Before last week, FTX cofounder and political megadonor Sam Bankman-Fried had some lawmakers and regulators convinced that he was one of the few adults in the room in the wild crypto industry. Now, they can’t run fast enough away from him.
His fall from grace, with his digital-asset empire filing for bankruptcy and under investigation by US regulators, is calling into question the future of legislation he championed as a way to bring more regulatory clarity to the crypto world. It leaves a power vacuum for the industry as officials consider new laws and rules, including several that Bankman-Fried was helping to shape.
The 30-year-old entrepreneur presented himself as one of the good guys in crypto. The fact that there were so many problems with his company has raised concerns among policy makers about the legitimacy of the entire industry, according to three people familiar with internal discussions who did not want to be identified.
FTX’s disintegration is “devastating” for the rest of the crypto industry, said Matthew Homer, a venture capitalist and former head of the New York Department of Financial Services’ innovation division. “If we thought we were in a crypto winter, it now looks like we’re in a nuclear winter,” he said.
Spending Machine
The blowup has led to finger-pointing and tough questions about why Washington hadn’t put in place rules to prevent exactly the type of situation unfolding at FTX. President Joe Biden signed an executive order earlier this year demanding that agencies focus on the issue in a more coordinated way, but their efforts have produced few tangible results so far.
Bankman-Fried amassed tremendous political clout in a short period of time, becoming a regular presence at congressional hearings, holding frequent meetings with regulators and pouring tens of millions of dollars into political campaigns.
He emerged as the sixth-largest player in US political spending in the two years leading up to the Nov. 8 midterm elections, donating a total of $39.4 million , almost all of it to Democrats, Federal Election Commission records show. One of his top lieutenants, Ryan Salame, gave $23.6 million -- mostly to Republicans.
Together, they represented about three-quarters of the $84.1 million in crypto campaign spending during the election cycle through the third quarter.
A representative for FTX didn’t immediately respond to a request for comment.
The executives’ influence has all but evaporated following FTX’s collapse, which left the company facing billions of dollars in losses and caused ripple effects across the crypto ecosystem. The extent to which those losses will harm investors is still largely unknown.
“It is really concerning to see that retail investors are really getting hurt by these losses, and it is also the case that despite a lot of hype -- you heard a lot about how decentralized these markets are and how innovative and different -- it turns out they’re highly concentrated, highly interconnected, and you’re just seeing a domino effect,” Federal Reserve Vice Chair Lael Brainard said at an event Monday at Bloomberg’s Washington office.
Lawmakers like Senators Debbie Stabenow and John Boozman -- the top Democrat and Republican on the Senate Agriculture Committee -- said the recent events underscore the urgent need for new laws to regulate the crypto industry. In statements last week, they both reinforced their commitments to advancing a bill they have cosponsored to give the Commodity Futures Trading Commission more power to oversee the asset class.
‘Driving Force’
Achieving that goal won’t be easy. The bill was already facing opposition from the decentralized finance, or DeFi, community -- a corner of the crypto market that allows participants to cut the middleman out of financial transactions. DeFi supporters had said the bill was skewed toward centralized exchanges like FTX.
The fact that Bankman-Fried, known as SBF, was so closely associated with the effort is unlikely to help the legislation advance.
“SBF was the driving force behind this bill, and I don’t think policy makers are going to want to move forward with what was his brainchild when he turned out to be the instigator of the current crisis that we have,” said Kristin Smith, executive director of the Blockchain Association, a crypto trade group.
The committee still hoped to vote on the bill sometime before year-end, said a crypto lobbyist who was skeptical of that happening. But lawmakers from both chambers are trying to understand the full details of the FTX meltdown and how to prevent a similar event, according to the lobbyist, who wasn’t authorized to discuss the matter and asked not to be identified. Forcing committee members to vote on what’s now a controversial bill puts them in a tough position, the person added.
Rushing to pass legislation also “risks laying a poor foundation for future oversight,” said Mark Hays, a senior policy analyst for Americans for Financial Reform and Demand Progress.
A spokesman for Boozman pointed to the senator’s statement on the FTX situation. Stabenow’s office didn’t immediately respond to a request for comment.
Turf Battle
The FTX fallout is giving ammunition to Securities and Exchange Commission Chair Gary Gensler and his allies in Washington to make the case that his agency should be the top watchdog of the crypto market, even as critics question whether regulators could have taken action before the FTX blowup.
“I call on Congress not to pass legislation that weakens the oversight of the securities markets and not to do something in the guise or being pro-crypto or pro-innovation that undermines investor protections,” Gensler said last week at a Healthy Markets Association event just blocks away from the Senate.
Legislation being considered by Congress doesn’t meet the test, he said.
Though the CFTC has long been seen as the preferred regulator by the crypto industry, FTX had also tried to make inroads with the SEC. The firm was exploring ways to engage with the SEC and gain a first-mover advantage in the industry by potentially registering its platform with the agency, a person familiar with the matter said in September. The SEC declined to comment.
The CFTC, however, has been perceived as the less-rigorous route when compared with the SEC’s strenuous disclosure regime. CFTC Chairman Rostin Behnam has disputed that characterization, often noting that the agency was an early mover in cracking down on crypto fraud.
Behnam said Monday at a conference in Chicago that the agency doesn’t have surveillance or market-monitoring tools when it comes to crypto, which is why the Stabenow-Boozman bill is needed.
“We have to rely on either implosions or people coming to us and saying they are seeing fraud or manipulation in the marketplace,” Behnam said. “We’re going to continue to monitor the entities we can, and other than that, I will continue to advocate for new authority.”
--With assistance from Isis Almeida, Katherine Doherty, Margaret Collins and Bill Allison.
This article was provided by Bloomberg News.