Where to start with the blame game for FTX’s multibillion-dollar collapse?
Obviously, FTX founder and CEO Sam Bankman-Fried is the biggest culprit, given his obfuscation of the cryptocurrency exchange’s self-dealing and reckless business strategy. Crypto-crazy venture capitalists deserve some shaming, too, for impetuously propping up SBF without subjecting him to more due diligence. A bit of an onus also falls on bellicose blockchain bulls, who badgered and berated anyone with the temerity to question the system.
But don’t forget our esteemed elected representatives in Washington, whose feckless leadership on all things tech contributed—directly and indirectly—to crypto’s biggest calamity to date.
For the better part of two decades, Congress has done little more than dawdle on tech regulation, spanning from antitrust oversight to data privacy issues to digital asset markets. The precise reasons for this inaction are debatable—policy differences, deference to market forces, lobbying by Big Tech, the gerontocracy—but there’s no denying the indolence.
Such has been the case with the cryptocurrency industry.
For years, industry insiders have warned about overcapitalization, exceedingly risky business models, and shady conflicts of interest. In response, Congress has held occasional hearings and periodically proposed new laws—often with Bankman-Fried heavily involved—but failed to come anywhere close to enshrining new statutes. As a result, the current, insufficient regulatory framework heavily relies on reactionary policing of crypto outfits by the SEC and Commodity Futures Trading Commission.
Amid this inaction, a spate of crypto crises this year has left everyday investors out in the cold. Two cryptocurrencies from Terraform Labs imploded in May, precipitating a $500 billion–plus crypto selloff. The fallout exposed risky borrowing and investment practices at hedge fund Three Arrows Capital, which went belly-up after holding about $3 billion in assets, and crypto lenders Celsius Network and Voyager Digital both filed for bankruptcy after once managing billions of dollars.
Now comes the apparent demise of FTX, the world’s second-largest crypto exchange. The company is trying to raise multiple billions of dollars amid the crypto equivalent of a bank run. Unlike some of its peers, FTX didn’t hold anywhere close to enough reserves to cover all of its customers’ assets. The crypto industry also doesn’t have anything resembling the Federal Reserve or Federal Deposit Insurance Corporation as a backstop.
To be sure, Congress alone might not have been able to prevent Bahamas-based FTX from erecting its house of cards. The vast majority of crypto trading occurs outside U.S. borders, and FTX’s business is dedicated to international customers. (A separate entity serving American crypto traders, FTX US, doesn’t appear to be at risk of imminent doom, though time will tell.)
Yet leaders in Washington could have done more to bring responsible crypto trading to American soil, reducing the odds of destabilizing events like FTX’s downfall.
Congress has yet to establish clear legal frameworks for key parts of the crypto ecosystem, including which bureaucratic agencies have regulatory authority and how existing securities laws apply to the industry. Amid that uncertainty, crypto entrepreneurs have opted against setting up shop in the U.S.
“Part of the issue here is that regulators have been focused onshore in each of their respective markets, while customers have moved offshore to companies with more opaque and risky business practices,” Brian Armstrong, CEO of U.S.-based crypto exchange Coinbase, tweeted earlier this week. “To take the U.S. as an example, 95%+ of crypto trading has developed overseas because crypto regulation in the U.S. has been hard to navigate. That’s bad for the U.S., and Americans are still losing money in these overseas blowups.”
Had U.S. policymakers acted more decisively, odds are that other countries would have followed suit, potentially opening the doors to better oversight. As Jesse Powell, cofounder and CEO of California-based crypto exchange Kraken, told Protocol in September: “Much of the world looks to Washington for policy and just ends up copying what the U.S. does. I think we have kind of an outside influence. What we do reverberates around the world.”
The FTX disaster is already prompting renewed attention to crypto reform on both sides of the congressional aisle, ranging from U.S. Sen. Elizabeth Warren (D-Mass.) to U.S. Rep. Patrick McHenry (R-N.C.), the GOP’s top member of the House Financial Services Committee.
If the deeply divided 118th Congress wants to start off on the right foot, tackling tech reform—and digital assets, in particular—is a good place to begin.
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Jacob Carpenter
