Washington needs a crypto overhaul

[ad_1]

Sam Bankman-Fried, the former cryptocurrency poster boy, has reportedly agreed to be extradited from the Bahamas, to face fraud charges that could keep him confined for decades. The tremors of the collapse of FTX, its crypto-trading platform, continue to reverberate around Washington. During a hearing last Wednesday, Sherrod Brown, the Democratic head of the Senate Banking Committee, said he hoped Bankman-Fried would be brought to justice soon, and added that he owed the American people an explanation.

The thirty-year-old entrepreneur certainly owes FTX’s private clients a fuller account than the pleas of ignorance he offered before he was arrested. But Bankman-Fried is not the only one to have explanations to make. There are also the politicians of both major parties who accepted his campaign donations and advocated for legislation he favored. According to Damian Williams, the U.S. Attorney for the Southern District of New York, the political donations Bankman-Fried made actually came from money he embezzled from clients. Although a number of recipients have now returned tainted money to Bankman-Frieds or donated it to charity, few, if any, have rejected the approach to crypto regulation he advocated.

FTX has followed the standard playbook of influencing Washington, and that’s buying influence on a bipartisan basis, Dennis Kelleher, president of the nonprofit Better Markets, told me last Friday. The centerpiece of Bankman-Frieds’ lobbying efforts was the Digital Commodities Consumer Protection Act, a bill unveiled in August by Debbie Stabenow, a Michigan Democrat who chairs the Senate Agriculture Committee, and John Boozman, a Republican from Arkansas which is the committees. ranking member. The bill’s co-sponsors include Democrat Cory Booker and Republican John Thune, who also serve on the Agriculture Committee. According to news reports, Bankman-Fried or other FTX executives made campaign contributions to Stabenow, Boozman, Booker and other committee members. (He also contributed to Republican Cynthia Lummis and Democrat Kirsten Gillibrand, who co-sponsored another crypto bill introduced earlier this year.)

What does agriculture have to do with crypto? As part of this country’s balkanized system of financial regulation, the Securities and Exchange Commission regulates financial securities, such as stocks and bonds. Senate and House committees on agriculture. Gary Gensler, the head of the SEC, has made it clear that he views the vast majority of crypto tokens as securities, implying that the SEC would regulate them. If companies like FTX were required to register with the SEC, they would have to make many public disclosures, for which they would be legally responsible, and, depending on exactly how they register, they might also have to comply with many many other agency requirements relating to conflicts of interest, protection of client accounts and risk compliance. The SEC has long regulated retail markets and retail brokerage firms.

But, rather than giving the SEC responsibility for overseeing the crypto industry, the two bills coming out of the Senate Agriculture Committee would go in the opposite direction, said law professor Hilary J. Allen. at American University, while testifying last week at the Senate Banking Committee hearing. The two are creating regimes for crypto assets to be regulated by the CFTC Critics say this is potentially a big deal. The CFTC is widely considered the crypto industry’s preferred regulator, Allen continued. The CFTC is a much smaller agency with a much smaller budget than the SEC, it has no statutory investor protection mandate, and it has limited experience regulating retail-dominated markets. Kelleher told me that handing over the lead regulator to the CFTC would be a massive win for the crypto lobby. The CFTC has been chronically underfunded and is easily penetrated and captured by an industry it is supposed to regulate, he said. FTX and Other Crypto Firms Wanted the Weakest Regulator Possible, and That’s the CFTC

Proponents of the two crypto bills say their critics misrepresent legislation that would provide effective dual oversight of the crypto industry, with the CFTC regulating crypto tokens classified as commodities and the SEC regulating crypto tokens classified as commodities. securities. I have not been shy about encouraging bills that contemplate the shared responsibility of the CFTC and the Securities and Exchange Commission, said Rostin Behnam, chairman of the CFTC, during a hearing of the Senate Committee on the agriculture, at the beginning of the month. Behnam, who previously served as senior counsel for Senator Stabenow, also said he was encouraged by bipartisan support for a regulatory approach that would bring transparency, accountability, stability, customer protection and oversight of digital assets.

However, questions have also been raised about the relationship between CFTC management and the crypto industry. At a New York University Law School event in September, Behnam said the price of bitcoin could double if there was a CFTC-regulated market. FTX hired a number of former agency officials and lobbied the agency aggressively. In recent congressional testimony, Behnam confirmed that he and his staff had met with Bankman-Fried ten times over the past fourteen months, and had also spoken on the phone and exchanged messages with the now-disgraced entrepreneur. He said the meetings related to a request by FTX to allow one of its affiliates LedgerX, a digital platform where investors trade derivatives related to cryptocurrencies to settle trades without the involvement of no other financial intermediary. There were strong feelings about the company’s app, Behnam said, noting that he approached it by being transparent and open with FTX. The LedgerX application had not been approved at the time FTX collapsed, and Behnam pointed out that the derivatives platform, which was overseen by the CFTC, survived the explosion unscathed, with funds from its customers intact. It is the regulation that works, he insisted.

At the same hearing, Stabenow said that passing the legislation she and Boozman proposed could have prevented the FTX from collapsing, a claim Kelleher dismissed as unsubstantiated. Other crypto advocates still argue that subjecting the industry to intrusive regulation would hamper its ability to innovate and hurt the economy. This is a deeply dubious claim. While the blockchain technology that underpins the crypto industry may have applications that could eventually expand financial access and spur economic growth, that hasn’t happened yet, at least in the United States. Indeed, if this year’s crises in the crypto sector have indicated anything, it’s that much of what passes for crypto innovation involves encouraging people to speculate, often with money. borrowed money, on digital assets that have little or no intrinsic value and can swing wildly in the market. assess. Crypto has demonstrated little utility in terms of real-world capital formation or financial inclusion…and so the public doesn’t need the industry to thrive, Professor Allen said, in his testimony to the Senate Banking Committee. What the public really needs is protection, individual investors need protection from crypto frauds, and our wider financial system also needs protection from booms and busts. cryptos.

[ad_2]