Senator Debbie Stabenow (D-MI) speaks at a news conference at 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 understand what went wrong and pass legislation to try to prevent another debacle that would affect hundreds of thousands of investors.
One bill, the Digital Commodities Consumer Protection Act, introduced in August, gives the Commodity Futures Trading Commission more authority to regulate digital commodities like FTX.
The bill arrived before FTX’s collapse ignited fresh debate over how to protect consumers in the relatively young and untamed crypto industry. It is among a handful of solutions lawmakers will consider as they begin to probe the implosion of FTX with high-stakes hearings this week — and try to implement safeguards across the industry.
New 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 at the House hearing — and had refused to testify in a Senate hearing set for Wednesday — before his arrest in 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 company 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, should be closely watching this space, because it is evident that Congress will not be able to ignore an increasingly dissatisfied public’s call to action, and there is a lot of potential to get this wrong,” 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 not considered securities. This applies to some digital currencies. Securities are regulated by the Securities and Exchange Commission.
“The DCCPA does not 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 can be used in many different ways, no single financial regulator has the expertise or the authority to regulate the entire industry.”
Joe Silvia, an attorney who advises financial institutions on corporate and regulatory matters, told CNBC that had the bill already been law, it may have helped to avoid the FTX debacle.
“I think the reality is if there was actual transparency that the legislation would be getting at … there wouldn’t be folks, I would hope, knowingly depositing their money with an exchange knowing that the exchange was taking that money 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 plenty of reasons to take offense at the legislation.”
What the DCCPA does
The bill would require entities seeking to become digital commodities platforms to register with the CFTC as a commodities broker, a custodian, a dealer or trading facility. Brokers would be required to establish fair, objective prices, set up risk management systems and conform to business product standards, while trading facilities must provide a competitive, open market 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 become the rulemaking authority on margined, leveraged or financed digital commodity trades. Under the bill, digital commodity platforms would become financial institutions under the Bank Secrecy Act, beholden to help the U.S. government detect and prevent 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’ve had recently” — if FTX had been registered in the United States. The company is headquartered in the Bahamas.
“Many of the actions that have been allegedly perpetrated actually have been crimes in this country for over a century,” Booker said during the Dec. 1 hearing. “And so the legislation is not going to solve everything. But I think it’s important that we move forward with providing a regulatory framework that can 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 more than any other legislation in 2022, according 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 legislation in a way that would have been detrimental to decentralized finance.”
An earlier draft of the DCCPA was said to effectively ban decentralized finance providers, or DeFi, which are services on public blockchains that allow users to borrow, lend and trade crypto assets without paperwork or a third party.
DeFi supporters have argued the bill favors exchanges such as FTX, according 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 at the Dec. 1 hearing that he couldn’t speak to FTX’s motivations for supporting the bill.
“The remarkable thing is to think about it in the context of what we’ve learned about the FTX entities and just thinking about the bill that [Sens. Stabenow and Boozman] introduced. [FTX] would have been so far out of compliance, that it just wouldn’t have been possible,” he said.
Officials at FTX, who were prolific donors during the midterm elections this year, also donated to members of the agriculture committee.
Stabenow and committee ranking member Sen. John Boozman, R-Ark., both received $23,200 in campaign contributions from individuals at FTX, according to OpenSecrets. Booker received $5,700 from individuals at FTX, according to The Washington Post.
Days after FTX’s implosion, Lisa Braganca, a former enforcement branch chief at the SEC, said Bankman-Fried’s close association with those on Capitol Hill made her doubtful that Congress would act on the DCCPA.
“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 legislation have criticized the power it grants to the CFTC relative to other financial regulators.
Lee, the former bank regulator, said the bill could put disproportionate power in the hands of the CFTC.
“In urging the public to embrace the DCCPA, the call to action makes a plea for a ‘whole of government’ approach, but ironically, the DCCPA gives the CFTC disproportionately more power than any 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 legislation even authorizes the CFTC to decide what is and is not covered within its own ambit of jurisdiction, and in so doing, may allow the CFTC to put its thumb on the scale 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 regulate 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 good, thoughtful legislation, Silvia said. But he cautioned against passing a bill too quickly without considering the size and nature of the FTX collapse.
“I think that there’s more information, there are more facts that need to be found,” he said. “And I think until that gets figured out, I don’t think it’s helpful to rush through legislation. I think there’s more to learn here that can really educate the legislators, as they’re doing.”