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An awkward pause followed one lawmaker’s questions at a hearing this week when they quizzed regulators about which agency was responsible for monitoring the failed cryptocurrency exchange FTX.
“Can you tell me who in our federal financial services regulatory administrative state was watching FTX to make sure no one there stole people’s money?” John Kennedy, a Republican senator from Louisiana, asked banking regulators during a Senate hearing. “Was anyone watching this?”
In the wake of the collapse of Sam Bankman-Fried’s $32bn empire, which included a large US affiliate, lawmakers and regulators in Washington have sought to pin blame on each other for FTX slipping through the cracks.
“There’s definitely a blame game going on and we’ll see more of it,” said Ian Katz, financial policy analyst at independent research firm Capital Alpha Partners.
Janet Yellen, US Treasury secretary, was among the officials pointing to supervisory shortcomings. The fall of FTX “demonstrate[s] the need for more effective oversight of cryptocurrency markets”, she said in a statement on Wednesday, adding that the same protections offered in traditional markets should apply to crypto assets.
But the nation’s top banking regulators — including the leading supervisory authorities at the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency — deflected, arguing that lawmakers’ questions should instead be directed to the likes of the Securities and Exchange Commission and Commodity Futures Trading Commission.
Market regulators are “the first place to start in this space”, Michael Barr, the Fed’s vice-chair for supervision, told members of the Senate banking committee on Tuesday. “They have existing authorities [and] we want to make sure those are fully utilised.”
Critics of the SEC, whose chair Gary Gensler once described the crypto market as the “wild west”, have argued that the agency has focused on headline-grabbing enforcement actions such as charging celebrity businesswoman Kim Kardashian for illegally touting crypto, rather than tackling systemic risk in the market. They have also said Gensler should clarify rules for digital assets.
But the SEC chair has argued that existing securities laws are sufficiently clear and has repeatedly urged crypto platforms to register with the agency, based on the assumption that most tokens qualify as securities.
Gensler last week told CNBC: “[Crypto] is a field that’s significantly non-compliant, but it’s got regulation, and those regulations are often very clear.” He has also asked Congress to give the SEC more power to oversee crypto.
Katherine Martin, managing director at Rock Creek Global Advisors, a policy advisory firm, agreed: “The SEC alone can’t be relied on to solve this problem unless the agency is given a new mandate by legislation and the resources to implement it.”
Like Gensler, Rostin Behnam, chair of the CFTC, has argued existing laws are unambiguous. He has also supported a bipartisan bill introduced by US senators Kirsten Gillibrand and Cynthia Lummis that would expand the CFTC’s authority, giving it jurisdiction over cash crypto markets based on the premise that most tokens resemble commodities. (There is still no definitive classification of tokens.)
Asked at a conference in Chicago this week whether regulators and the broader industry had been too easily taken in by Bankman-Fried, Behnam said: “We always have to scrutinise ourselves to learn . . . but from my standpoint I did what I could with the authority I have.”
He added that regulators could “prevent” similar events in the future if Congress acted quickly to give them more powers.
LedgerX, a CFTC-regulated futures exchange that was bought by FTX last year, was not included in last week’s bankruptcy filings. Behnam and CFTC commissioner Kristin Johnson both pointed to LedgerX’s survival as evidence of the efficacy of the commission’s oversight.
Banking regulators also took flak from some lawmakers, in part for failing to provide detailed guidance to banks about how to engage with crypto companies and dispense services like holding assets in custody. Others complained they were simply too light touch.
“I’m distressed by what I’ve heard from you gentlemen: ‘guardrails, safe and sound ways to deal with crypto’,” Brad Sherman, a Democratic representative from California, said to banking regulators present at the House financial services committee hearing on Wednesday. “You sound like Sam Bankman-Fried, only you’re wearing long pants instead of shorts.”
The debate highlights flaws in what is a complex regulatory network.
“We have three different bank regulators, two different market regulators, ambiguities and at times limitations around jurisdictional scope,” said Kathryn Judge, a professor of law at Columbia University. “Part of what the entire fiasco reflects is the fact that there are ongoing costs to having such a fractured regulatory scheme.”
The majority of FTX entities were not registered with US agencies, the main exchange being regulated in the Bahamas, where it is headquartered. FTX.US, the platform’s US counterpart, was not regulated by the SEC or the CFTC.
But legal experts argue it may have fallen under their purview if assets trading on the platform were established to be securities or commodities, or if FTX.US was passing orders from US investors to Bahamas-based FTX, thereby acting as a broker.
Analysts argue legislative inaction is also to blame for an incomplete regulatory crypto framework in the US. While lawmakers have introduced crypto bills — including one that Bankman-Fried supported — none has passed so far.
According to Aaron Klein, former deputy assistant secretary for economic policy at the Treasury department, “any legislation drafted before FTX’s implosion needs to be fundamentally rethought”.
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