Crypto giant’s failure exposes cozy Washington ties, weak regulation

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“It is cru­cial that we devel­op a clear under­stand­ing of the chain of events and man­age­ment fail­ures that led to this col­lapse,” said Rep. Brad Sher­man (D‑Calif.), one of the industry’s most vocal skep­tics on Capi­tol Hill. “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.”

Fin­ger-point­ing over who failed to see the col­lapse com­ing has reg­u­la­tors play­ing defense and warn­ing that there was noth­ing they could have done because FTX’s par­ent com­pa­ny is off­shore. The chair of the Com­mod­i­ty Futures Trad­ing Com­mis­sion on Mon­day said it was urgent that Con­gress pass leg­is­la­tion to empow­er his agency.

“We don’t have the lux­u­ry of time any­more,” CFTC Chair Ros­tin Behnam said. “If we wait, we’re just going to be wait­ing for the next crisis.”

The tumult has the poten­tial to upend the Wash­ing­ton cryp­to debate as indus­try cham­pi­ons find their influ­ence dimin­ished. Cryp­to crit­ics like Sen­ate Bank­ing Chair Sher­rod Brown (D‑Ohio) and Sen. Eliz­a­beth War­ren (D‑Mass.), whose warn­ings about the industry’s excess­es were on the verge of being drowned out by its cheer­lead­ers, are try­ing to lever­age the moment to crack down on what’s left of the ail­ing industry.

“My focus has always been on the fraud, scams, volatil­i­ty and out­right theft in the cryp­to indus­try,” Brown said in a state­ment Mon­day. “FTX’s bank­rupt­cy and the many oth­er recent instances of insta­bil­i­ty have proved why we need a com­pre­hen­sive reg­u­la­to­ry approach that pro­tects con­sumers and our econ­o­my from the risks of crypto.”

The cri­sis — which includes alle­ga­tions of poten­tial fraud, mis­used cus­tomer accounts and, by Bankman-Fried’s own admis­sion, ter­ri­ble inter­nal account­ing prac­tices — is threat­en­ing to derail leg­is­la­tion that star­tups in the dig­i­tal asset indus­try had championed.

One FTX-backed bill from the top Demo­c­rat and Repub­li­can on the Sen­ate Agri­cul­ture Com­mit­tee would give the CFTC — the small­er sis­ter agency to the Secu­ri­ties and Exchange Com­mis­sion — broad over­sight over dig­i­tal cur­ren­cy exchanges and bro­ker­ages. The leg­is­la­tion was poised for a com­mit­tee vote in the com­ing weeks, in what would have been a huge vic­to­ry for cryp­to inter­ests try­ing to avoid reg­u­la­tion by the SEC. Lob­by­ists now believe the leg­is­la­tion has been delayed, after Sen. John Booz­man of Arkansas, the lead Repub­li­can co-spon­sor, said it was under­go­ing a “top-down look” in the wake of the FTX collapse.

FTX had lob­bied heav­i­ly in sup­port of the bill from Booz­man and Sen­ate Agri­cul­ture Chair Deb­bie Stabenow (D‑Mich.). Con­gres­sion­al staff also draft­ed the bill in con­sul­ta­tion with lead­ers at the CFTC.

SEC Chair Gary Gensler, who may be vin­di­cat­ed after spend­ing much of the Biden era warn­ing of crypto’s risk to con­sumers, said after FTX’s col­lapse that the bill is “too light-touch” and cit­ed the company’s sup­port for the pro­pos­al. The leg­is­la­tion would let cryp­to trad­ing plat­forms make their own deter­mi­na­tion — through a process known as self-cer­ti­fi­ca­tion — if the tokens on their plat­forms com­ply with finan­cial regulations. 

“This is real­ly a chance to look hard in the mir­ror and say, ‘Are the pro­pos­als that we’re putting for­ward here the right ones or are they a pro­pos­al that’s been flawed from the start?’” said Amer­i­cans for Finan­cial Reform senior pol­i­cy ana­lyst Mark Hays, who advo­cates for tougher cryp­to reg­u­la­tion. “If it’s the lat­ter, they need to go back to the draw­ing board.” 

While Stabenow and Booz­man have said they’d like to move for­ward with the bill, it now faces intense oppo­si­tion from con­sumer advo­ca­cy groups that have blast­ed the mea­sure as an exam­ple of FTX’s polit­i­cal influ­ence. Oth­er cryp­to indus­try play­ers — includ­ing the Blockchain Asso­ci­a­tion, the ven­ture firm Andreessen Horowitz and the DeFi Edu­ca­tion Fund — had also raised objec­tions to the bill because it would restrict decen­tral­ized finance net­works while empow­er­ing cen­tral­ized oper­a­tions like FTX.

“It’s still too hard to get any­thing done any­time soon,” said one lob­by­ist who request­ed anonymi­ty to speak frankly about nego­ti­a­tions over the bill. “There’s going to be more con­ta­gion. They’re going to have to make changes as we get more facts. More com­pa­nies are going to go under. I just don’t see it hap­pen­ing in the lame duck.”

The episode is thrust­ing the CFTC’s role into the spot­light, amid ques­tions about its response to the FTX deba­cle and whether it should be grant­ed new author­i­ty to over­see the industry.

Behnam, who served as an aide to Stabenow before tak­ing the helm of the agency, said law­mak­ers need to give the CFTC more pow­er to reg­u­late dig­i­tal asset mar­kets. He made the pitch as one promi­nent con­sumer advo­ca­cy group — Bet­ter Mar­kets — said the agency “failed mis­er­ably” at super­vis­ing FTX’s Bahamas-based par­ent com­pa­ny via reg­u­la­tion of FTX’s U.S.-based sub­sidiary. Reports that Bankman-Fried’s busi­ness empire tapped into FTX cus­tomer funds echoed the 2011 MF Glob­al bank­rupt­cy, a mishap that occurred on the agency’s watch.

Before FTX’s bank­rupt­cy, Bankman-Fried and FTX U.S. head of pol­i­cy Mark Wet­jen — the CFTC’s for­mer act­ing chair — had been lob­by­ing the agency to sign off on a plan that would have allowed the com­pa­ny to loan mon­ey to retail investors for round-the-clock cryp­to trades. Wet­jen late last week removed the com­pa­ny from his LinkedIn pro­file and delet­ed his Twit­ter account, which had includ­ed his title.

Behnam said the prob­lem was that the CFTC lacked the abil­i­ty to police the activ­i­ties of the cen­tral FTX oper­a­tion in the Bahamas. The CFTC’s inter­na­tion­al reach has been a con­tentious pol­i­cy debate since Con­gress expand­ed its author­i­ty in the wake of the 2008 finan­cial cri­sis, when off­shore deriv­a­tives trad­ing by AIG near­ly top­pled the insurer.

“We don’t have the author­i­ty to go past the reg­u­lat­ed enti­ty itself,” Behnam said, refer­ring to U.S. firms under its juris­dic­tion. “But those are the types of ques­tions that we have to ask to see what those non‑U.S. enti­ties are, what those rela­tion­ships are like, and whether or not we want to pierce through those.”

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