Former FTX CEO Sam Bankman-Fried spent a significant amount of time in Washington over the past half year, meeting with legislators and their staffers. His lobbying efforts focused on shaping the future of crypto regulation in the U.S., with a specific emphasis on how an exchange providing both spot and derivative trading could be regulated by the Commodity Futures Trading Commission (CFTC). Some on Capitol Hill felt they had a personal connection with the CEO, which has resulted in shock as to both the fallout of FTX and the highly suspect behavior of Bankman-Fried.
Before the collapse of FTX, Bankman-Fried and his lobbyists were getting resistance to what many considered an aggressive, go-it-alone approach. Much of this activity centered on promoting the Digital Commodity Consumer Protection Act of 2022 (DCCPA), which addresses a gap in U.S. law that leaves financial regulators unsure over who has priority when it comes to overseeing crypto spot markets. However, the legislation as written currently requires decentralized finance (DeFi) platforms to submit to regulations with which they argue that due to their technological design, they would not be able to comply.
Now that the FTX empire has crumbled and Bankman-Fried’s reputation is in tatters, the outlook for regulation is uncertain.
Congress is currently in what many describe as the lame-duck cycle, where elections are generally concluded and not much in the way of legislation usually gets done. Time is against the efforts of any bill that may still be under consideration. However, the turmoil ignited by the FTX collapse, in which U.S. customers may have suffered significant financial harm, raises the prospect that there may be action on crypto-market legislation as soon as next week.
The two original sponsors and key architects Debbie Stabenow (D-Mich.), who chairs the Senate Agriculture Committee, and John Boozman (R-Ariz.) each received the most in individual donations from Bankman-Fried at $23,200 a piece. However, there is more than just Bankman-Fried that is the impetus for the bill, as a report to the White House from the Financial Stability Oversight Council (FSOC) submitted under an executive order regarding the responsible development of digital assets, recommends three different areas in which Congress could pass legislation to address the risks in the crypto markets.
The FSOC report first suggests legislation for stablecoins, which is what leaders of the House Financial Services Committee seem most focused on right now. FSOC recommends that legislation to cover the spot markets for cryptocurrencies also be considered, which is what the DCCPA would address. Finally, the FSOC report suggested that legislation allow for prudential regulators to regularly examine the affiliates and subsidiaries of any major crypto exchange. This is similar to how the Federal Reserve regulates bank holding companies today for institutions such as Wells Fargo
“The events that have transpired this week reinforce the clear need for greater federal oversight of the digital asset industry…In light of these developments, we are taking a top-down look to ensure it establishes the necessary safeguards the digital commodities market desperately needs. Chairwoman Stabenow and I remain committed to advancing a final version of the DCCPA that creates a regulatory framework that allows for international cooperation and gives consumers greater confidence that their investments are safe.”
John Boozman (R-Ariz.), ranking member of the Senate Agriculture Committee and sponsor of the Digital Commodities Consumer Protection Act.
According to OpenSecrets, FTX.US through individuals and political action committees has donated over $70 million, ranking it as the third-largest influencer of political campaigns. The donations include 57 representatives and 22 senators. Regarding lobbying, the DCCPA was the most heavily lobbied bill by FTX.US during 2022.
Outlook and Implications
The outlook is fairly grim in the short term. All of this negative publicity may also reduce the chances that the crypto industry will have meaningful input into new regulations, leaving consumer protection groups and other interested parties to influence the rules. Quick action on regulation may also mean the crypto industry will be unhappy with the results.
The crypto trade associations and other voices on Capitol Hill, such as Coin Center, the Blockchain Association and the DeFi education fund, will need to work extra hard to establish goodwill again for the industry. While harsher language for stablecoin and spot market regulations may appear as amendments to current legislation, there could also be a new bill that might seek to empower regulators to examine the affiliates and subsidiaries of digital asset exchanges similar to the way bank holding companies are examined. The Administration may also support this kind of bill as this was one of the recommendations from FSOC that turned out to be right on point in light of the FTX collapse.
The DCCPA may be severely damaged in particular by the fact that it has the reputation of being the FTX Bill in the Senate. However, the act is not going away, a press release on Friday from Boozman made clear that both sponsors committed to ensure the bill establishes necessary safeguards for the digital commodities market. After a review takes place, the commitments from Stabenow and Boozman are to see the bill in a final form be advanced to the Senate floor for a vote.
The slowdown to the DCCPA seems to open the door for the previously introduced Lummis-Gillibrand Responsible Financial Innovation Act (RFIA), which sets out to regulate the entire digital asset industry, including the spot markets. A meaningful difference between the two is that the RFIA bill provides that registration by an exchange with the CFTC for federal oversight is optional, while the DCCPA makes it mandatory. Senator Cynthia Lummis (R-Wyo.) is an advocate for the industry and wants to see the U.S. take advantage of the emergence of digital assets. Watch carefully for how this bill gets reintroduced in 2023 and expect an update to address what has happened, including potential new language for how affiliates and subsidiaries of major exchanges are regulated.
For a stablecoin bill, the latest statements from both Chairwoman Maxine Waters (D-Calif.) of the House Financial Services Committee and Patrick McHenry (R-N.C.), it’s ranking Republican, indicate they are on the same page regarding a desire to get the legislation passed, perhaps this year. This type of law would create a licensing regime for providers of stablecoins that are specifically backed 100% by U.S. dollars, where the Federal Reserve is likely to be designated as the regulator of these providers. The bill could also place a moratorium on algorithmic-backed stablecoins (not based on U.S. dollars as collateral) for two years, which has been one of the sticking points in the negotiations.
Waters made it clear this is a priority, and now that the White House has chimed in that crypto needs to be regulated, expect to see some kind of action as early as next week.
Look to see if there is a strong push for legislation on crypto and particularly stablecoins in the House if the midterm elections result in a Republican majority. With Tether
Overall, the crypto legislation has generally been approached on a bipartisan basis in the Senate, and it is more likely than not that the DCCPA will take on a new form and be reintroduced in 2023 after the dust from Bankman-Fried and the FTX failure settles. Watch for any senators that start to take a hard line on cryptocurrency, as they may be seeking to distance themselves from what became too much of a cozy relationship with Bankman-Fried.
The RFIA may see new life. The only question might be how Senator Kirsten Gillibrand (D-N.Y.) wants to approach the fact that she also is a co-sponsor of the DCCPA. If she is not very public or outspoken about the need for the DCCPA to see movement in 2023, it could be her way of pulling back because of Bankman-Fired’s involvement. This may drive her to go all-in on the RFIA that managed to avoid the spectacle that Bankman-Fried and his lobbyists created.
Ultimately, the memory of what happened with Bankman-Fried and FTX is not positive for crypto, and investors should be prepared for potential new approaches to legislation that would not sit well with the industry. However, if crypto markets stabilize and it is clear by the Q1 the overall DeFi, NFT and stablecoin marketplaces have survived the FTX crash, institutional investors should expect positive movements on issues such as stablecoins and regulation of the spot market of cryptocurrencies, which could create better market efficiencies and outcomes.
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