watch on HFS:
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Senate Ag Committee Attempts To Resuscitate DCCPA, Distance From FTX

Senate Ag hearing

With the collapse of cryptocurrency exchange FTX not even a month old, the first FTX hearing commenced on Capitol Hill with the Senate Agriculture Committee questioning Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam yesterday in Washington D.C.

Overall, the hearing seemed to be a theater of positioning by Senate Ag intended to address…

    • Urgency – Senate Ag and the CFTC appeared to believe the Digital Commodity Consumer Protection Act (DCCPA) has more urgency than ever in light of the FTX collapse.
    • Overcoming the conflict of interest – Senate Ag and the CFTC endeavored to distance themselves from FTX and its founder Sam Bankman-Fried (SBF). The unspoken message is that FTX did not influence the creation of the DCCPA. On that note – and grasping for transparency, for example – CFTC Chair Behnam’s calendar in the past year was under the microscope which included 10 FTX meetings largely related to its subsidiary LedgerX and its DCO application – not DCCPA.
    • Refinement– Chair Rostin Behnam and Committee members urged that learnings from FTX’s implosion be incorporated into the new bill. In some ways, the refinement appears to be finding a way to bring companies like FTX onshore, which would have required the company to adhere to regulations that would have prevented the implosion in the first place.
    • Pause – In spite of the urgency, the need for refinement requires pause. DCCPA won’t be heading for a vote on the Committee or Senate floor until next year at the earliest. Chair Behnam advocated as much.

Hearing context

On its face, D.C. appears to be in soul-searching mode as it gropes for answers on how the FTX collapse occurred even though the company was based in the Bahamas. The krux of the concern, though, stems from the humiliation endured by unsuspecting lawmakers who had been courted and cajoled by FTX founder and CEO Sam Bankman-Fried.

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Where Are We: SBF on Wednesday, Senate Ag Committee on FTX This Thursday

Where Are We for Monday, November 28, 2022

As the United States comes spinning out of the Thanksgiving holiday, the fallout from crypto exchange FTX’s implosion continues and another week of drama unfolds for the blockchain technology industry in D.C. and elsewhere.

Where we are….

SBF to speak on Wednesday

The NY Times Dealbook Summit, which is guided by DealBook reporter and CNBC anchor Andrew Ross Sorkin, will include – incredibly – a “live” interview with Sam Bankman-Fried (SBF). The FTX founder announced in a tweet that he’ll be speaking on Wednesday -via video from the Bahamas.

Bankman-Fried’s appearance will come in the wake of last week’s FTX bankruptcy hearing where new CEO John Jay Ray III said that “the mess at FTX was the worst he had seen in his career,” and that included the bankruptcy of notorious energy, trading and services company Enron says The New York Times.

Meanwhile, SBF published a note on an internal FTX Slack channel suggesting that he reluctantly caved into “coordinated” pressure to file for bankruptcy.

Thursday: Senate Ag hearing

On Thursday, December 1 at 10 a.m., the first hearing on the FTX debacle will begin on Capitol Hill courtesy of the Senate Agriculture Committee. Watch the live video of “Why Congress Needs To Act: Lessons Learned From The FTX Collapse” here.

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Staffers See Stablecoin Legislation And DCCPA in 2023

Staffers speak

A swirl of several hundred government relations executives and general counsels from crypto companies around the globe gathered at the Conrad Hotel this week for Blockchain Association’s first annual Policy Summit.

Even amidst the recent implosion of crypto exchange FTX, an agenda sprinkled with an impressive list of elected officials offered hope to a beleaguered audience that could be justified for wanting to update their LinkedIn profile in the past week.

In a panel titled, “Post Midterms Political Outlook: What’s On Deck for the Next Congress?,” Congressional staffers who drive policy discussion on Capitol Hill, provided a behind-the-scenes look at a range of blockchain-related issues facing Congress.

Participants reflected the bipartisan strategy of crypto policy in the House and Senate today with two Democratic and two Republican staffers – who stressed they spoke for themselves and not Members of Congress:

    • Francesco Castella, Senior Policy Advisor for Congressman Ted Budd (R, NC). Rep. Budd, a member of the House Financial Services Committee and the Blockchain Caucus, will be moving to the Senate in the next Congress. Mr. Castella appeared at DeFiCon (https://blockchaintipsheet.com/policy/us-house-staffers-blockchain-cryptocurrency/) in August in New York City.
    • Rashan A. Colbert, Legislative Assistant for Senator Cory Booker (D, NJ). Sen. Booker, who sits on the Senate Agriculture committee, is co-sponsoring the Digital Commodity Consumer Protection Act (DCCPA). Mr. Colbert appeared in a CFTC financial inclusion webcast about blockchain technology in August.
    • Emily German, Subcommittee Staff Director at U.S. House of Representatives Committee on Agriculture, which has jurisdiction over the Commodity Futures Trading Commission (CFTC). Ms. German serves the interests of Democrats on the House Ag Committee and its Chairman, Rep. David Scott (D, GA).
    • Tim Hite, Financial Services Counsel for Congressman Warren Davidson (R, OH). Rep. Davidson has been an active Member when it comes to cryptocurrency legislation (such as the Digital Taxonomy Act and Token Taxonomy Act) which includes his participation in the House Financial Services Committee and the Blockchain Caucus.

Ron Hammond, Director of Government Relations at Blockchain Association and a former staffer for Rep. Davidson, moderated the discussion.

FTX fallout for this Congress

With FTX’s imploding looming over the conference, Hammond didn’t waste any time by asking staff members about the FTX elephant-in-the-room particularly as it related to DCCPA and where FTX and its founder/CEO Sam Bankman-Fried had taken an active, aggressive role in lobbying efforts.

Just prior to the panel, the House Financial Services Committee announced it would convene a hearing about FTX in December.

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Congress and Industry Attempt Reset After FTX Debacle

FTX and Congress

FTX CEO Sam Bankman-Fried would appear to not have any friends left in Washington, D.C. after his company’s implosion earlier this week.

Members of Congress and industry trade organizations are trying to build a protective wall around legislation still in its embryonic stages – such as the Digital Commodity Consumer Protection Act (DCCPA) – while distancing themselves from any perceived influence Bankman-Fried had on the process.

Meanwhile, Bankman-Fried’s global company has had its assets frozen by authorities in the Bahamas where FTX global operations are based. And, it appears that FTX’s US operations are also under pressure with perhaps only enough money for another week of payroll for employees according to Bloomberg. Customers are being asked to remove their assets from the US-based exchange with assurances around the exchange’s liquidity in the interim. (Update: Bankman-Fried has resigned and his company has declared bankruptcy. Read more.)

And last but not least, the SEC and CFTC are rumored to be starting investigations. Could it get any uglier?

Senate speaks

Back in Congress, leaders from the Senate Agricultural Committee expressed urgency and made clear that their still-in-committee DCCPA is alive and well despite FTX’s fall from grace.

Chairwoman and Senator Debbie Stabenow (D, MI) tweeted: “The recent collapse of a major cryptocurrency exchange reinforces the urgent need for greater federal oversight of this industry. Consumers continue to be harmed by the lack of transparency and accountability in this market. It is time for Congress to act.”

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