After the demise of cryptocurrency exchange FTX, Senate Banking Democrats anticipate a bigger role for their committee in legislation for the industry in the next Congress after taking a back seat to the Senate Agriculture Committee this year.
Senate Banking Chairman Sherrod Brown, D-Ohio, said the committee so far had focused on drawing attention to shortcomings in the cryptocurrency sector but it would play a more active role in the next Congress. Brown and other Democrats criticized the efforts by the Agriculture Committee as too friendly to the industry.
“Our role so far has been to continue to show the skepticism that I felt from the beginning, to put them on notice, to push the SEC to move,” Brown said in an interview. “But I look in the new Congress to be increasingly aggressive.”
The fall of FTX, valued at $32 billion before a run on customer accounts forced the exchange to declare bankruptcy last month, underlined the gaps in oversight of the cryptocurrency sector. A report that Alameda Research, FTX’s affiliated trading arm, stood on shaky financial ground prompted the run. FTX reportedly lent Alameda billions of dollars, and the two had closer financial ties than previously known.
With Democrats retaining control of the Senate, Brown will remain chairman of the committee. But the Republican majority in the House next year means Brown will have to work with a House Financial Services Committee that is expected to be led by Rep. Patrick T. McHenry, R-N.C., to get legislation to the president’s desk.
Consumer protection and national security threats, including sanctions evasion, would drive legislative efforts coming out of the Banking Committee next Congress, Brown said. He sent a letter to Treasury Secretary Janet L. Yellen on Thursday asking her to work with other regulators on fleshing out legislative recommendations granting them the authority they need to supervise the sector.
Stabenow-Boozman bill
Brown and other Banking Committee Democrats shared misgivings that a prominent bill introduced by Agriculture Chairwoman Debbie Stabenow, D-Mich., and co-sponsored by ranking member John Boozman, R-Ark., would be too industry-friendly. The bill would rely largely on the Commodity Futures Trading Commission to police cryptocurrency markets and counted Sam Bankman-Fried, the former CEO of FTX, among its most vocal supporters.
“I’m on the Ag Committee too. I think their proposal has too much lean to the crypto industry,” Brown said. “I don’t oppose their wanting to do something. I don’t support what they’re doing at this point.”
[Related: As FTX burned, lawmakers said to be dithering over regulator]
The Stabenow-Boozman bill would give the CFTC jurisdiction over spot markets of cryptocurrencies established as digital commodities and leave the Securities and Exchange Commission in charge of digital securities. The legislation would define bitcoin and ether, the two biggest cryptocurrencies, as commodities but would not define digital securities. Digital commodity platforms, including exchanges and brokers, would have to register with the CFTC.
Sen. Jon Tester of Montana, a moderate Democrat on the Banking panel, said Congress and regulators must balance protecting consumers against conferring legitimacy on cryptocurrencies through regulation. Senate Banking is the proper venue to sort that out, he said.
“It needs to be done in this committee, not Ag, so CFTC is a ‘no,’” Tester said in an interview.
Sen. Elizabeth Warren, D-Mass., another Banking Committee member, said Congress may need to take action to ensure the cryptocurrency sector is subject to the same know-your-customer requirements as other financial institutions, a weakness she sees in the Stabenow-Boozman bill.
“I have concerns about the CFTC’s lack of experience in investor protection, but I also see in that bill an effort to fence off large parts of the crypto world to prevent know-your-customer regulation,” Warren said in an interview. “That is exactly the wrong direction. Congress should not pass legislation that effectively holds up a big sign that says money laundering can be safely done over here.”
A purported amendment to the bill would exclude software developers from the legislation’s registration requirements, potentially allowing decentralized finance to avoid the anti-money laundering protections the bill would impose on centralized entities, including cryptocurrency trading platforms. Although the document was published on some cryptocurrency sites, Stabenow and Boozman haven’t confirmed it was an amendment.
“Know Your Customer is critical in virtually all value exchange transactions throughout our financial system. But crypto is clearly not consistently following the law in this area,” Warren said. “If there’s any doubt about regulators’ ability to reach those actors, then Congress should step up and make it clear in the law that they can.”
When asked whether to anticipate legislation from the Banking Committee to address that in the new year, Warren said, “Let’s just leave it as we’re working on it.”
In an appearance before the Senate Agriculture Committee last week, CFTC Chairman Rostin Behnam defended the Stabenow-Boozman bill and his agency’s ability to police cryptocurrency spot markets.
“If individuals took a harder look at our record, both from a regulatory perspective and enforcement perspective, they would understand that we’re the farthest thing from a light-touch regulator,” Behnam said. “We’re one of the strongest, most respected regulators in the world, especially around derivatives markets.”
Despite lacking direct jurisdiction over cryptocurrency spot markets, the CFTC has brought more than 60 enforcement cases in the digital asset business since 2014. This year, more than 20 percent of its enforcement actions targeted such activity, Behnam said. The agency has jurisdiction over cryptocurrency derivatives but can police the underlying spot markets only if there’s evidence of fraud or manipulation.
Moreover, LedgerX, an FTX subsidiary registered with the agency and subject to its oversight, was one of the few affiliates to survive the collapse, Behnam said. “Solvent, operational and customer money is where it’s supposed to be,” he said.
The House
McHenry said House Financial Services plans to get to the bottom of what happened at FTX and hopes to reach consensus on cryptocurrency legislation. An FTX hearing scheduled for this month is likely the first of many examining the issue, he said in an interview.
McHenry said he would continue to work with current Financial Services Chairwoman Maxine Waters, D-Calif., on a bill in the next Congress to establish a regulatory framework for stablecoin cryptocurrencies pegged to the dollar. But the legislation could take a back seat to more pressing needs uncovered by the FTX bankruptcy, he said.
McHenry declined to weigh in on the Stabenow-Boozman bill but said there are still plenty of questions on which his committee should take the lead.
“It’s a very different jurisdiction. It doesn’t clear up the question of what is a security and what is not,” he said of the Senate bill. “That’s a fundamental issue that my committee will have to wrestle with and provide clarity.”
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