Senate Banking Committee Considers Takeaways from FTX Collapse

The Senate Banking Committee considered testimony on regulatory responses in the wake of the FTX bankruptcy.

Committee Chair Sherrod Brown (D-OH) said that the rapid rise in popularity of cryptocurrencies revealed many novel risks that need to be addressed through regulation. He said that a comprehensive framework must be developed for cryptocurrencies that treats cryptocurrencies "for what they are, not what crypto executives want them to be." Senator Brown also emphasized that crypto has "made it easier for fraudsters and scammers to steal consumers' money," and that Congress must "look closely at the risks from conflicts at crypto platforms that combine multiple functions." Ranking Member Pat J. Toomey (R-PA) urged regulators to continue to investigate the events that led up to FTX's collapse, but said that it is important to distinguish that the mismanagement of crypto-assets - not the cryptocurrency market itself - caused FTX's failure.

American University Professor of Law Hilary J. Allen warned that integrating cryptocurrencies into traditional finance could cause a broader financial crisis that will hurt all investors, even those who never even invested in crypto. She urged Congress to grant the SEC regulatory oversight over crypto, saying that the agency is best suited to limit the creation of crypto-assets.

Chairman of O'Shares Kevin O'Leary testified that in the long run, the collapse of FTX won't ruin the significant potential of the cryptocurrency any more than the fall of companies like Enron, Lehman Brothers and Bear Sterns did long-term damage to their respective industries. Mr. O'Leary urged Congress to pass clear policy and regulation for the crypto industry, and to "start by passing bipartisan legislation that creates a sensible regulatory framework for digital stablecoins backed by the U.S. dollar."

Director of Financial Regulation Studies at the Cato Institute Jennifer J. Schulp recommended that (i) lawmakers differentiate between centralized and decentralized exchanges, as each presents a different set of risks; (ii) lawmakers develop a "rational regulatory framework" that distinguishes between "projects that reproduce the risks of traditional finance and those that mitigate those risks through disintermediation, including establishing clear rules for the regulation of crypto marketplaces and token issuers"; and (iii) "regulatory interventions should not bias outcomes by stunting an industry's natural development."

Actor/Author Ben McKenzie Schenkkan argued that cryptocurrencies should be treated like securities. He encouraged regulators to act quickly to prevent any further harm to investors.