This is an article I published on the technology edition of The Paper last December.
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The U.S. Securities and Exchange Commission and the Commodity and Futures Trading Commission are fighting for greater jurisdiction over the emerging field of digital currency through a battle for definition.
Almost a month after FTX went bankrupt, Bankman-Freed is still living freely in the Bahamas, suggesting there are still some difficulties in judging him.
American politics is a politics of votes. In order to win votes, the top politicians in the United States are all top actors. In order to attract attention, they need to seize hot spots, stir up heat, and package their own political achievements. As a year-end drama, FTX's bankruptcy is undoubtedly a bargaining chip that can be used for continuous hype. In the recent overwhelmed activities in Washington, it is possible that some things that have a greater impact on future crypto regulation will be born.
First, stablecoin legislation
Theoretically, the possibility of the U.S. Congress completing any legislation before the end of the year is already very small. This is because, firstly, the current Congress is in a lame duck period. After the midterm elections, the old members are about to leave office, and the new members have not yet taken office. This transitional period lacks the momentum needed to pass legislation. Secondly, it takes a relatively lengthy process for Congress to form formal laws. First, hearings must be held in the subcommittees of the House of Representatives and the Senate respectively to fully listen to the opinions of social people and professionals. Then, the subcommittees of the two houses will form a draft respectively, which will then need to be passed by the two houses respectively. Finally, a meeting will be held to compare the different versions of the two houses. The final draft can only be formed after coordination and compromise. This process is time-consuming and laborious, and the quarrels between the two parties in the middle will make the entire time span unpredictable.
The timing of legislation becomes a decisive factor. Important events will build consensus, simplify the whole process and speed up the whole process. Members of Congress are experts in this field. There is no better time than now for crypto legislation. The FTX incident has caused anger in Washington to soar. In the recent speeches of various officials, the urgency of crypto legislation has become a consensus, and the only difference is the direction and intensity of crypto regulation.
Stablecoin legislation is the easiest of all crypto legislation to be introduced as soon as possible. Because the topic of stablecoins has been discussed for a long time among regulators (such as the discussion of sovereign digital currencies CBDCs, and the previous discussion of Facebook's stablecoin "Libra", etc.), members of Congress are familiar with related issues. In addition, there are already several different versions of stablecoin legislation in Congress, and the basis for selection is relatively good. If there is any legislation that may enter the relevant procedures quickly before the end of the year, it is stablecoin legislation. Ron Hammond, director of public relations at the Blockchain Alliance in the United States, mentioned in a tweet on November 22: "Stablecoin bills are back in the sights of legislators. Although not directly related to the FTX issue, some versions of stablecoin bills require practitioners not to abuse customer funds, which is an issue that many legislators believe can be completed this year."
Some politicians are actively promoting stablecoin legislation. The most representative of them is Republican Senator Pat Toomey, who is very influential in the Senate Banking, Housing and Urban Development Committee and pays close attention to crypto issues. On December 1, Bankless, a well-known podcast in the crypto circle, interviewed Toomey. In the interview, Toomey said, "This year is not over yet. In order to prioritize my legislation in crypto, I will use the current legislative process to the extreme. We still have a chance. FTX made such a big fuss because the United States lacks a lot of certainty when regulating our own crypto institutions." The "current legislative process" he mentioned in the interview refers to the "unspoken rules" of legislation in the two houses. Different from the formal legislative process of Congress mentioned above, in the current situation of mutual hatred and political polarization between the two parties, pushing a piece of legislation must rely on private solicitation and transactions. The general practice is that a proposal must first be supported by an important figure of one party, and then this person will win over the senior figures of the other party, and in this way reach a "bipartisan consensus" in one house, and then they must greet the "gatekeeper" of their house (that is, the big guy who presides over the procedure) to make this proposal one of the several bills that "must be passed" in that house that year. Similarly, similar operations are required in another house to produce a "passable" bill. Thanks to the momentum of the FTX incident, stablecoin legislation basically has these conditions. Toomey mentioned in the interview, "I hope I can announce a stablecoin bill that has achieved bipartisan consensus soon. It is still difficult to complete all the procedures this year, but if this bill is backed by a bipartisan consensus, it will be a big step in the right direction."
In addition, there are also bipartisan forces in the House of Representatives doing the same thing. Republican Representative Patrick McHenry, who chairs the House Financial Services Committee, and Democratic Representative Maxine Waters are advancing stablecoin-related legislation in the House of Representatives.
Second, using crypto issues to attack each other and fight for power
Important events provide legislators with legislative momentum while also providing politicians with ammunition to attack each other. The FTX incident has aroused such great negative emotions in Washington that it has become much easier for politicians to "throw mud" at each other. They only need to direct the anger to the other side.
After the midterm elections, Republicans took control of the House Oversight Committee, which is responsible for oversight and investigations within Congress. With relevant power in hand, Republicans will look for the Democratic Party's "Benghazi moment" and hope to find negative news like Hunter Biden, son of US President Biden.
After the FTX incident, the Republicans have begun to attack the Democrats. One way is to accuse the Democratic government of regulatory failures, and because the government's inflexible attitude towards encryption has lost the opportunity to make encryption compliant. Another is to attack the Democratic Party's political corruption. On November 19, Republican Senator Josh Hawley asked Biden administration officials and Democratic lawmakers to disclose emails related to FTX and its founder Sam Bankman-Fried. It is rumored that Bankman-Fried has donated more than $5.2 million to Biden's political donations. Fox News, which is labeled as a Republican, also has a special investigative program that spends a lot of space describing Bankman-Fried's political donations to the Democratic Party, accusing the Democratic Party of using unidentified black money for campaigning.
Another is to use the dispute over the definition of crypto assets to expand its own regulatory boundaries. The core of this is the functional positioning of the U.S. Securities and Exchange Commission (SEC) and its definition of crypto assets. SEC Chairman Gary Gensler has undoubtedly been brought to the forefront by the FTX incident. On November 11, Congressman Tom Emmer tweeted: "My office has received reports that SEC Chairman Gary Gensler is helping Sam Bankman-Fried and FTX exploit legal loopholes to gain a regulatory monopoly. We are investigating this matter."
In addition to Gensler himself, the SEC has also been widely criticized for its unclear definition of the regulatory attributes of crypto assets, and many members of Congress have criticized this. The core issue is: Is digital currency a security? Which digital currencies are securities and which are not.
The SEC's attitude has always been: the legal definition of securities is very clear, and the SEC has an open attitude towards this. The SEC will manage different digital currencies in accordance with the law. If there are gray areas in the law, Congress needs to enact new bills to clarify them.
In the eyes of the outside world, this attitude has created huge uncertainty in crypto regulation. Because digital currency is a new thing, the previous legal definition of securities does not cover the new phenomenon that comes with digital currency. If a company issues a digital currency, the company itself cannot determine whether the digital currency is a security, and does not know whether it needs to be registered and managed in accordance with compliance procedures. Due to the unclear law, the SEC has a certain degree of discretionary power, which is in fact equivalent to the power to kill crypto assets at will. The SEC has become a sword of Damocles hanging over the heads of practitioners. Doing business in the United States is always at risk of SEC supervision, which has led many American companies to go overseas. It is this uncertainty that has led companies like FTX to move to the Bahamas and act recklessly in their operations after being out of the supervision of the laws of a major country.
In addition to the SEC, the Commodity and Futures Trading Commission (CFTC) also plays an important role in crypto regulation. The CFTC's regulatory scope includes the derivatives market and the commodity market in the United States. The CFTC has previously stated publicly that Bitcoin and Ethereum are commodities, and commodities are within the scope of CFTC regulation. After the FTX incident, the CFTC is also seeking to expand its regulatory powers.
On December 1, the Senate Agriculture Committee held a hearing on the FTX incident. This was the first of the recent hearings on FTX. CFTC Chairman Rostin Behnam was the only witness at the hearing. At the meeting, he explicitly called for legislation to strengthen the CFTC's empowerment. "We lack the power to fully regulate the digital commodity market," Behnam said. "To prevent this from happening again, we must obtain appropriate authorization from Congress." In addition, Behnam also actively promoted the passage of the Digital Commodity Consumer Protection Act (DCCPA). The Digital Commodity Consumer Protection Act is a bill that Bankman-Fried lobbied vigorously before, and it was proposed in the Senate Agriculture Committee. The bill is currently being coldly received because it is labeled Bankman-Fried. Behnam's attention to the bill is largely because the bill strengthens the regulatory power of the CFCT.
The focus of the game of the Digital Commodity Consumer Protection Act also involves the relationship between the CFTC and the SEC. The CFTC and the SEC have a cooperative and division of labor relationship. Due to the unclear boundaries of digital currency supervision, there is a vague area in the actual division of labor between the two. The approximate division of labor between the two is that the CFTC is responsible for commodities and the SEC is responsible for securities. Although the SEC will have the power to decide whether digital assets are securities or commodities according to the Digital Commodity Consumer Protection Act, it actually narrows the scope of SEC supervision. It clarifies that part of digital currency is digital commodities, and the jurisdiction of commodities lies with the CFTC. According to the crypto media The Block, SEC Chairman Gensler once said that most digital assets, possibly including Ethereum, fall within the definition of securities, and also hinted that the Digital Commodity Consumer Protection Act may complicate the law enforcement role of his agency. For the emerging field of digital currency, the SEC and the CFTC are fighting for the right to define in order to gain a wider jurisdiction.
Third, the investigation surrounding Bankman-Fried’s conviction
Bankman-Fried is undoubtedly the central figure in the FTX incident. He spent a lot of energy lobbying politicians in Washington, but all his promises have now become lies. The politicians he deceived are only angry with him. He misappropriated a huge amount of customer funds to engage in high-risk gambling, arbitrarily transferred funds between the two companies he controlled, FTX and Alameda, and used huge sums of money to buy land for his parents in the Bahamas. These things have been widely criticized after being magnified by the media. After FTX went bankrupt, the assets of millions of accounts evaporated in an instant. The prospect of compensation for these investors is slim, and he has become a rat crossing the street. The name of a recent Bankless podcast can well reflect people's mood: "Why hasn't SBF gone to jail yet?"
After the FTX incident, everyone is paying attention to the investigation into Bankman-Fried’s conviction.
According to a Reuters report on November 11, the FTX bankruptcy resulted in the disappearance of at least $1 billion in customer funds. According to a CNBC report on November 15, FTX's bankruptcy involved more than 1 million creditors, which means that more than 1 million people around the world have the right to claim debts from Bankman-Freed.
The biggest crime Bankman-Fried faces is the unauthorized misappropriation and abuse of customer funds. A CNBC report on November 13 mentioned: A source familiar with FTX's operations revealed that Alameda Research, a fund founded by Bankman-Fried, had previously misappropriated billions of dollars of customer funds from the FTX exchange. This directly led to FTX's insufficient reserve funds and its inability to withstand customer cash-out requirements, which eventually led to FTX's bankruptcy. Bankman-Fried misappropriated funds in the form of loans, and the relevant lending activities were not disclosed to customers. Under US securities laws, it is illegal to use customer funds for transactions without explicit consent. At the same time, this behavior also violated FTX's terms of service. FTX's terms of service clearly promise to ensure the safety of customer funds. Fortune magazine reported on November 14 that an unnamed crypto lawyer said that after reviewing FTX's terms of service and Bankman-Fried's public statements and other evidence, he had no doubt that there was fraud in Bankman-Fried's behavior and FTX's business practices. All elements for filing a lawsuit are in place under Section 1343 of the Federal Criminal Code. The statute carries a maximum penalty of 20 years in prison.
However, it has been almost a month since FTX went bankrupt, and Bankman-Fried is still living freely in the Bahamas, which shows that there are still some difficulties in sentencing him. An article titled "Will Bankman-Fried go to jail for the FTX disaster?" in Fortune magazine on November 14 summarized two difficulties in convicting him. The first is the issue of jurisdiction. FTX is an offshore company headquartered in the Bahamas. Therefore, in theory, Bankman-Fried's actions are not within the jurisdiction of US law enforcement. In order to sort out the jurisdiction issue, the US Department of Justice needs to find a "link" that connects Bankman-Fried's business activities to the United States. The second potential obstacle is intent. The key to convicting Bankman-Fried is to determine the main reason for the customer's loss. If the loss is caused by poor management, it will not be easy to convict him. If it is intentional deception of investors, then he will be held accountable. Former U.S. prosecutor Randall Eliason said, "Poor corporate management and losing a lot of other people's money is not a crime. It happens all the time. If it is classified as a criminal case, there must be an element of deception in the behavior." Bankman-Fried has undoubtedly received advice from his lawyer. On November 30, he had a video link with New York Times columnist Andrew Ross Sorkin at the DealBook Summit. Bankman-Fried emphasized throughout the process that he made mistakes in management, but refused to admit fraud. For example, when answering whether he used customer assets, he said, "I didn't manage Alameda operations. I didn't know what was going on at the time. I didn't know the size of its positions. I only learned a lot of things last month."
One of the current official efforts is to get FTX executives to accept official investigations. Because previous information shows that FTX's internal management is very chaotic, outsiders can no longer figure out FTX's specific operations on wallets and funds. Only insiders can answer relevant questions. So the next step for Congress to investigate is to find a way to summon the original FTX insiders to Washington for hearings. The highlight is to ask Bankman-Fried to testify in Congress. Congressman Maxine Waters has officially notified Bankman-Fried and invited him to testify at the House Financial Services Committee hearing on December 13. However, judging from the current situation, Bankman-Fried, who is the target of public criticism, will definitely not go to Washington. For this reason, someone proposed a compromise plan to let Bankman-Fried attend the hearing online. This compromise plan has been agreed by some members of Congress, but Bankman-Fried has not yet officially responded to it.
(The author is curiousjoe, a cross-border researcher of international politics and cryptocurrency.)