Senate FTX hearing: calls for regulation and crypto criticisms aplenty

“Short of enacting draconian authoritarian policies, cryptocurrency cannot be stopped,” said Senator Pat T

United States lawmakers with the Senate Banking Committee had their share of crypto proponents and skeptics in a hearing exploring the collapse of the FTX exchange.

In a Dec. 14 hearing on ‘Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers’, many senators reiterated views on crypto they had held seemingly without considering the events leading up to the collapse of FTX and the arrest of Sam Bankman-Fried. Unlike in a Dec. 13 House hearing — in which FTX CEO John Ray was the sole witness — the Senate hearing featured a mix of anti- and pro-crypto figures from business, entertainment, and higher education.

Pennsylvania Senator Pat Toomey, who has previously expressed support for the U.S. introducing a digital dollar, compared cryptocurrencies to software rather than currencies, arguing that an outright ban of digital assets wouldn’t solve the problems that led to FTX’s financial issues. The Cato Institute’s Jennifer Schulp and investor Kevin O’Leary echoed many of the lawmaker’s sentiments, saying that crypto wasn’t entirely to blame in FTX’s demise, but rather having unregulated companies in charge of user assets.

“The 2008 financial crisis involved obvious misuse of products related to mortgages — did we decide to ban mortgages?” said Toomey. “With FTX, the product is not the instruments that were used, the problem was the misuse of customer funds, gross mismanagement, and likely illegal behavior.”

The senator added:

“Some of my colleagues have suggested somehow pausing cryptocurrency before we pass legislation. This is a profoundly misguided not to mention impossible idea. Short of enacting draconian authoritarian policies, cryptocurrency cannot be stopped.”

Law professor Hilary Allen, one of the crypto skeptics appearing as a witness at the hearing, argued that Bankman-Fried had been lobbying hard to have regulations favorable to his firm under the jurisdiction of the Commodity Futures Trading Commission, or CFTC. Hollywood star Ben McKenzie, who also testified at the hearing, said cryptocurrencies qualified as securities under the Securities and Exchange Commission’s regulatory umbrella.

“Sam Bankman-Fried and the rest of the crypto industry weren’t looking for [regulatory] clarity on the current law,” said Allen. “They were looking for changes in the law that would accommodate the industry. In particular, they wanted to be regulated by the CFTC, and not the SEC. I respectfully submit that Congress should not adopt legislation to that end.”

Different lawmakers proposed alternative legislation aimed at regulating certain parts of the crypto space — though none appeared to stem from the events at FTX. Senator Toomey suggested beginning regulation with stablecoins, pointing to a framework he introduced in April as well as a bill from Senator Cynthia Lummis and SenatoKirsten Gillibrand in June.

Senator Elizabeth Warren, a well known skeptic of cryptocurrencies in Congress, used her time to push associations between digital assets and the financing of terrorism and ransomware payments. Together with Senator Roger Marshall, she introduced a bill requiring additional Anti-Money Laundering, or AML, policies for money service businesses as well as setting up AML rules and review processes at the Treasury Department, SEC, and CFTC.

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Many U.S. lawmakers turned their attention to Bankman-Fried and FTX following the bankruptcy filing of the crypto exchange and allegations the former CEO used user assets to fund investments at Alameda Research. Authorities in the Bahamas arrested Bankman-Fried on Dec. 12 as part of extradition proceedings with the United States. He will be held without bail until at least February.

The Senate hearing was the third exploring the collapse of FTX following a Dec. 1 hearing of the Senate Agriculture Committee and a Dec. 13 hearing of the House Financial Services Committee. The House committee said it plans to hold a second hearing on FTX sometime in 2023.