Cryptic crypto

The road to crypto regulation starts with a string of Senate and House hearings

The SEC and the CFTC are both trying to take the lead on crypto regulation

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It’s unclear if Sam Bankman-Fried will be at any of the Senate or House hearings.
It’s unclear if Sam Bankman-Fried will be at any of the Senate or House hearings.
Photo: Saul Loeb (Getty Images)

The US Congress wants to take a closer look at how FTX fell apart, so that it can prevent the next FTX-like implosion.

The US Senate Agriculture Committee will hear the first of several Congressional hearings on crypto tomorrow (Dec. 1). That will be the first of many public probes into what went wrong at FTX, the crypto exchange founded by Sam Bankman-Fried. Eventually, these hearings will help draw up more robust crypto regulation.

At tomorrow’s session, titled “Why Congress needs to act: Lessons learned from the FTX collapse,” Rostin Behnam, the chair of the Commodity Futures Trading Commission (CFTC), is expected to testify. He will likely outline recommendations for better regulating crypto.

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While federal agencies like the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) continue to investigate the FTX crash in detail, policymakers want the bigger picture—not just so that the industry as a whole can learn lessons but also so that new rules can be formulated to avert future crypto implosions.

When are the other FTX hearings?

The US House Financial Services Committee was the first to announce an investigation into the FTX collapse, on Nov. 16, but it did not set a date at the time. Yesterday (Nov. 29), the committee announced that its first hearing is scheduled for Dec. 13.

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The House expects Bankman-Fried, as well as representatives from his trading firm Alameda Research and the rival crypto exchange Binance, to be present at the hearing.

The Senate Banking Committee also plans to hold a meeting in December.

The damage done by FTX: By the digits

1 million: The number of customers and other investors facing billions of dollars in total losses, after FTX filed for bankruptcy on Nov. 11

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$8 billion: The financial hole at FTX, before filing for bankruptcy

$3 billion: The combined sum that FTX owes to its 50 largest creditors

$226 million: The sum that FTX owes its largest creditor

$175 million: The amount that LedgerX—one of the solvent structures of Sam Bankman-Fried’s crypto empire—will make available for use in FTX’s bankruptcy proceedings, as reported by Bloomberg. The money comes from a $250 million fund that LedgerX had earmarked for use to finance regulatory approvals that would enable exchanges to clear crypto derivatives trades without intermediaries. That plan has been scrapped.

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$32 billion: FTX’s valuation, days before its liquidity crisis came to the fore

Who should oversee crypto?

In March, US president Joe Biden signed an executive order for the “responsible development of digital assets.” In September, his administration released its first-ever crypto framework, which emphasized the risks of crypto. The document laid out some broad, vague ideas for regulation, but did not go into specifics.

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What it did do, though, was urge several agencies to play a role in navigating this new terrain:

  • The SEC and CFTC should “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.”
  • The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) should “redouble their efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.”
  • The Financial Literacy Education Commission (FLEC) should “lead public-awareness efforts to help consumers understand the risks involved with digital assets, identify common fraudulent practices, and learn how to report misconduct.”
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For the most part, two agencies are jockeying for the right to regulate crypto, and one is closer to taking the lead.

The SEC is gunning for it...

In a September speech, Gary Gensler, the chair of the SEC, said “the vast majority” of the 10,000 tokens in the crypto market are securities. “These are not laundromat tokens: Promoters are marketing and the investing public is buying most of these tokens, touting or anticipating profits based on the efforts of others,” he said. “Therefore, investors deserve disclosure to help them sort between the investments that they think will flourish and those that they think will flounder. Investors deserve to be protected against fraud and manipulation.”

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Gensler wants companies to register with the SEC, provide investors with more information, and be more up front about the risk of digital assets—even if the reportage is tailored to give people peace of mind about the anonymity of blockchain-based transactions.

...but the CFTC seems to have more support

As early as 2015, the CFTC was going after virtual currencies, filing cases against illegal offerings and wash trading (a form of market manipulation in which an investor simultaneously sells and buys the same financial instruments).

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The agency, which oversees the physical commodities markets, believes it should lead the charge in the crypto world.

Congress is leaning towards the CFTC as well. A bill introduced in August, called the Digital Commodities Consumer Protection Act, aims to give jurisdiction to the agency.

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But Americans for Financial Reform, a non-profit, and two leading financial regulatory experts warned against putting CFTC in regulagory charge. In a detailed September letter, they cited the lack of sufficient protections for retail investors and the problems with self-certifications, among other things.

If Bankman-Fried could pick, he’d go with the CFTC—he has said as much. In fact, most crypto players would, because they believe it’ll be the more lenient agency out of the two. The agency that spoke of “do no harm” and a “light-touch” approach back in 2016 has changed its tune somewhat since then, though. It will not go easy on anyone, Behnam said.

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Quotable: Wait-and-watch before regulating

“Before its collapse last week, FTX and its CEO Sam Bankman-Fried spent enormous amounts of money buying access and influence to get Congress to quickly pass its special interest legislation putting the smallest and least funded financial regulator, the CFTC, in charge of the complex, sprawling crypto industry. FTX and its allies did that even though some proposed legislation gutted the SEC’s ability to properly police the capital markets, putting at risk the deepest, most liquid capital markets in the world at risk.

The CFTC Chair de facto endorsed both these FTX endorsed bills and, next to Sam Bankman-Fried himself, appears to have pushed the hardest for them to be passed, including last week when he said legislation should be passed “no questions asked.” This ready, shoot, aim approach to legislation should be rejected. In light of the FTX’s collapse and the apparent loss of billions of dollars to investors and customers, reportedly due in part to potentially illegal if not criminal conduct, there are lots of questions that should be asked and answered before there is any legislation, especially legislation endorsed and pushed by FTX.”

-  Dennis M. Kelleher, co-founder, president and CEO of the non-profit, non-partisan, and independent organization Better Markets, founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets

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