WASHINGTON, December 14, 2022 – As lawmaker animosity toward digital assets mounts following the FTX collapse, Sen. Pat ToomeyR-Penn., defended the industry Wednesday during a Senate Banking Committee hearing.
FTX, until recently a highly regarded crypto exchange, suffered an acute liquidity crisis and subsequently filed for bankruptcy in November. The crisis was sparked by reports that FTX-linked investment firm Alameda Research was heavily reliant on FTX’s in-house token, FTT.
Since the collapse, intense scrutiny has revealed that FTX improperly funded the Alameda businesses with billions of dollars of client investment. Bahamian authorities arrested FTX founder and former CEO Sam Bankman-fried on Monday, and could be extradited to the United States.
Toomey, the committee’s ranking member, rejected the proposals of “pause” trade cryptocurrencies until a comprehensive regulatory scheme becomes law or avoid regulation of digital assets altogether to avoid their further legitimization. Toomey advocated for instituting consumer protections and disclosure requirements that would still allow for healthy innovation in the crypto industry.
“With FTX, the problem is not the instruments that were used (digital assets), the problem was the misuse of client funds, mismanagement and likely illegal behavior,” Toomey said.
“The 2008 financial crisis involved blatant misuse of mortgage-related products,” Toomey said. “Did we decide to ban mortgages? Of course, no.”
While several senators denounced the losses that the FTX collapse weighed on investors, Sen. Elizabeth Warren, D-Mass., expressed concern that cryptocurrency is a favored tool of terrorists, rogue states, and other nefarious actors. With roger marshalR-Kan., Warren on Wednesday sponsored a bill that would target money laundering in the crypto space.
Jennifer Schulp, director of financial regulatory studies at the Cato Institute’s Center for Monetary and Financial Alternatives and a witness at the hearing, told Broadband Breakfast that Warren ignored the relative small scale of cryptocurrency-related money laundering. The illicit activity represents only 0.15 percent of crypto transaction volume, Schulp said.
Hearing witnesses clash over banks and cryptocurrencies
Testifying before the committee, Hilary J. Allen, a professor at the American University of Washington School of Law, advocated banning cryptocurrencies altogether. Instead of such a ban, he urged lawmakers to ban banks from investing in cryptocurrencies, which he said would shield the traditional financial system from cryptocurrency volatility. “We have little to lose by limiting the growth of the cryptocurrency industry,” Allen argued, calling blockchain technology “not very good.”
Kevin O’Learyinvestor of shark tank fame, then told the committee that preventing banks from holding crypto could cripple American financial institutions. If such a ban were enacted, O’Leary said, “As an investor, I would be shorting all shares of American banks because it would make it the least competitive financial services sector in the world.”
Sam Bankman-Fried indicted, new CEO testifies
The US Attorney’s Office for the Southern District of New York filed an indictment, unsealed Tuesday, charging Bankman-Fried with eight counts of fraud. The Securities and Exchange Commission and the Commodity Futures Trading Commission also filed lawsuits against the FTX founder on Tuesday.
FTX’s new CEO, John J. Ray IIIappeared before the House Financial Services Committee Tuesday for a hearing at which Bankman-Fried was scheduled to testify before his arrest.
“This is really old-fashioned embezzlement. This is simply taking money from clients and using it for its own purpose,” Ray testified. “Sophisticated, perhaps, in the way that they were able to hide it from people, frankly, right in front of their eyes.”