The dramatic collapse of the cryptocurrency exchange FTX is unlikely to lead to meaningful efforts by Congress to rein in the cryptocurrency industry because one Republican leader set to take control of the House in January has already interfered with investigations of crypto firms, including FTX.
Rep. Tom Emmer (R-Minnesota) led a bipartisan effort in March to thwart attempts by the Securities and Exchange Commission (SEC) to probe cryptocurrency companies when he and seven other lawmakers, including four Democrats, wrote the agency demanding that it stop using “investigative functions to gather information from unregulated cryptocurrency and blockchain industry participants.”
FTX was one of two crypto exchanges under SEC investigation at the time, according to reporting published on November 23 by The American Prospect. The agency was looking into how the company handled customers’ money and allegations that it was selling unregistered securities months before filing for bankruptcy on November 11.
In the time leading up to its collapse, FTX had been secretly funneling customers’ money into financing risky bets made by Alameda Research, a hedge fund with close ties to FTX executives. While the SEC discovered no wrongdoing by FTX, The Prospect said it’s “possible that the pressure from members of Congress deterred the SEC from probing further.”
Input from lawmakers may have been especially chilling because of an inter-agency dispute and an ongoing debate in Washington over how to regulate cryptocurrency. SEC Chair Gary Gensler has maintained that most cryptocurrencies are under his agency’s jurisdiction because they fit the legal definition of securities: investment assets with values dependent on the work of private enterprises.
Many experts and observers have echoed the assertion that Congress doesn’t need to act for regulators to clamp down on crypto malfeasance. Most recently, former Federal Deposit Insurance Corporation Chair Sheila Bair called for executive agencies to act without special permission from Congress. But the White House has said that Congress should pass additional laws before definitive crypto rules can be established. Industry-friendly lawmakers like Emmer have taken advantage of the situation by insisting that the SEC has little to no jurisdiction whatsoever over cryptocurrency.
Attempts by Emmer and his colleagues to meddle in the investigation of FTX were likened by The American Prospect to the Keating Five scandal of 1989, in which a quintet of U.S. senators were exposed for obstructing a regulatory investigation of a financial firm owned by Charles Keating, a major campaign donor engaged in wrongdoing that eventually led to a conviction on 73 counts of fraud, racketeering and conspiracy. While the “Keating Five” escaped meaningful punishment after facing charges from the Senate Ethics Committee, the scandal cast a pall over their careers. Questions about the affair hounded one of the legislators involved, Sen. John McCain (R-Arizona), during his failed presidential campaign of 2008.
Lawmakers who responded to The Prospect’s criticism denied any impropriety. But the appearance of a conflict of interest is there, especially from Emmer, who raised $2.75 million from FTX executives this election cycle as head of the campaign arm for the House Republican caucus. Emmer also personally praised FTX founder Sam Bankman-Fried at a congressional hearing in December 2021 for “doing a lot to make sure there is no fraud or other manipulation.” The Justice Department and the SEC are currently looking into allegations of wrongdoing related to the FTX collapse.
Bankman-Fried and other company executives also back legislative proposals, like one co-sponsored by Emmer, to grant authority over so-called digital assets to the Commodity Futures Trading Commission (CFTC), even though the SEC has six times the resources and a reputation for being tougher on white-collar crime.
“We don’t need new legislation or regulation; we need politicians to fully fund the SEC and to publicly support them in cracking down on the crypto industry,” said Dennis Kelleher, founder and president of Better Markets, an organization founded after the 2008 financial crisis in support of regulation.
In a separate statement, Kelleher said Bankman-Fried “spent enormous amounts of money buying access and influence to get Congress to quickly pass its special interest legislation putting the smallest and least funded financial regulator, the CFTC, in charge of the complex, sprawling crypto industry.”
Some of that money was earmarked for Kelleher himself, who claimed that Bankman-Fried offered him “seven figures” to support FTX in the company’s bid to get the CFTC to approve of its proposal to deregulate derivatives markets.
Even with FTX and its lobbying budget out of the picture, there are still plenty of sketchy enterprises clamoring for tougher regulators to be sidelined. Top executives of the tech venture capital firm a16z, formerly known as Andreessen Horowitz, gave $2.2 million in campaign donations to Republicans and Democrats last midterm election cycle, mostly through an entity called GMI PAC. Bankman-Fried also gave $2 million to the PAC and FTX co-CEO Ryan Salame donated $1.5 million.
Critics have accused a16z of investing like it’s engaging in pump-and-dump schemes based on dubious ventures, such as an exchange for NFTs, digital cartoons that can be digitally copied and pasted by anyone with internet access, and a carbon credit venture involving cryptocurrency and disgraced WeWork co-founder Adam Neumann — as if carbon credits weren’t already sufficiently controversial for failing to live up to their billing as a mechanism to combat global warming. GMI PAC has given money in support of Sen. John Boozman (R-Arkansas), one of the lawmakers leading the charge to wrest jurisdiction over cryptocurrency from the SEC.
Old school financial industry players also appear keen on seeing the crypto beat assigned to the CFTC. Fidelity Investments — which has launched crypto retirement funds and in January saw the SEC reject an application for a publicly traded Bitcoin-based fund — has lobbied Congress on two pieces of legislation that would grant the CFTC jurisdiction over crypto. The $4.5 trillion investment firm and a16z are also both members of a trade association called the Crypto Council for Innovation, which supports elevating the CFTC above the SEC on digital matters. JPMorgan Chase, which recently applied for a cryptocurrency wallet trademark, has said that it expects the CFTC to have an increased role in cryptocurrency markets.
The lobbying blitz has critics of the crypto industry worried, and Emmer’s rise to a House leadership role exacerbates those fears. He will exert significant influence over what bills move through the chamber starting in January, when he becomes House majority whip — third in command behind the speaker of the House and the House majority leader. One congressional staffer who works on matters before the House Financial Services Committee spoke to Truthout about concerns over Emmer’s rise.
“If Congress is serious about ensuring companies like FTX cannot continue to harm consumers, it must empower the SEC with more resources,” the staffer said on condition of anonymity, due to not being authorized to speak on industry influence in Washington. “Unfortunately, crypto industry insiders, like Tom Emmer, are doing the opposite. Emmer as majority whip will make it harder for Congress to pass effective regulation.”
The CFTC itself has supported proposals to grant the agency jurisdiction over cryptocurrency. CFTC chair, Commissioner Rostin Behnam, defended its legislative push during a hearing on December 1 before the Senate Agriculture Committee, saying congressional action was necessary to avoid another FTX-style collapse.
But Behnam appeared to concede that the SEC is better suited for regulating retail financial markets when Sen. Tina Smith (D-Minnesota) asked several questions in succession on existing agency powers. Smith queried Behnam on the existence of current executive agency authority to enforce rules on investment advisers and exchanges. Behnam responded that the SEC currently has this power. While he qualified his answers later in Smith’s round by saying that the agency lacks jurisdiction over “commodity tokens,” he conveyed respect for the agency’s institutional knowledge and power. “We know how to do this,” Smith said of regulating financial markets, newfangled or not.
At the same hearing, Sen. Dick Durbin (D-Illinois) expressed skepticism of the argument that Congress needs to act quickly to prevent another FTX-style collapse by passing legislation that industry lobbyists and FTX itself have clamored for. “I’ve heard some of my colleagues say we’ve got to move on this fast,” he said. “I don’t know if they’re saying that now as they did a month ago.”
But the alternative to fast action could be worse with Emmer set to take power in a matter of weeks. The Minnesota Republican is already openly excited about using his power to help out his friends in the cryptocurrency industry.
“We need to use the stage that is Congress to promote all of you beyond the walls of the Capitol,” he told a Washington gathering hosted by the Blockchain Association, a crypto trade group, just days after FTX went bankrupt. “People need to understand more out there that they shouldn’t be afraid of this.” He said the legislative process next year “could be a lot of fun.”
Meanwhile, the growing list of FTX victims demonstrates that the fun will likely come at the expense of working people, and that some amount of cryptocurrency fear is probably healthy. One attorney involved in a class-action suit against Bankman-Fried and celebrities who endorsed FTX said that his office received “more than 1,000 calls and emails from investors around the world in the 24 hours after the lawsuit was filed,” according to The Wall Street Journal. In Australia alone, there are at least 30,000 people who lost money in FTX, including one woman who works as a cleaner and will “struggle to pay rent and with Christmas expenses after losing almost US$5,000 of investments,” according to The Guardian. “I hope FTX take action to refund me my money … I am not a rich person,” she said.