1 year ago
Cryptocurrency firms are at the cusp of a breakthrough vote for their regulatory agenda in Congress. They are wooing members of both parties, preparing an ad blitz to push their proposals and targeting swing state lawmakers for support.
But they have one inescapable problem: Sam Bankman-Fried.
Jury selection for the failed mogul’s fraud trial is set to begin Tuesday at a federal court in Manhattan, and the daily headlines about his misdeeds are landing at the worst possible time for the industry’s lobbying contingent — at least what’s left of it after his fall triggered a crypto meltdown.
The House is preparing to vote on landmark bills that would set up regulations blessed by the industry. At the same time, lobbyists are trying to fend off a push by Sen. Elizabeth Warren (D-Mass.) and a growing list of crypto skeptics who want to crack down on financial crimes that use digital currency.
How it all shakes out may be impacted by Bankman-Fried's trial, where Washington's former go-to crypto magnate and a major source of campaign cash will fight charges that he orchestrated one of the largest financial frauds in U.S. history at the helm of his FTX exchange.
“If you’re not familiar with the crypto industry — and this is the first time you’re thinking about it — your impression is certainly not a positive one,” said Blockchain Association CEO Kristin Smith, whose group is a leading crypto trade organization. “He was a terrible ambassador for our industry.”
The coming split-screen will test crypto’s lobbying influence after it spent much of last year trying to rehabilitate the industry’s image. Advocates have framed Bankman-Fried as an outlier whose alleged misdeeds could have happened in any corner of finance. But it’s a distinction that may not matter to lawmakers who have been on the fence, with many already going out of their way to distance themselves from the fraud and consumer protection concerns that have been front of mind since Bankman-Fried’s arrest in November.
“Sam Bankman-Fried’s trial will remind everyone in Congress about the risks that an unregulated crypto industry poses for all of our constituents, for our economy and for international stability,” Warren said in an interview.
A year ago, Bankman-Fried was a force in Washington. He showered lawmakers with campaign contributions — at one point pledging to spend $1 billion through the 2024 election — and became a familiar face on Capitol Hill. He was able to get meetings with regulators at the highest levels, after recruiting former top officials to help FTX navigate agencies and Congress.
Then his empire collapsed, and with it crypto’s broader Washington influence operation.
The 31-year-old — now in jail — faces a slate of criminal fraud and conspiracy charges. Prosecutors allege that Bankman-Fried used $100 million in stolen FTX deposits to fund a massive political operation. He has pleaded not guilty.
In the aftermath of FTX’s collapse, prices in the crypto market tumbled and a slew of other digital asset firms imploded. Lawmakers gave up donations from Bankman-Fried. Crypto-friendly legislation — including a bill he championed to revamp regulations — effectively died.
But crypto has seen a comeback in the last few months. House Republicans have approved bills that would set up a regulatory regime that digital asset firms have long sought. The bills would curb the reach of the Securities and Exchange Commission, an agency that’s facing off with the biggest exchanges and token providers in court. The proposals would also boost the growth of so-called stablecoins used in payments.
In key respects, the end result of the House Republican legislation would resemble policy that Bankman-Fried had championed. The SEC would take a backseat to the Commodity Futures Trading Commission, a smaller agency that’s historically played less of a role in regulating consumer-facing financial products.
The proposals would codify in law for the first time explicit actions regulators must take to police digital asset trading. At this moment, the agencies are operating in the crypto space using authority drafted for traditional financial markets, including stock trading and futures contracts.
Critics counter that the House plan would potentially weaken industry oversight rather than improve it.
“The end goal is the same,” said Lee Reiners, a lecturing fellow at the Duke Financial Economics Center. “The industry’s been pretty successful in preventing the [House GOP bill] from being tarred with any association to Sam.”
Republican lawmakers are trying to brush off the SBF baggage before House floor votes this fall, but some see a potential challenge ahead.
Rep. Bill Huizenga, a senior Michigan Republican who’s helping shepherd the bills, said he thinks more Democrats would be supporting the legislation if not for Bankman-Fried's downfall.
"That flame burned pretty close and hot next to a number of them," he said, referring to the millions of dollars Bankman-Fried spent to back Democrats. It “is not unexpected to have them step back from their enthusiasm.”
Rep. Jim Himes of Connecticut, among the few Democrats who support the House bills, said he warned crypto lobbyists last week that they have a “fundamental problem in this space.”
“I hear all these promises, but I say, ‘How is this going to change the neighborhood in St. Louis, or the state of Connecticut, or the United States?’” he said. “To the average member, [they see] $2 trillion lost over time.”
House Republicans argue that the failure of FTX should compel more lawmakers to back their legislation.
Rep. Andy Barr (R-Ky.), a senior member of the committee that drafted the bills, said Bankman-Fried is “exhibit A” for why Congress needs to act on the House legislation.
“Reminding everybody about the bad behavior of some market participants will help us make the case for why some basic rules of the road are necessary,” said Rep. Dusty Johnson (R-S.D.), who chairs a digital asset subcommittee.
But in the Senate, crypto critics are on the rise and betting that a re-tread of the FTX and Bankman-Fried calamity will help grow their ranks.
Warren has a bipartisan group of 15 senators on her bill that would impose new anti-money laundering rules on digital asset trading. She said the trial will strengthen the case for her legislation.
“The deep skepticism about crypto is even deeper with his arrest,” Senate Banking Chair Sherrod Brown (D-Ohio) said in an interview. “All of these things contribute to the deep skepticism that the public has about crypto and how some pretty unscrupulous people are using it for some very unscrupulous purposes.”
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