Congress and Industry Attempt Reset After FTX Debacle

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.”

Ranking Member and Senator John Boozman (R, AR) of Senate Ag issued a statement directly commenting on the state of DCCPA: “The events that have transpired this week reinforce the clear need for greater federal oversight of the digital asset industry. That has been our goal since we began drafting the Digital Commodities Consumer Protection Act of 2022. Working closely with our colleagues, financial regulators, academics and a wide array of industry participants, we introduced a robust bill that aims to bring transparency and accountability to the market.”

Boozman added, “In light of these developments, we are taking a top-down look to ensure it establishes the necessary safeguards the digital commodities market desperately needs. Chairwoman Stabenow and I remain committed to advancing a final version of the DCCPA that creates a regulatory framework that allows for international cooperation and gives consumers greater confidence that their investments are safe.”

Stressing “top down” may emphasize that the Senators are in charge of DCCPA –not industry players such as Bankman-Fried who had been publicly working with Congress on DCCPA up until now.

Senate Banking committee Ranking Member Senator Pat Toomey (R, PA) decried the risks to customers in a tweet thread and said, “More broadly speaking, the crypto sector has been operating with far too much ambiguity because (a) regulators refuse to give well-meaning actors clear guidance and (b) lawmakers refuse to act. We should start by finding common ground in the lame duck with stablecoin regulation.”

Toomey’s partner across the aisle on Senate Banking, Chairman and Senator Sherrod Brown (D, OH), did not mince words in his statement. From the Democrats Senate Ag committee Twitter account, he said, “The recent collapse of FTX is a loud warning bell that cryptocurrencies can fail, and just like we saw with over-the-counter derivatives that led to a financial crisis, these failures can have a ripple effect on consumers and other parts of our financial system.”

The perception that “Cryptocurrencies can fail” is a potential warning sign to crypto supporters in DC that the fog is thickening as the facts of FTX’s implosion do no support a failure of a cryptocurrency. In fact, it appears to be mismanagement.

Not to be outdone, Senator Elizabeth Warren (D, MA), who is also on Senate Banking, banged on the enforcement “drum” saying, “The collapse of one of the largest crypto platforms shows how much of the industry appears to be smoke and mirrors. We need more aggressive enforcement and I’m going to keep pushing [the SEC] to enforce the law to protect consumers and financial stability.”

The House

Over in the House, Chairwoman and Rep. Maxine Waters (D, CA) on the House Financial Services Committee issued a statement of her own regarding FTX, urging robust federal oversight for crypto. She concluded: “I’ve been working around the clock with Ranking Member Patrick McHenry to craft bipartisan legislation that establishes a federal framework for stablecoins in order to begin building the safeguards needed to protect customers’ assets and insulate our financial markets from contagion. This week’s news further highlights the urgent need for legislation.”

At nearly the same time as Rep. Waters’ statement, Rep. Patrick McHenry (R, NC) tweeted his dissatisfaction with SEC Chair Gary Gensler: “When the ‘cop on the beat’ is too busy chasing headlines to do the work of protecting investors—investors get hurt. This is why [Republicans on Financial Services have] urged Chair Gensler to focus on the SEC’s core mission, while Congress works to provide clear rules of the road for digital assets.” Earlier in the week, McHenry stated his interest in looking into the FTX mess.

Regulators speak

Among regulatory agencies, SEC Chair Gary Gensler (CNBC interview) and CFTC Commissioner Kristin Johnson (Coindesk) offered their takes on recent events. Chair Gensler countered sentiments that the proper regulation for crypto does not exist saying, “It’s a field that’s significantly non-compliant, but it’s got regulation.” Commissioner Johnson said the opposite, “There is a regulatory gap… that really limits our ability.”

The industry

Representatives of Blockchain Association brought an industry perspective that emphasized the importance of creating effective legislation and regulation but not to rush it. The perspective also tried to provide some distance to FTX and its founder and industry efforts in DC to date.

Blockchain Association’s Director of Government Relations Ron Hammond offered a lengthy must-read Twitter thread which distanced FTX’s potential impact on legislation: “First, it is important to highlight just how present [Sam Bankman-Fried] was in DC. No CEO (crypto or not) has been personally lobbying in DC to this extent. This access to policymakers and staff was welcomed. Between his personality and apparent success, the Hill largely liked SBF.”

That said, his conflicts of interest – beginning with political campaign donations – created issues, and may still, suggests Hammond.

And then regarding DCCPA, Hammond continues, “FTX took the approach that they didn’t want perfect definitions to get in the way of passing consumer protection legislation.” But at the same time, many other industry players wanted better and “advocated for tweaks to understand and regulate DeFi better.”

He concludes, “Lobbying usually isn’t as loud as it is in the crypto space. The ethos of this space though is transparency and community engagement which is why so many Members of Congress and staffers actively read crypto twitter. No one person is the ‘savior’ and DC knows that. Buckle up.”

Hammond’s colleague and Head of Government relations emphasized patience on all sides, “No doubt, FTX reinforces the need to consider new laws for custodial platforms, but it’ll take time to get those laws right. Let’s let the dust settle and get to it in 2023.”

From here

It all comes down to what to do about decentralized finance when you’re a centralized government. What are the acceptable trade-offs for both sides in integrating the two? We shall see.