WASHINGTON, Dec. 14, 2022 — As lawmakers’ animosity toward digital assets grows after FTX’s collapse, Sen. Pat ToomeyR-Penn., defended the industry at a Senate Banking Committee hearing Wednesday.
FTX, until recently a highly regarded cryptocurrency exchange, suffered a severe liquidity crisis and subsequently filed for bankruptcy in November. The crisis was triggered by reports that FTX-linked investment firm Alameda Research was heavily reliant on FTX’s internal token, FTT.
After the crash, close scrutiny revealed that FTX improperly funded Alameda ventures with billions of dollars in client investment. Authorities in the Bahamas have arrested the founder and former CEO of FTX Sam Bankman-Fried Monday, and could face extradition to the United States.
Toomey, the ranking member of the committee, rejected proposals to “pause” cryptocurrency trading until a comprehensive regulatory framework becomes law or completely avoid regulating digital assets to prevent their further legitimization. Toomey advocated establishing consumer protections and disclosure requirements that would still allow for healthy innovation in the cryptocurrency industry.
“With FTX, the problem is not the tools used (digital assets), the problem was the misuse of client funds, mismanagement and likely illegal behavior,” said Toomey.
“The 2008 financial crisis led to clear misuse of mortgage-related products,” Toomey analyzed. “Have we decided to ban mortgages? Obviously not.”
While several Senators have decried the losses the FTX crash has inflicted on investors, Sen. Elizabeth Warren, D-Mass., has raised concerns that cryptocurrency is a favorite tool of terrorists, rogue states, and other nefarious players. With Roger MarshallR-Kan., Warren sponsored a bill Wednesday 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 small relative scope of crypto money laundering. Illicit activity accounts for just 0.15% of crypto transaction volume, Schulp said.
Hearing witnesses clash over banks and crypto
Testify before the committee, Hilary J. Allen, a professor at the American University Washington College of Law, has advocated banning cryptocurrencies entirely. In lieu of such a ban, he urged policymakers to stop banks from investing in cryptocurrencies, which he said would protect the traditional financial system from cryptocurrency volatility. “We have little to lose by limiting the growth of the cryptocurrency industry,” Allen said, labeling blockchain technology as “not very good.”
Kevin O’Learyan investor of Shark tank fame, later told the committee that preventing banks from holding cryptocurrencies could cripple America’s financial institutions. If such a ban were enacted, O’Leary said, “As an investor, I would short all the shares in a US bank because it would make it the most uncompetitive financial services industry in the world.”
Sam Bankman-Fried indicted, new CEO testifies
The U.S. 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.
The new CEO of FTX, John J. Ray IIIappeared before the House Financial Services Committee on Tuesday for a hearing in which Bankman-Fried was expected to testify before his arrest.
“This is really just old-fashioned embezzlement. This is just taking money from customers and using it for their own purposes,” Ray testified.