FTX’s collapse upends sam bankman-fried’s Washington play

FTX founder Sam Bankman-Fried. (via REUTERS)
FTX founder Sam Bankman-Fried. (via REUTERS)

Summary

  • The goal was to steer oversight of crypto into the hands of what was perceived to be a friendlier regulator than the SEC

Sam Bankman-Fried’s multimillion-dollar Washington charm offensive revolved around a small financial regulator and a group of senators with whom the purported crypto billionaire found common cause in a bid for light-touch regulation of digital assets.

For FTX, the crypto exchange Mr. Bankman-Fried founded, the goal was to steer oversight of crypto into the hands of what was perceived to be a friendlier regulator than the Securities and Exchange Commission, which has been promising a more stringent approach.

His effort dovetailed with desires of other regulators and legislators to hold sway over a new, fast-growing industry. The Commodity Futures Trading Commission, which has had periodic turf battles with the SEC, wanted to expand its regulatory purview, while the Senate committee that oversees it saw a rare chance to carve out an expanded role for itself.

Then FTX collapsed. Legislation to provide light-touch regulation is on hold. The CFTC’s dealings with FTX are drawing scrutiny. Mr. Bankman-Fried, once the friendly, confident face of crypto, is toxic. And crypto firms face the prospect of far stricter enforcement by the SEC.

Meanwhile, Mr. Bankman-Fried’s ascent in Washington shows how, by doling out enough cash to politicians and interest groups, even a 30-year-old in cargo shorts can win a seat at the table for critical policy debates.

So far, crypto is largely unregulated. But that state of play wasn’t likely to last. The crypto market swelled to around $3 trillion in 2021, before crashing this year. Stunning gains drew in big-name institutional investors and hordes of individual investors. Even Wall Street began to engage with some crypto products.

With crypto becoming more intertwined with traditional markets, policy makers grew concerned about the risks it posed to investors and the broader financial system.

The crypto industry began a concerted lobbying effort to influence the debate. In the U.S., the key question is which regulatory agency—the CFTC or SEC—should be the main cop on the beat.

Crypto firms prefer the CFTC, and Mr. Bankman-Fried became a champion of this push. A 700-person agency that regulates derivatives like corn futures and interest-rate swaps, the CFTC has less experience than its larger sibling in policing the sort of conduct that can harm ordinary investors.

The CFTC also has less than one-sixth the staff of the SEC. The markets it regulates—futures, options and swaps—are geared toward companies hedging risk and professional investors who generally need less protection than individuals saving for retirement.

To regulate crypto, it would need to write rules from scratch—a process that would likely take years. Still, cryptocurrencies represented an opportunity for the agency and its chairman, Rostin Behnam, to gain additional power—though Congress would need to pass legislation.

Mr. Bankman-Fried proved a powerful ally. Along with FTX and executives at the firm, he showered politicians on both sides of the aisle with $70 million in campaign contributions ahead of the 2022 elections.

Aiding FTX’s effort to gain influence was a cast of former CFTC officials who helped Mr. Bankman-Fried build trust with policy makers, claiming FTX supported reasonable regulation. The agency’s former chairman, Chris Giancarlo, set up introductory meetings between Mr. Bankman-Fried and regulators. Mark Wetjen, a former Democratic CFTC commissioner, joined FTX in November 2021 as the firm’s head of policy in Washington. A former CFTC attorney, Ryne Miller, was the firm’s general counsel.

At the same time as it was lobbying Congress to increase the agency’s jurisdiction and funding, FTX was seeking CFTC approval for a unique way to handle leveraged crypto-linked products.

“The finances and futures of both the CFTC and FTX were tied together," said Ty Gellasch, chief executive of the Healthy Markets Association, an investor trade group. “It raises questions about the agency leadership’s engagement with FTX."

The CFTC has declined to disclose how many times its chairman, Mr. Behnam, met with Mr. Bankman-Fried and his deputies, or to release Mr. Behnam’s meeting calendar. Other agencies, including the SEC and Federal Reserve, regularly publish their leaders’ meeting calendars.

A CFTC spokesman said the agency plans to make Mr. Behnam’s calendars public soon. He noted FTX has withdrawn its application with the CFTC and said the company “had no input into our work" with the Agriculture Committee on the crypto bill.

As momentum built for the bill, Mr. Bankman-Fried donated the individual maximum of $5,800 to Sens. Debbie Stabenow (D., Mich.) and John Boozman (R., Ark.), the chairwoman and ranking member of the Senate Agriculture Committee, which oversees the CFTC. FTX officials also donated $3 million to a political committee affiliated with Senate Majority Leader Chuck Schumer (D., N.Y.) and $6 million to a committee affiliated with House Speaker Nancy Pelosi (D., Calif.). Another FTX executive contributed $2.5 million to the Senate Leadership Fund, associated with Republican leader Sen. Mitch McConnell of Kentucky.

In the spring, FTX also hired a lobbyist, former Republican Senate staffer Eliora Katz, whom it paid $270,000 per quarter to push for the Stabenow-Boozman bill in Congress and regulatory agencies, according to official disclosures.

Ms. Stabenow and Mr. Boozman introduced the crypto bill on Aug. 3. Mr. Schumer indicated to FTX officials a willingness to tack the bill onto a broader spending package before the full Senate if it could pass the Agriculture Committee by December, several people familiar with the matter said.

“No one industry stakeholder had significant input in the content of this bill—including FTX. In fact, none of the substantial changes FTX requested were included in the legislation," a spokesman for Ms. Stabenow said. He added the bill would bring needed protections for crypto investors.

Mr. Schumer’s press office didn’t respond to requests for comment. The Agriculture Committee has scheduled a Dec. 1 hearing titled “lessons learned from the FTX collapse, and the need for congressional action." Mr. Behnam is set to testify. Reached by a Wall Street Journal reporter, Ms. Katz hung up the phone.

Mr. Giancarlo said FTX was a client of his law firm, Willkie Farr & Gallagher LLP. Mr. Miller couldn’t be reached for comment. Mr. Wetjen said, “Like many, I was shocked and dismayed to read the allegations in the company’s bankruptcy filing." Mr. Bankman-Fried didn’t respond to requests for comment.

The Stabenow-Boozman bill would have authorized the CFTC to regulate spot markets for the largest cryptocurrencies, bitcoin and ether, and increased the agency’s head count. It also would have provided a new revenue stream—user fees from crypto exchanges—to reduce the agency’s longstanding dependence on congressional appropriations.

For Mr. Bankman-Fried and FTX, the legislation would have provided a pathway to U.S. regulatory compliance, a status no crypto platform currently enjoys. Such a breakthrough could have boosted crypto prices as well as FTX’s own valuation, potentially drawing in more customers and investors at a time when—unbeknown to the public—its finances were in dire straits.

For senators and staffers on the Agriculture Committee, the legislation would have given them some oversight of crypto through the CFTC, cementing the industry as a source of campaign donations, lobbyists and private-sector job opportunities.

The bill was criticized by SEC Chair Gary Gensler as too light-touch, particularly a provision that would enable crypto exchanges to self-certify assets they offer for trading. Mr. Gensler said most crypto assets are securities that should be registered with his agency before exchanges list them.

“Back to the legislation, I think it would unambiguously undermine investor protection if the trading platforms were self-certifying," Mr. Gensler said Nov. 9. “As much admiration as I have for our sibling agency, this is the agency—the SEC—that looks after securities."

Mr. Behnam, however, made the bill a hallmark of his tenure. In a February hearing before the Agriculture Committee, he called on Congress to grant the CFTC authority to regulate spot markets for cryptocurrencies that fall outside the SEC’s remit, such as bitcoin. Doing so would fill a major regulatory gap that puts cryptocurrency investors at risk, he said.

Mr. Bankman-Fried also appeared at the hearing, telling senators he “would love to see the CFTC play a more active role" in regulating crypto.

Ms. Stabenow asked him to “speak to how Congress should ensure that the CFTC has adequate resources" to expand its responsibilities. “I think one way could be contributions from the digital-asset industry," Mr. Bankman-Fried answered.

The CFTC’s Mr. Behnam worked closely with committee staff to draft the bill, he has said. That effort was led by Lucy Hynes, a former CFTC attorney who joined the Agriculture Committee last year.

On a visit to Washington in April, Mr. Bankman-Fried chatted with Ms. Hynes at a crypto-sponsored happy hour near the U.S. Capitol, according to attendees. He also met with Mr. Behnam and other CFTC officials, said Republican CFTC Commissioner Caroline Pham, who posted a photo posing with Messrs. Bankman-Fried and Wetjen to Twitter.

Ms. Pham subsequently deleted the post because, she said, “it got too distracting."

This story has been published from a wire agency feed without modifications to the text

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