Lawmakers are scrambling to understand why FTX collapsed and how the implosion of a titanic cryptocurrency company could upend the industry.
The Senate Agriculture Committee will hold a hearing on Thursday with a major financial regulator focused on how the federal government can gain a clearer view of the cryptocurrency industry and prevent future incidents like the FTX explosion. The hearing also comes amid a deep crisis of confidence within the crypto industry sparked by the demise of FTX.
"The failure of [FTX] it will radically transform the crypto ecosystem, further shaking confidence and casting doubt on its ongoing prospects,โ Moody's Analytics analysts wrote in a research note Monday.
"However, at the same time, the rapid failure of FTX will invite increased regulatory oversight and scrutiny of the sector, which we hope will ultimately translate into clearer guidance for crypto market participants."
FTX, one of the world's largest cryptocurrency trading platforms, filed for bankruptcy earlier this month after a series of shoddy financial reports led to a run on its books. FTX also lost billions of dollars in client deposits on risky bets made by Alameda Research, an investment firm run by FTX founder Sam Bankman-Fried.
Over a span of three days, FTX clients tried to withdraw billions of dollars in deposits stored on the platform, but FTX lacked enough cash to win back its clients.
Bankman-Fried admitted to sending money deposited into FTX by clients to finance Alameda's investments, many of which backfired as cryptocurrency values โโplummeted throughout the year. He also said that FTX lacked basic information about its liabilities and assets and drastically underestimated how much money the company owed to its various creditors, including its clients.
โAlthough FTX International was a cryptocurrency exchange, its failure had virtually nothing to do with cryptocurrency. Rather, it was caused by common mismanagement and embezzlement,โ argued the Blockchain Association, a trade group for cryptocurrency firms, in a letter to the Senate Agriculture Committee.
Even so, FTX's deep financial connections to other crypto companies have plunged the broader industry into a crisis.
Cryptocurrency lender BlockFi filed for bankruptcy on Monday, citing a $275 million loan to FTX as part of its financial demise. Genesis, another cryptocurrency broker, is struggling to avoid bankruptcy after losing $175 million in funds locked up on FTX systems.
When federally regulated and supervised financial institutions fail, customers can generally be reimbursed for money lost through no fault of their own. The Federal Deposit Insurance Corporation was created in 1933 to prevent customer losses from bank runs, and the Securities Investor Protection Corporation was created in 1970 to serve a similar purpose for investment accounts.
But none of the three shaky crypto lenders have any backing from the federal government, which means their clients may see little to no compensation in bankruptcy proceedings.
"The fate of crypto investors is now determined by the fine print in contracts they probably never read, and they took on far more risks than they thought," said Tyler Gellasch, president and CEO of Healthy Markets, a transparent pro-investment organization. . Association, in an interview on Wednesday.
"At the end of the day, financial firms in the business of trading need to know what you own, and you need to know how you control what you have and what your risks are to your counterparties."
Thursday's hearing will likely focus on what the federal government needs to do to prevent another FTX-like collapse and how to finally draft a clear regulatory regime for cryptocurrency companies. Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam, who will testify before the Agriculture Committee, will also face questions about what the agency needs from lawmakers to step up its oversight.
The CFTC and the Securities and Exchange Commission oversee various parts of the cryptocurrency industry. But it also does not have the exclusive legal authority to investigate and regulate certain cryptocurrency companies, such as exchanges like FTX, due to the unique ways that cryptocurrencies blur the lines between securities, commodities, and futures contracts.
Several senior members of the Committee on Agriculture, which has jurisdiction over the CFTC, published a bill earlier this year, the Digital Commodity Consumer Protection Act (DCCPA), which would give the agency a greater authority to supervise crypto companies. However, the bill was championed by Bankman-Friend and FTX and was seen by some cryptocurrency advocates as an attempt by the company to shape the regulations to its liking.
Sen. Debbie Stabenow (D-Mich.), chair of the Agriculture Committee and a lead sponsor of the DCCPA, has denied allegations that the bill was essentially written by Bankman-Fried and has said he was influenced by a wide range of points of view.
โMembers of the US Senate have been working in a bipartisan fashion for the past few months to draft legislation that will provide necessary safeguards for this industry. In fact, the DCCPA was designed to address the very risks that caused FTX to collapse,โ the committee said in a fact sheet released last week.
โApplies time-tested financial regulation rules to crypto businesses, to protect client assets and eliminate conflicts.โ
Critics of the bill counter that it would have done nothing to prevent FTX's collapse because the company was registered in the Bahamas, not the US, in part to avoid exposure to US trade regulations. .
โThere is no US law or regulation that can prevent the bankruptcy of an offshore entity. The best way to address exchanges outside of the US is to develop a regulatory framework that attracts them to the US market, but the DCCPA would not achieve that goal,โ argued the Blockchain Association.
"Had FTX International been subject to US jurisdiction, then existing US law would have been sufficient to prohibit and allow detection of the transactions that led to its bankruptcy."
