An awkward pause followed a lawmaker’s questions at a hearing this week when they asked regulators about which agency was responsible for overseeing failed cryptocurrency exchange FTX.
“Can you tell me who in our state federal financial services was watching FTX to make sure no one there was stealing people’s money?” John Kennedy, a Republican senator from Louisiana, asked bank regulators during a Senate hearing. “Has anyone seen this?”
In the wake of the collapse of Sam Bankman-Fried’s $32 billion empire, which included a major U.S. affiliate, lawmakers and regulators in Washington have sought to pin the blame for FTX’s slip through the cracks.
“There’s definitely a debt game going on and we’re going to see more of it,” said Ian Katz, fiscal analyst at independent research firm Capital Alpha Partners.
Janet Yellen, the US Treasury secretary, was among the officials who pointed to deficiencies in supervision. The case of FTX “demonstrate[s] the need for more effective oversight of cryptocurrency markets,” she said in a statement on Wednesday, adding that the same protections offered in traditional markets should apply to crypto assets.
But the nation’s top bank regulators — including the top regulators at the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — declined, arguing that lawmakers’ questions should instead be directed to the likes of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Market regulators are “the first place to start in this area,” Michael Barr, the Fed’s vice chairman for supervision, told members of the Senate Banking Committee on Tuesday. “They have existing authorities [and] we want to make sure they are fully utilized.”
Critics of the SEC, whose chairman Gary Gensler once described the crypto market as the “Wild West,” have argued that the agency has focused on headline-making enforcement actions such as charging celebrity businesswoman Kim Kardashian with illegally declaring crypto, rather than addressing systemic issues. the risk in the market. They have also said Gensler should clarify rules for digital assets.
But the SEC chairman has argued that existing securities laws are clear enough and has repeatedly urged crypto platforms to register with the agency, based on the assumption that most tokens qualify as securities.
Gensler last week told CNBC: “[Crypto] is an area that is significantly under-compliant, but it has regulation, and those regulations are often very clear.” He has also asked Congress to give the SEC more power to oversee crypto.
Katherine Martin, managing director at Rock Creek Global Advisors, a policy consulting firm, agreed: “The SEC alone cannot be trusted to solve this problem unless the agency is given a new mandate through legislation and the resources to implement it.”
Like Gensler, Rostin Behnam, chairman of the CFTC, has argued that existing laws are ambiguous. He has also supported a bipartisan bill introduced by US Senators Kirsten Gillibrand and Cynthia Lummis that would expand the CFTC’s authority and give it jurisdiction over cash crypto markets based on the assumption that most tokens are similar to commodities. (There is still no definitive classification of tokens.)
Asked at a conference in Chicago this week whether regulators and the broader industry had been too easily swayed by Bankman-Fried, Behnam said: “We always have to examine ourselves to learn . . . but from my point of view, I did what I could with the authority I have.”
He added that regulators can “prevent” similar events in the future if Congress acts quickly to give them more powers.
LedgerX, a CFTC-regulated futures exchange bought by FTX last year, was not included in last week’s bankruptcy filings. Behnam and CFTC Commissioner Kristin Johnson both pointed to LedgerX’s survival as evidence of the effectiveness of the commission’s oversight.
Banking regulators also took issue with some lawmakers, in part because they failed to provide detailed guidance to banks on how to partner with crypto companies and dispense services such as holding assets in custody. Others complained that they were simply too light.
“I’m concerned about what I’ve heard from you gentlemen: ‘restricted, safe and sound ways to deal with crypto,'” Brad Sherman, a Democratic representative from California, told banking regulators present at the House Finance Committee hearing. on Wednesday. “You sound like Sam Bankman-Fried, only you’re wearing long pants instead of shorts.”
The debate highlights shortcomings in what is a complex regulatory network.
“We have three different banking regulators, two different market regulators, ambiguities and sometimes limitations on the scope of jurisdiction,” said Kathryn Judge, a law professor at Columbia University. “Part of what the whole fiasco reflects is the fact that there are ongoing costs to having such a broken regulatory system.”
The majority of FTX units were not registered with US agencies, the main exchange is regulated in the Bahamas, where it is headquartered. FTX.US, the platform’s American counterpart, was not regulated by the SEC or CFTC.
But legal experts argue that it could have fallen under their purview if assets traded on the platform were determined to be securities or commodities, or if FTX.US sent orders from US investors to Bahamas-based FTX, thereby acting as a broker.
Analysts argue that legislative inaction is also to blame for an incomplete crypto regulatory framework in the US. While lawmakers have introduced crypto bills — including one that Bankman-Fried supported — none have passed.
According to Aaron Klein, former deputy assistant secretary for economic policy at the Treasury Department, “any legislation drafted before the FTX implosion needs to be fundamentally rethought”.
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