The swift and surprising collapse of crypto exchange FTX last week continues to send shock waves across the crypto industry and beyond – and Capitol Hill isn't immune.
Former FTX CEO Sam Bankman-Fried was, until last week, a major political donor – he gave $5.2 million to U.S. President Joe Biden’s presidential campaign and spent another $40 million supporting mainly Democratic candidates ahead of the November midterm elections – and an influential figure in Washington.
Bankman-Fried regularly met with regulators and lawmakers, weighing in on how the crypto industry should be regulated. He was a vocal supporter of one bill, in particular: the bipartisan Digital Commodities Consumer Protection Act (DCCPA), a still-in-progress bill backed by Senate Agriculture Committee Chairwoman Sen. Debbie Stabenow (D-Mich.) and ranking member, Sen. John Boozman (R-Ark.).
This year, Bankman-Fried has donated at least $26,600 to Stabenow and $8,700 to Boozman. In June, he donated $16,600 to Sen. Kirsten Gillibrand (D-N.Y.), who signed onto the bill in September, and in 2021, he donated $5,700 to Sen. Cory Booker (D- N.J.), another co-sponsor of the bill.
That bill sits at the intersection of the existential question now facing the crypto industry: Why did FTX collapse and how can repeats be prevented? FTX was a centralized exchange, a single point of failure – that did indeed fail, seemingly because of choices made by Bankman-Fried – in the crypto ecosystem.
Many crypto purists, on the other hand, argue this is a moment to double down on crypto’s origin story, which critics of the DCCPA argue the bill would undermine. Born in the wake of the 2008 financial crisis, Bitcoin was proposed as a decentralized way of running a financial system. Today, that idea lives on in decentralized exchanges (DEXes) like Uniswap and the rest of decentralized finance (DeFi).
Effects on DeFi
DCCPA’s detractors say it would effectively kill DeFi in the U.S. by making it impossible for large players like Uniswap to comply, which would entrench centralized exchanges. The argument is basically that the regulatory requirements outlined in the latest draft of the bill (posted to GitHub by Delphi Labs general counsel Gabriel Shapiro) amount to a de-facto ban on DeFi.
In a statement issued on Nov. 10, Boozman said the collapse of FTX only reinforced the need for more federal oversight of the crypto industry.
“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,” Boozman said.
With his statement, Boozman joined a bipartisan group of lawmakers, including Sens. Cynthia Lummis (R-Wyo.), Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio), who have expressed concern about the collapse of FTX and the need for crypto regulation.
As one of the most fully formed pieces of potential crypto legislation, it seems the DCCPA is not, in fact, dead, despite the shadow cast over it by Bankman-Fried’s ruined legacy.
The DCCPA aims to amend the Commodity Exchange Act to give the Commodity Futures Trading Commission oversight of the crypto spot market. Under the DCCPA, crypto broker-dealers would be required to register with the CFTC and submit to oversight from the federal regulator.
The bill can be roughly divided into two sections: requirements for “crypto commodity platforms,” which includes brokers, dealers, custodians and exchanges, and requirements for the CFTC.
Crypto commodity platforms would be required to maintain a relationship with the CFTC similar to other commodity dealers. For example, they would need to keep good records for at least five years, share information with the CFTC upon request, appoint a chief compliance officer and submit to provisions that protect against “fraud, deceit and manipulation.”
The DCCPA also requires that crypto commodity platforms have adequate financial resources to hold customer funds “in a manner that minimizes the risk of loss or of unreasonable delay in access to the customer property.” Commingling of customer funds with the broker-dealer’s assets is strictly prohibited (something Bankman-Fried has been accused of), as is investing customer funds in anything other than U.S. Treasurys or other “high-quality liquid assets that the Commission may by rule or regulation prescribe.”
Unlike several of its predecessors, the DCCPA also has a lengthy definitions section that carves out exemptions to the rules for non-commodity platform entities, including software developers and validators. The CFTC is also not given jurisdiction over any crypto transactions used in the purchase of a good or service.
The DCCPA also requires the CFTC to produce several reports within 180 days of the bill’s passing – including one on “historically underserved customers” that will examine the racial, ethnic and gender demographics of crypto users and another on the energy consumption of mining cryptocurrencies. If the DCCPA becomes law, both reports will be periodically updated and used to inform future legislation.
The DCCPA also states that the CFTC will be tasked with “international harmonization,” which means working with foreign regulators to create consistent international standards for crypto regulation.
A de-facto ban on DeFi?
The potential impact on decentralized exchanges – seen by many as an attempt by Bankman-Fried to use regulation to push users away from DEXs and toward centralized exchanges including what was his own – has been made only more galling for many DeFi supporters after Bankman-Fried’s alleged fraud was exposed.
The leaked version of the draft, however, contains changes that imply that Stabenow and Boozman are sensitive to concerns that the bill could be interpreted as a blanket ban on DeFi.
In October, Shapiro, the Delphi Labs lawyer, tweeted that the leaked version contains a limited exception to the term “digital commodity trading facility” that removes the word “person” from the definition and adds a line that exempts a person who “develops or publishes software” from the definition – adding that he thought the wording could be a “boon to DeFi/crypto.”
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