WASHINGTON, Dec. 14, 2022 — As lawmakers’ hostility toward digital assets mounts in the wake of 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, faced an acute liquidity crisis and subsequently filed for bankruptcy in November. The crisis was sparked by reports that FTX-affiliated investment firm Alameda Research was relying heavily on FTX’s internal token, FTT.
Since the collapse, an intense scrutiny has revealed that FTX improperly funded Alameda’s operations with billions in customer investments. The Bahamian authorities arrested the FTX founder and former CEO Sam Bankman Fried on Monday, and he faces extradition to the United States.
Toomey, the committee’s most senior member, dismissed proposals to “pause” trading in cryptocurrencies until a comprehensive regulatory regime becomes law, or to drop regulation of digital assets altogether to prevent their further legitimacy. Toomey advocated the introduction of consumer protection and disclosure requirements that would still allow for healthy innovation in the crypto industry.
“With FTX, the problem isn’t the instruments used (digital assets), the problem was misuse of client funds, gross mismanagement and likely illegal behavior,” Toomey said.
“The 2008 financial crisis included an apparent abuse of mortgage-related products,” Toomey analogized. “Have we decided to ban mortgages? Of course not.”
While several senators lamented the losses that the FTX collapse had carried over to investors, Sen. Elizabeth Waren, D-Mass., raised concerns that cryptocurrency is a popular tool of terrorists, rogue states, and other nefarious actors. with Roger MarshallR-Kan, Warren on Wednesday sponsored a bill targeting money laundering in the crypto space.
Jennifer Schulp, director of financial regulation 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 scale of crypto-related money laundering. Illegal activity accounts for just 0.15 percent of crypto transaction volume, Schulp said.
Hearing of witnesses clashes over banks and crypto
testimony before the committee, Hilary J Allen, a professor at American University Washington College of Law, advocated a total ban on crypto. Instead of such a ban, she urged policymakers to block banks from investing in crypto, which she said would protect the traditional financial system from crypto’s volatility. “We have little to lose by restraining the growth of the crypto industry,” Allen argued, calling blockchain technology “not very good.”
Kevin O’Learyan investor of shark tank Celebrity later 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 short any American bank stock because it would make it the most uncompetitive financial services sector in the world.”
Sam Bankman-Fried charged, new CEO testifies
The US Attorney for the Southern District of New York on Tuesday filed an indictment 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 at which Bankman-Fried was scheduled to testify before his arrest.
“It’s really just old-fashioned embezzlement. That’s just taking money from clients and using it for your own ends,” Ray testified. “Maybe clever in the way they were able to hide it from people, frankly, right from their eyes.”