The crypto industry is calling for U.S. regulations as the epic failure of FTX drags at the sector. Most regulators say they can’t do the job without more powers from Congress. So far, a sound-and-fury campaign from lawmakers hasn’t shown a path forward.
Any path will almost certainly depend on Sen. Sherrod Brown (D-Ohio), the chairman of the Senate Banking Committee, who concluded an FTX hearing Wednesday with a pointed question:
“Do you think crypto platforms could mostly comply with actual regulations?” he asked of witness Hilary Allen, a professor at American University’s law school who is a critic of the digital assets industry.
“No, I don’t,” she said. “And I think when they’re calling for regulator clarity, what they’re asking for actually is bespoke regulation that they can comply with.”
“Good answer,” he said.
Brown and other lawmakers in the hearing settled into the lanes the parties have established in the wake of FTX: condemnation and suspicion of cryptocurrencies from Democrats, and an insistence from Republicans that the technology isn't to blame. But the hearing did little to signal what they might do about the industry next year, when crypto legislation is expected to really get rolling.
The chairman hinted that one priority may be going after the structure of the big crypto firms, which routinely combines exchange, lending, custody and investing functions all under the same roof in ways that would be outlawed in the more closely regulated U.S. financial industry.
“If we are going to learn from FTX’s meltdown, we must look closely at the risks from conflicts at crypto platforms that combine multiple functions,” Brown said. “We can look to existing banking and securities laws for time-tested approaches.”
FTX and Alameda Research, the trading firm also founded by Sam Bankman-Fried, commingled their funds and accounts, according to the criminal charges and the findings of FTX's current CEO, John Ray III.
The Securities and Exchange Commission (SEC) is still leading the way in crypto oversight via enforcement actions. On Tuesday the SEC accused FTX and former CEO Sam Bankman-Fried of defrauding investors. SEC Chair Gary Gensler has insisted that his agency is fine moving ahead with the powers it already has to force digital assets companies to comply with securities regulations. He’s warned the industry the standoff between his agency and crypto firms is nearing its end.
But Brown and other regulators, such as Treasury Secretary Janet Yellen, have argued the answer has to be a wider effort across the federal government. Such a legislative solution would likely involve debates in several committees next year and may take months to make significant progress.
Any action from the Democrat-controlled Senate will also have to mesh with the views of a Republican-controlled House of Representatives for at least the next two years. While the industry has enjoyed a period of some bipartisanship, the drama around FTX may have widened the rift a bit. Committee members such as Sen. Jon Tester (D-Mont.) questioned whether establishing regulations would give the industry too much credibility.
The committee had initially meant to have Bankman-Fried testify, but he'd refused the invitation even before being arrested this week. The committee also didn't have CEO Ray, who appeared Tuesday before a House committee.
Instead, the Senate witness list included Kevin O’Leary, a former spokesman for FTX who said crypto's problems could be solved with regulation; Jennifer Schulp from the libertarian Cato Institute; and Ben McKenzie Schenkkan, a television actor who has written about crypto.
A number of Republican senators were no-shows at the FTX hearing, and the crypto views of Sen. Tim Scott, (R-S.C.), who is set to serve as the committee’s ranking Republican in the next congressional session, remain an open question. He’s replacing Sen. Pat Toomey (R-Pa.) in that role, and Toomey has been one of the industry’s most reliable defenders on Capitol Hill.
Toomey, who is retiring from the Senate in the next couple of weeks, said the actions inside FTX seem to have been illegal and Bankman-Fried’s arrest in the Bahamas was no surprise to anybody, “with the possible exception of Mr. Bankman-Fried.” But he argued against blaming digital assets.
“There’s nothing intrinsically good or evil about software,” he said. “FTX and cryptocurrencies are not the same thing.”
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