Senate crypto hearing yields big claims, possible regulation

Whether increased regulation would have prevented the spectacular collapse of cryptocurrency exchange FTX was fiercely debated at a hearing of the Senate’s banking committee Wednesday. However, new legislation is potentially on the way.

Sen. Elizabeth Warren announced at the hearing bipartisan legislation aimed at cracking down on cryptocurrencies being used in money laundering. The legislation, co-sponsored by Republican Sen. Roger Marshall of Kansas, would require cryptocurrency exchanges to verify customer identities like banks and other financial institutions do.

“Crypto has become the preferred tool for terrorists, for ransomware gangs, for drug dealers and for rogue states that want to launder money,” said Warren, the Massachusetts Democrat, adding that “crypto doesn’t get a pass to help the world’s worst criminals – no matter how many television ads they run or how many political contributions they make.”

Republican Sen. Cynthia Lummis, of Wyoming, said she and Democratic Sen. Kirsten Gillibrand, of New York, would reintroduce their bipartisan legislation, the Responsible Financial Innovation Act, next year. That act would require disclosures and consumer protection obligations from cryptocurrency issuers.

Lummis, like several other Republicans on the banking committee, said the alleged financial crimes of former FTX CEO Sam Bankman-Fried should not be used to target cryptocurrency more generally.

“Let’s separate digital assets from corrupt organizations,” she said. “FTX is good old-fashioned fraud.”

However, Democratic Sen. Sherrod Brown, chairman of the Senate Committee on Banking, Housing and Urban Affairs, asked the hearing’s four witnesses – two crypto proponents and two critics – whether fraud was systemic at other firms in the industry. They all indicated that it was – one of the few points of agreement in the entire hearing.

Hilary J. Allen, professor of law at the American University Washington College of Law, testified that the current environment cryptocurrency operates in is highly conducive to fraud.

“Sam Bankman-Fried may have engaged in good old-fashioned embezzlement,” she said, “but the embezzlement was able to reach such a scale and go undetected for so long because it was crypto – shrouded in opacity, complexity, and mystique.”

Entrepreneur Kevin O’Leary, best known as Mr. Wonderful on the TV show “Shark Tank,” disagreed with the characterization, even though the $15 million he earned as a paid spokesman for FTX is now essentially worthless.

“I am of the opinion that crypto, blockchain technology and digital payment systems will be the 12th sector of the S&P within a decade,” he said, referring to the S&P 500, a well-known benchmark for stocks.

O’Leary also testified that Bankman-Fried told him that the collapse of FTX was due to its battle with crypto competitor Binance, which also held a stake in FTX.

“These two behemoths that owned the unregulated market together… were at war with each other,” O’Leary said. “And one put the other out of business.”

Federal prosecutors say Bankman-Fried defrauded FTX customers and investors starting in 2019 and illegally diverted their money to cover expenses, debts and risky trades at the crypto hedge fund he started in 2017, Alameda Research. Bankman-Fried, 30, was arrested Monday in the Bahamas at the request of the U.S. government, and remains in custody after being denied bail.

Based in the Bahamas, FTX was able to bypass U.S. futures restrictions and offer a range of leveraged derivatives, generating huge trading volume amid volatile crypto price swings. The U.S. trading platform for FTX launched in January 2021, establishing Chicago as its headquarters in June of that year.

A U.S.-regulated exchange, FTX.US offered fewer products than the global exchange, but was the only FTX platform licensed for American investors to trade crypto. FTX generated $3.45 trillion in global trading volume this year, while FTX.US hit $65 billion before both exchanges came to a mandated halt in November, according to Nomics, a leading cryptocurrency index.

Pennsylvania Republican Sen. Pat Toomey, the ranking member of the banking committee, said during Wednesday’s hearing that FTX’s actions do not reflect the business of cryptocurrency as a whole.

“There’s nothing intrinsically good or evil about software – it’s about what people do with it,” he said. “Code committed no crime.”

However, actor and author Ben McKenzie Schenkkan, best known for his role as Jim Gordon on “Gotham,” said his research shows cryptocurrency is built on “misinformation, hype and fraud” and that the estimated 40 million Americans who have invested in it were lied to.

“In my opinion, the cryptocurrency industry represents the largest Ponzi scheme in history,” he said. “The fact that it has roped in tens of millions of Americans from all walks of life, as well as hundreds of millions of people worldwide, should be of concern to us all.”

Chicago Tribune contributed.