After FTX’s meltdown, Congress might finally try to regulate crypto

What should Washington do about crypto? Thanks to the epic, multi-billion-dollar collapse of digital currency exchange FTX, that’s suddenly become one of the hottest questions on Capitol Hill.

The House Financial Services Committee announced Wednesday that it planned to hold a hearing next month on the meltdown of FTX, which was forced into bankruptcy after suffering the digital equivalent of a 20th-century bank run. The panel expects its founder Sam Bankman-Fried to testify (Bankman-Fried is an investor in Semafor).

At the same time, key lawmakers, particularly Republicans who support the industry, are saying that the company’s failures show the need for basic regulations.

“It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S.,” Patrick McHenry, R-N.C., the ranking member on the financial services committee, said in a statement this week.

Meanwhile, Treasury Secretary Janet Yellen issued a statement on Wednesday that, without naming the firm directly, suggested its collapse “demonstrates the need for more effective oversight of cryptocurrency markets.“

FTX is now under federal investigation for improper use of customer funds. It’s a stunning fall for a one-time billionaire who spent $40 million in the 2022 midterms, most of it benefiting Democrats. FTX’s co-CEO Ryan Salame spent roughly $23 million and much of it was channeled to Republicans, underscoring the sector’s growing political influence.

Before this week, Bankman-Fried had said he supported some new regulations on the crypto industry.  In particular, he was a strong supporter of a bill assembled by Sens. Debbie Stabenow, D-Mich., and John Boozman, R-Ark., that would empower the Commodity Futures Trading Commission to oversee crypto broker-dealers like Binance and Coinbase.

The legislation had notable detractors. Gary Gensler, chair of the Securities and Exchange Commission, for instance, called it “too light-touch.” It may face new questions after Vox published an unexpectedly frank interview with Bankman-Fried on Wednesday, in which he said his pro-regulatory comments were mostly just a “PR” move. “Fuck regulators,” he told the news site.

Spokespeople for the Senate Agriculture Committee didn’t respond to a request for comment on the fate of that bill. However, Boozman said in a Nov. 10 statement that he and Stabenow “remain committed” to getting crypto regulation over the finish line.

Although crypto’s value has plunged $2 trillion over the past year, some Democrats are worried that the next cryptocurrency collapse could trigger a broader financial crisis. “If we do regulation halfway or haphazardly, events like FTX’s collapse could balloon and impact the rest of our financial system if we don’t have the proper safeguards,” a Senate Democratic aide told Semafor.

It’s unclear how much agreement exists between lawmakers about what regulations should look like. There are still basic disputes about which agency should be put in charge of overseeing the industry. And some key leaders are hesitant to discuss specifics.

Senate Finance chair Ron Wyden, D-Ore., recently told Semafor he was working on crypto consumer protections in the wake of FTX’s collapse without going into details. “You have significant consumer involvement already,” Wyden said on Wednesday, “So I just want to make it clear that basic core consumer protections in this space are needed.”

And some key Democrats may be cautious about passing regulations that give the industry greater legitimacy without significantly curtailing the way it does business. During a hearing on Tuesday, Senate Banking Chair Sherrod Brown, a vocal crypto critic, pointedly said that “private cryptocurrencies are not backed or protected by the government, and they shouldn’t be,” and noted their use in “fraud and scams, sanctions evasion, and outright theft.”