Senate Banking Committee holds Valentine’s Day hearing on 2022 crypto crash

The U.S. Senate Banking Committee discussed last year’s cryptocurrency market crash and assorted company collapses during a hearing on Tuesday, Feb. 14.

Chairman Brown calls for regulations

Several individuals commented on the state of the cryptocurrency industry. Chairman Sherrod Brown took a harsh stance on the matter, stating:

“These crypto catastrophes have exposed what many of us already knew: digital assets … are speculative products run by reckless companies that put Americans’ hard-earned money at risk. Not surprising from an industry thatwas created to skirt the rules.”

Brown said in his opening statement that the crypto market lost $1.46 trillion in 2022, while cybercriminals stole $3 billion and companies cut 1,600 jobs (a number that other estimates place as high as 23,600). He also remarked on the crypto industry’s absence from the Super Bowl this year and discussed the extent of FTX’s collapse.

Brown noted that although the crisis didn’t spread to the broader financial system, that possibility was “glimpsed” when several crypto banks needed loans after bank runs.

He suggested that “basic, commonsense principles” applied elsewhere should be imposed on the crypto industry. His recommendations included consumer protection, prevention of conflict of interest, and transparency requirements.

Scott calls for SEC enforcement

Ranking Member Tim Scott suggested that there is room for safe financial innovation but acknowledged Brown’s concerns over the current state of regulation.

Specifically, Scott criticized the U.S. Securities and Exchange Commission’s attempts at regulatory enforcement during 2022’s market crash. He said:

“The SEC has failed to take any meaningful, preemptive action to ensure this type of catastrophic failure does not happen again.”

Scott said investors need to know why the SEC did not take action before FTX collapsed and why millions of dollars of cryptocurrency investments can no longer be recovered. He added that this concern applies to other companies and projects, such as Terra, Celsius, Voyager Digital, and BlockFi — all of which failed in 2022.

Though the SEC has taken action against many crypto companies, it has often done so after the collapse of said companies. Several notable companies remain engaged in bankruptcy proceedings and have not returned funds to their customers.

Scott also observed that SEC chair Gary Gensler was absent during today’s Senate hearing despite making other public appearances. He said that Gensler “should be here testifying with us this morning” and said that Congress “needs to hear from him very soon.”

Witnesses comment on industry

Three witnesses also gave statements during the hearing.

Lee Reiners, a policy director at the Duke Financial Economics Center, noted that some cryptocurrencies are commodities rather than securities. The CFTC regulates commodity derivatives, not commodity spot markets such as crypto exchanges. As such, Reiners urged Congress to close that regulatory gap and laid out options for doing so.

Yesha Yadav, a Vanderbilt University Law School professor, suggested that a public regulatory framework could allow crypto exchanges to partially self-regulate. This would see companies fund their regulatory efforts and save costs for taxpayers.

Linda Jeng, a Georgetown Institute of International Economic Law professor, suggested that the supposed “crypto collapse” should be put in context. She said that the entire industry should not be declared a failure due to the collapse of certain companies. She added that the cryptocurrency market cap is still larger than $1 trillion and observed that full-time crypto developers grew 8% year-over-year in 2022.

The prepared remarks from each speaker did not focus on high-profile actions in recent days, such as those against Kraken’s staking service or Paxos’s BUSD stablecoin. Those developments will undoubtedly be a topic of future discussions.

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