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The past few months have been a tumultuous ride for the crypto industry, with assets shedding well over $1 trillion in market value since reaching an all-time peak of $2.9 trillion. The false promises shrouded in technobabble have led to tragic stories of vanished life savings, shattered dreams, and desires to self-harm.
But those disasters have fallen on ordinary investors lured into crypto as a failed get-rich-quick scheme. The industry’s winners, who have already made their fortune, are not only insulated from the mess, but they are using their clout to eagerly preach to policymakers that the industry is fine and needs no burdensome regulation.
A leading voice in this push is Sam Bankman-Fried, 30-year-old CEO of crypto trading exchange FTX. Christened by some as a crypto prince and others as Washington’s aspiring kingmaker, Bankman-Fried has in the past year developed an extensive crypto policy agenda that entails revolving-door hiring of former CFTC officials, formation of super PACs, and congressional campaign donations.
Bankman-Fried co-founded the (of course) Bahamian-based FTX in 2019, after stints at quantitative trading firm Jane Street Capital and crypto trading shop Alameda Research. Today, FTX has grown exponentially, with backing from the likes of Sequoia Capital, Softbank, Temasek, and Tiger Global. It is currently valued at $32 billion. The firm’s U.S. affiliate, FTX US, is valued at $8 billion.
According to Forbes estimates, Bankman-Fried himself is worth at least $21 billion. While he claims to be guided by a commitment to effective altruism and utilitarianism, his documented giving shows a greater desire to protect and enhance his wealth. In the 2022 electoral primary cycle alone, the crypto billionaire has spent over $30 million on political donations, much larger than the $21.8 million his firm’s foundation has earmarked to charity since its inception. His co-CEO Ryan Salame has spent over $5 million on political donations in this cycle. And Bankman-Fried has said he could spend up to $1 billion on the 2024 elections.
Much of this money has gone to opaque super PACs for unlimited political spending. Bankman-Fried has almost single-handedly bankrolled the Protect Our Future PAC, contributing over $23 million, purportedly in order to support congressional candidates who prioritize forward planning and pandemic preparedness. These candidates include political upstart Carrick Flynn, whose Democratic primary campaign for an open seat in Oregon was backed to the tune of $12 million by Bankman-Fried, making it the most expensive race this cycle. Despite the considerable war chest, Flynn was smoked in the election. But Bankman-Fried’s involvement in the race shows the lengths he is willing to go to to get political allies into positions of power.
While Bankman-Fried has channeled his giving mainly toward Democratic candidates, including a $6 million contribution to the House Majority PAC (which he got to intervene on behalf of Flynn, to no avail), his co-CEO Salame has looked to empower members of the Republican Party. Salame launched the American Dream Federal Action PAC with an initial $4 million gift, with the goal of supporting “forward-looking” Republican candidates.
This parallel giving by separate members of the firm to each major party comes straight out of a playbook used by established Wall Street actors that the crypto industry purports to challenge. Blackstone, the world’s largest private equity firm, is led by staunch Republican Stephen Schwarzman and staunch Democrats Tony James and Jonathan Gray. All of them heavily fund their respective parties, and neither party has made challenging private equity a central priority over the years.
It doesn’t take deep-seeded cynicism to realize that the motivations of FTX’s CEOs go well beyond preventing the next pandemic. We are at a critical moment for crypto, as lawmakers ponder how to determine oversight of the industry. There are a number of areas where congressional action would be decisive, from enshrining a primary digital assets regulator to outlining a framework for central bank digital currencies. These are issues that FTX and other industry members are keen to influence. In fact, FTX has ramped up its lobbying activity in recent months, as Bankman-Fried has become a more common fixture on Capitol Hill. In addition to testifying at committee hearings, he has apparently conducted one-on-one meetings with influential lawmakers who hold sway over regulatory matters.
And what is FTX’s main objective? To make the Commodity Futures Trading Commission (CFTC) the primary regulator of his business and the industry at large. Bankman-Fried has pushed Congress to expand the agency’s authority from oversight of just crypto products that have been determined commodities (coins that are not issued by a centralized authority, i.e., Bitcoin and Ethereum) and their derivatives, to include spot trading of all cryptocoins.
This would be a reckless move. It would also weaken the Securities and Exchange Commission (SEC), which has adopted a robust regulatory posture toward the crypto industry since Gary Gensler became chair. Gensler actually taught a course on crypto at the Massachusetts Institute of Technology, Bankman-Fried’s alma mater. But there is ample reason beyond Gensler’s personal expertise to grant the SEC exclusive authority over the digital assets industry.
In 2021, the SEC’s $1.9 billion budget was over six times larger than the CFTC’s $300 million budget, and its 4,500 full-time staff is over six times more than the CFTC’s about 700 full-time workers. Moreover, the SEC has a clear mandate of investor protection and a more demonstrable history of regulating securities markets—and make no mistake, the overwhelming majority of crypto assets are securities, not commodities. In addition, the SEC has been more inclined to enforce rules in the digital assets area. Just last month, the agency nearly doubled the size of its Enforcement Division Crypto Assets and Cyber Unit. Gensler is currently asking Congress for more funding to further expand that unit.
Crypto’s supporters in Congress are determined to ignore the massive gap in capacity between the two agencies; in fact, they likely understand that its incapacity is part of its appeal to FTX. A bill proposed by Sens. Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) seeks to grant the CFTC “exclusive jurisdiction over any agreement, contract, or transaction involving a contract of sale of a digital asset that is offered, solicited, traded, executed, or otherwise dealt in interstate commerce, including market activities relating to ancillary assets.” Perhaps in anticipation of such a move, FTX has stocked up its ranks with former CFTC officials. Former CFTC commissioner and acting chair Mark Wetjen is FTX’s head of policy and regulatory strategy. Ryne Miller, who was legal counsel to Gensler when he led the CFTC, is FTX’s general counsel. The Tech Transparency Project has also identified 14 other cases of CFTC alumni revolving into the crypto industry.
These CFTC alumni could also play a role in FTX’s request for the agency to eliminate intermediaries and fully automate crypto margin trades—in plain English, to allow FTX to complete crypto futures trades 24 hours a day, 7 days a week, 365 days a year. To do this, FTX would require customers to deposit enough collateral (likely in the form of cryptocurrencies) to support margin requirements, which would be calculated every 30 seconds. If customers are unable to meet these frequent assessments in real time, they would see their positions automatically liquidated.
This proposal poses a number of serious concerns. First, it requires retail investors to monitor their positions all day long, which is unsustainable. Since automated liquidations would happen quickly, investors could easily find their positions emptied without warning. There is also the issue of systemic risk. Automated liquidations during a market downturn could very easily add to market volatility, especially in the crypto sector. Another concern is that FTX could easily extend this privilege to other CFTC-regulated derivatives. Bankman-Fried recently took a stake in trading app Robinhood, and FTX has begun listing regular stocks on its platform in a bid to “[o]ffer an everything app for financial services,” so there is valid cause for concern.
Maybe crypto bros are starting to worry that they will soon run out of people to exploit with their speculative products, and their solution is to become a full-service, underregulated financial institution. However, the CFTC should not be party to this. The agency must engage in a formal rulemaking process before making a decision on this application, rebuffing demands from FTX’s shadow CFTC.
In an interview professing his devotion to effective altruism, Bankman-Fried emphasized the need to do little harm while accumulating the funds for future giveaways. That’s difficult to square with the harm the crypto industry has already inflicted on the lives of so many people, and the environment. If he gets his wish to sideline the SEC, there is a real danger of crypto’s clear risks to investors becoming a permanent fixture. Instead of lofty narratives about innovation or mildly funny commercials starring Larry David, the public needs strong, independent-minded regulators who are prepared to be vigilant overseers of this space.