FTX Failure Divides Lawmakers Over Difficulty Getting Crypto Regulation

[ad_1]

John J. Ray III, CEO of FTX Group, testifies at the US House Committee hearing (Photo by Nathan Howard/Getty Images)

NC’s Patrick McHenry Defends Cryptocurrency Industry at House Financial Services Committee Hearing; Senator-elect Ted Budd is a no-show

Members of a U.S. House committee disagreed at a Tuesday hearing on whether more aggressive federal regulation would have protected customers from the crypto firm’s collapse -FTX currency and the alleged fraud of its founder, Samuel Bankman-Fried.

Lawmakers at the House Financial Services Committee’s four-hour hearing appeared to view the ongoing scandal around Bankman-Fried, who was arrested in the Bahamas on Monday, through the lens of their existing stances on cryptocurrency, a relatively technology news whose regulations are still being written.

Meanwhile, the only witness in the hearing, FTX CEO John Jay Ray III, who was hired last month to oversee FTX’s bankruptcy, called the crypto scheme an old-fashioned embezzlement. . Bankman-Fried was scheduled to appear before Congress until his arrest.

A federal prosecutor also alleged Tuesday afternoon that Bankman-Frieds’ crimes included unspecified violations of campaign finance law in contributions to federal candidates from both political parties.

A handful of Democrats on the House panel argued that Bankman-Fried would not have been allowed to easily mix client funds and lend each other money, as federal prosecutors alleged if FTX had done so. subject to more aggressive surveillance.

Some Republicans, however, said the Bankman-Frieds actions were almost identical to other fraud schemes using other financial instruments and should not be viewed as an inherent problem with crypto.

Bankman-Fried funneled FTX client money to Alameda Research, a hedge fund he almost wholly owned, said committee chair Maxine Waters, a California Democrat, allowing it to effectively gamble with client money without their knowledge or consent.

If FTX was registered as a stock exchange, several laws would have required segregation of client assets and prevented such obvious conflicts of interest, she said.

Another California Democrat, longtime crypto critic Brad Sherman, said FTX’s example confirmed his view that cryptocurrency had no purpose other than to help criminals avoid to be detected.

My fear is that I do see Sam Bankman-Fried as just one big snake in a crypto garden of Eden, Sherman said. The thing is, crypto is a snake garden.

Representative Patrick Mchenry

The new president says that FTX is unique

But others, including top Republican Patrick McHenry, a North Carolina man who is expected to become the committee’s chairman when Republicans take control of the U.S. House in January, said Bankman-Fried was an example. unique.

McHenry compared Bankman-Frieds’ conduct with famous fraud schemes related to railroads, real estate, and the Enrons accounting scandal. These crimes meant nothing about the underlying industries, and Bankman-Frieds shouldn’t be forced to challenge the crypto, he said.

It appears to be the same old fashioned fraud, just using new technology, McHenry said. We must separate the bad deeds of an individual from the good created by an industry and an innovation. I believe in the promise of digital assets and those around the world that rely on blockchain technologies.

U.S. Representative Tom Emmer, the No. 3 Republican in the House, also said that Bankman-Fried and not the crypto itself was to blame for billions of dollars in customer losses.

I encourage my colleagues to understand the Sam Bankman-Frieds scam for what it is: a failure of centralization, a failure of business ethics and a crime, the Minnesota Republican said. It is not a failure of technology.

Emmer, co-chair of the bipartisan Congressional Blockchain Caucus, has been a leading advocate in the House for crypto companies. He led a letter in March that opposed the Securities and Exchange Commissions approach to enforcing cryptocurrencies. He said recently that the failure of FTX was an example of a flawed application.

Senator-elect Ted Budd

As chairman of the Republican National Congressional Committee, Emmer raised $2.75 million from FTX employees, including co-CEO Ryan Salame, for GOP candidates in the 2022 election cycle. He also agreed $5,800 from Salame, the maximum allowed by law for his own re-election race.

U.S. Representative Ted Budd, another member of the Congressional Blockchain Caucus who signed the March letter and received more than $500,000 from Salames’ independent political action committee on spending, sits on the financial services panel but was not not present at Tuesday’s hearing.

Budd, a Republican from North Carolina, won a U.S. Senate seat last month and will take office in January.

campaign money

The political contributions were part of the Bankman-Frieds scheme, prosecutors said.

Shortly after the hearing, Damian Williams, the lead prosecutor for the Southern District of New York where Bankman-Fried is being prosecuted, expanded on the allegations at a press conference.

Williams described four general areas of misconduct alleged by authorities.

The founder of FTX defrauded customers of the crypto exchange known as FTX.com, lenders of the hedge fund known as Alameda Research and FTX investors and violated campaign finance laws said Williams, calling it one of the biggest financial frauds in American history.

Bankman-Fried diverted billions of dollars belonging to FTX clients to the hedge fund. He lied to FTX investors about the source of the money, Williams said.

After taking money from FTX clients and putting it into the hedge fund, he also broke campaign finance law by disbursing tens of millions of dollars in hedge fund payouts to political candidates in both parties, using wealthy co-conspirators as intermediaries, Williams said. , without naming any of the political beneficiaries or co-conspirators.

All of that dirty money was used in service of Bankman-Fried’s desire to buy bipartisan influence and impact the direction of public policy in Washington, he said.

Bankman-Fried was previously known to be a top Democratic campaign funder, contributing $27 million to a political action committee that backed Democrats in 2022.

During the hearing, Sherman urged his colleagues to reject Bankman-Frieds’ desired influence and not pass a bill he said would create unserious baby regulations on crypto.

Don’t throw out Sam Bankman-Fried and then pass his bill, Sherman said. I’m afraid that’s happening because Sam wasn’t the only crypto bro with PACs and lobbyists, and there’s no PAC or lobbyist here to work for effective tax or penalty enforcement.

Sherman did not specify any particular bill, but Bankman-Fried was a strong supporter of a measure that would give the Commodity Futures Trading Commission more power to regulate cryptocurrencies and other digital products.

Not sophisticated

Panel members lamented that they were unable to question Bankman-Fried under oath, with some speculating that prosecutors may have added a charge of lying to Congress to his indictment.

Ray, an experienced bankruptcy attorney who was also named CEO of Enron in 2001 to oversee the company’s bankruptcy triggered by a fraud scandal, has not committed to a position on the appropriate role for federal regulation. in cryptography.

Ray said FTX’s poor record keeping and lack of internal controls were among the worst he had ever seen.

I’ve never seen a complete lack of record keeping, absolutely no internal controls, he told New York Democrat Nydia Velzquez, and called it old-fashioned embezzlement in an exchange with another member.

He also said it was not a sophisticated plan.

It just takes money from customers and uses it for your own purposes, he said. Not sophisticated maybe in the way that they were able to kind of hide it from people, frankly, right in front of their eyes, but it’s not that sophisticated at all. It’s just an old embezzlement.

[ad_2]