Brookings Panelists Debate the Future of Crypto

WASHINGTON, December 14, 2022 – As legislators’ animosity toward digital assets builds following the FTX meltdown, Sen. Pat Toomey, R-Penn., on Wednesday defended the industry during a Senate Banking Committee hearing.

FTX, until recently a highly regarded crypto exchange, suffered an acute liquidity crisis and subsequently filed for bankruptcy in November. The crunch was triggered by reports that the FTX-linked investment firm, Alameda Research, relied heavily on FTX’s in-house token, FTT.

Since the collapse, intense scrutiny has revealed that FTX improperly financed Alameda’s ventures with billions of customers’ investment dollars. Bahaman authorities arrested FTX founder and former-CEO Sam Bankman-Fried on Monday, and he may face extradition to the United States.

Toomey, the committee’s ranking member, rejected proposals to “pause” cryptocurrency trading until a comprehensive regulatory scheme becomes law or eschew regulating of digital assets entirely to prevent their further legitimization. Toomey advocated instituting consumer protections and disclosure requirements that would still allow for healthy innovation in the crypto industry.

“With FTX, the problem is not the instruments that were used (digital assets), the problem was the misuse of customer funds, gross mismanagement, and likely illegal behavior,” Toomey said.

“The 2008 financial crisis involved obvious misuse of products related to mortgages,” Toomey analogized. “Did we decide to ban mortgages? Of course not.”

While several senators decried the losses the FTX collapse inflected on investors, Sen. Elizabeth Warren, D-Mass., raised concerns that cryptocurrency is a favorite tool of terrorists, rogue states, and other nefarious actors. With Roger Marshall, R-Kan., Warren on Wednesday sponsored a bill that would target 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. Illicit activity accounts for only 0.15 percent of crypto transaction volume, Schulp said.

Hearing witnesses clash on banks and crypto

Testifying before the committee, Hilary J. Allen, professor at the American University Washington College of Law, advocated banning crypto outright. In lieu of such a ban, she urged policymakers to bar banks from investing in crypto, which, she said, would protect the traditional financial system from crypto’s volatility. “We have little to lose from limiting the growth of the crypto industry,” Allen argued, labeling blockchain technology “not very good.”

Kevin O’Leary, an investor of Shark Tank fame, 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 every American bank stock because it would make it the most uncompetitive financial services sector 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 on Tuesday filed suits against the FTX founder as well.

FTX’s new CEO, John J. Ray III, appeared before the House Financial Services Committee on Tuesday for a hearing at which Bankman-Fried was scheduled to testify before his arrest. 

“This is really just old-fashioned embezzlement. This is just taking money from customers and using it for your own purpose,” Ray testified. “Sophisticated, perhaps, in the way they were able to sort of hide it from people, frankly, right in front of their eyes.”