Senator Debbie Stabenow (D-MI) speaks at a news conference on the U.S. Capitol in Washington, DC, March 16, 2021.
Kevin Dietsch | Pool via Reuters
The shocking collapse of cryptocurrency exchange FTX has increased the urgency in Congress to know what went fallacious and pass laws to try to stop one other debacle that may affect a whole bunch of 1000’s of investors.
One bill, the Digital Commodities Consumer Protection Act, introduced in August, gives the Commodity Futures Trading Commission more authority to control digital commodities like FTX.
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The bill arrived before FTX’s collapse ignited fresh debate over the way to protect consumers within the relatively young and untamed crypto industry. It’s amongst a handful of solutions lawmakers will consider as they start to probe the implosion of FTX with high-stakes hearings this week — and take a look at to implement safeguards across the industry.
Recent FTX CEO John J. Ray is scheduled to testify before the House on Tuesday. Former FTX CEO Sam Bankman-Fried was also set to testify on the House hearing — and had refused to testify in a Senate hearing set for Wednesday — before his arrest within the Bahamas Monday night.
Bankman-Fried was charged in a U.S. indictment with eight criminal counts: conspiracy to commit wire fraud and securities fraud, individual charges of securities fraud and wire fraud, money laundering and conspiracy to avoid campaign finance regulations.
The corporate filed for Chapter 11 bankruptcy in November after revelations that Alameda Research, a trading firm founded by Bankman-Fried, had secretly borrowed and traded billions of dollars from FTX customers.
“Stakeholders from all sides, providers, customers, and lawmakers, ought to be closely watching this space, since it is obvious that Congress is not going to have the option to disregard an increasingly dissatisfied public’s call to motion, and there may be lots of potential to get this fallacious,” Jenny Lee, a partner at law firm Reed Smith and a former bank regulator, told CNBC.
Sen. Debbie Stabenow, D-Mich., the DCCPA’s sponsor and chair of the Senate Committee on Agriculture, Nutrition and Forestry, which oversees commodities, said the bill will close the gap in federal regulation of spot crypto assets that are usually not considered securities. This is applicable to some digital currencies. Securities are regulated by the Securities and Exchange Commission.
“The DCCPA doesn’t take authority away from other financial regulators. Nor does it make the CFTC the ‘primary’ crypto regulator,” Stabenow said during an agriculture committee hearing Dec. 1. “Because crypto assets will be utilized in many alternative ways, no single financial regulator has the expertise or the authority to control your complete industry.”
Joe Silvia, an attorney who advises financial institutions on corporate and regulatory matters, told CNBC that had the bill already been law, it could have helped to avoid the FTX debacle.
“I believe the truth is that if there was actual transparency that the laws could be getting at … there would not be folks, I might hope, knowingly depositing their money with an exchange knowing that the exchange was taking that cash and using it for proprietary trading with a sister company,” Silvia said.
But Lee said consumer advocates, crypto enthusiasts and lawmakers are “going to have loads of reasons to take offense on the laws.”
What the DCCPA does
The bill would require entities searching for to change into digital commodities platforms to register with the CFTC as a commodities broker, a custodian, a dealer or trading facility. Brokers could be required to ascertain fair, objective prices, arrange risk management systems and conform to business product standards, while trading facilities must provide a competitive, open marketplace for transactions and protect customers from abuse.
The bill would also establish core principles that platforms must abide by, including providing records of transactions to the CFTC when requested.
The commission would change into the rulemaking authority on margined, leveraged or financed digital commodity trades. Under the bill, digital commodity platforms would change into financial institutions under the Bank Secrecy Act, beholden to assist the U.S. government detect and forestall money laundering.
Sen. Cory Booker, D-N.J., a co-sponsor of the bill and a member of the agriculture committee, said the bill would have “solved many problems we have had recently” — if FTX had been registered in the US. The corporate is headquartered within the Bahamas.
“Lots of the actions which were allegedly perpetrated even have been crimes on this country for over a century,” Booker said in the course of the Dec. 1 hearing. “And so the laws shouldn’t be going to resolve every little thing. But I believe it is vital that we move forward with providing a regulatory framework that may protect consumers.”
Bankman-Fried lobbied for the DCCPA
Despite the allegations later made against him and his company, Bankman-Fried supported the DCCPA. FTX lobbied for the bill greater than some other laws in 2022, in response to watchdog OpenSecrets.
Brandon Neal, chief operating officer of decentralized finance protocol Euler Finance, told CNBC that Bankman-Fried “attempted to shape this piece of laws in a way that may have been detrimental to decentralized finance.”
An earlier draft of the DCCPA was said to effectively ban decentralized finance providers, or DeFi, that are services on public blockchains that allow users to borrow, lend and trade crypto assets without paperwork or a 3rd party.
DeFi supporters have argued the bill favors exchanges comparable to FTX, in response to The Block, a digital assets news website.
Neal said the bill Bankman-Fried lobbied for “would have built a moat around his now-defunct exchange, FTX.”
CFTC Chair Rostin Behnam told the agriculture committee on the Dec. 1 hearing that he couldn’t speak to FTX’s motivations for supporting the bill.
“The remarkable thing is to give it some thought within the context of what we have learned concerning the FTX entities and just enthusiastic about the bill that [Sens. Stabenow and Boozman] introduced. [FTX] would have been to this point out of compliance, that it just would not have been possible,” he said.
Officials at FTX, who were prolific donors in the course of the midterm elections this 12 months, also donated to members of the agriculture committee.
Stabenow and committee rating member Sen. John Boozman, R-Ark., each received $23,200 in campaign contributions from individuals at FTX, in response to OpenSecrets. Booker received $5,700 from individuals at FTX, in response to The Washington Post.
Days after FTX’s implosion, Lisa Braganca, a former enforcement branch chief on the SEC, said Bankman-Fried’s close association with those on Capitol Hill made her doubtful that Congress would act on the DCCPA.
“Have a look at how much work [Bankman-Fried] was doing to get someone to step up and get regulation done, and now it’s all fallen through,” Braganca said in a Nov. 16 interview with CoinDesk’s “First Mover.”
DCCPA criticized as centralizing authority
Opponents of the laws have criticized the facility it grants to the CFTC relative to other financial regulators.
Lee, the previous bank regulator, said the bill could put disproportionate power within the hands of the CFTC.
“In urging the general public to embrace the DCCPA, the decision to motion makes a plea for a ‘whole of presidency’ approach, but satirically, the DCCPA gives the CFTC disproportionately more power than some other agency that has an interest, including the SEC, the [Consumer Financial Protection Bureau], the prudential banking regulators, and Treasury or [Financial Crimes Enforcement Network],” Lee told CNBC.
“The laws even authorizes the CFTC to choose what’s and shouldn’t be covered inside its own ambit of jurisdiction, and in so doing, may allow the CFTC to place its thumb on the dimensions in a way that edges other regulators out,” she added.
SEC Chair Gary Gensler said Wednesday that his agency already has the tools needed to control crypto firms and other securities.
A Treasury Department official declined to comment on the DCCPA but said its Financial Stability Oversight Council has called for spot market regulation consistent with the bill.
The DCCPA is nice, thoughtful laws, Silvia said. But he cautioned against passing a bill too quickly without considering the dimensions and nature of the FTX collapse.
“I believe that there is more information, there are more facts that should be found,” he said. “And I believe until that gets discovered, I do not think it’s helpful to rush through laws. I believe there’s more to learn here that may really educate the legislators, as they’re doing.”
