The unexpected collapse of one of the world’s largest cryptocurrency exchanges shook the nation’s capital this week, as lawmakers grappled with the wide-ranging fallout — and began to confront the consequences of ignoring the booming financial sector.
Only a few weeks ago, top Democrats and Republicans alike were cashing campaign checks and collaborating with industry leaders, including FTX founder Sam Bankman-Fried, to craft new regulations in the frenetic, cutting-edge digital space.
Instead, Bankman-Fried has unexpectedly become a potential case study of the costs of inaction in Congress. While Washington dallied, it appeared that he made a series of risky bets that destroyed his fortune, jeopardized billions of dollars in Silicon Valley investment, and upended an entire ecosystem of cryptocurrency start-ups. The lawyer appointed to lead FTX’s restructuring, who previously oversaw Enron’s bankruptcy, described the situation as a “complete failure of corporate controls” on Thursday.
Investigators in the United States and abroad have launched investigations into Bankman-Fried and his holdings, while the Treasury Department has quietly requested that other large crypto exchanges assess the risks of a broader contagion. Meanwhile, a slew of congressional committees have begun their own investigations, including a House inquiry announced Wednesday that could see Bankman-Fried testify under oath next month.
Brown has called for comprehensive cryptocurrency legislation, which Congress has repeatedly proposed as the sector has grown but has failed to achieve in the face of staunch industry lobbying. During that time, a wide range of crypto firms experienced meteoric rises — and previously unfathomable collapses — on the promise of vast wealth that did not always materialize.
From the dot-com bubble at the turn of the millennium to Facebook’s rampant privacy missteps decades later, federal policymakers have historically been slow to anticipate the problems of the digital age. Only after massive, costly scandals have lawmakers and regulators been compelled to act, sometimes with unfavorable outcomes.
The emerging world of cryptocurrency, in which digital tokens replace dollars, investments, and payments without the need for traders, governments, or banks, has presented perhaps the most difficult challenge to date. As an entirely new financial system has emerged, Washington has been forced to choose between imposing strict crypto regulations and staying out of Silicon Valley’s way.
To the relief of crypto companies, executives, and investors, the US government has largely adopted the latter approach. This has enabled bitcoin’s rapid growth and skyrocketing valuations, as well as a wide range of related currencies and an entire ecosystem of firms to support them. Until recently, this included FTX, a marketplace for buying and selling tokens with its own currency — an exchange that was once the world’s third largest.
However, the dangers of that approach became clear as FTX began to unravel. Large investors sold their FTX-issued tokens, known as FTT, in response to questions about its finances and whether Bankman-Fried used FTX deposits in potentially illegal ways. With nowhere else to turn and losses mounting, Bankman-Fried filed for Chapter 11 bankruptcy last week, triggering a chain reaction that has hammered Silicon Valley venture firms and start-ups that rely on FTX. Other cryptocurrency exchanges soon found themselves in jeopardy, with their own assets entangled in the fallout.
John J. Jay III, who took over as CEO of FTX after the company declared bankruptcy, told a federal court on Thursday that he had never seen “such an absence of trustworthy financial information as occurred here” in his career. Despite having previously overseen Enron’s $23 billion dissolution and recovery of funds for creditors, Jay believes the FTX meltdown is worse in some ways.
Across the Capitol, the fallout from FTX quickly overshadowed what would normally be a sleepy Senate Banking Committee hearing on credit unions. Sen. Patrick J. Toomey (R-Pa.), the state’s top Republican, took advantage of the situation to highlight “several high-profile collapses of crypto companies, including one prominent example last week” — a reference to FTX, if not explicitly by name.
Toomey has previously purchased cryptocurrency assets, according to his personal financial disclosures. However, he focused his opening statement on the consequences of a firm like FTX, which is based in the Bahamas, being able to run roughshod over the U.S. economy.