US watchdogs blamed for FTX’s demise

An awkward pause followed questions from a lawmaker at a hearing this week as they questioned regulators about which agency is responsible for overseeing the failed cryptocurrency exchange FTX.

“Can you tell me who in our federal financial services administration state was watching FTX to make sure nobody was stealing people’s money there?” John Kennedy, a Republican senator from Louisiana, asked banking regulators during a Senate hearing. “Has anyone looked at this?”

Following the collapse of Sam Bankman-Fried’s $32 billion empire, which included a major US subsidiary, Washington lawmakers and regulators have sought to blame one another for FTX slipping through the cracks.

“There’s definitely a blame game going on and we’re going to see more of it,” said Ian Katz, fiscal policy analyst at independent market research firm Capital Alpha Partners.

Janet Yellen, US Treasury Secretary, was among the officials who pointed out oversight weaknesses. The case of FTX “show[s] the need for more effective oversight of cryptocurrency markets,” it said in a statement on Wednesday, adding that the same protections offered in traditional markets should also apply to crypto assets.

But the country’s top banking regulators — including top regulators at the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — differed, arguing that lawmakers’ questions should instead be directed to bodies like the Securities and Exchange Commission should be and Commodity Futures Trading Commission.

Market regulators are “the first port of call in this area,” Michael Barr, the Fed’s vice chairman for oversight, told members of the Senate Banking Committee on Tuesday. “They have existing authorities [and] we want to make sure they are fully utilized.”

Critics of the SEC, whose chairman Gary Gensler once dubbed the crypto market the “wild west,” have argued that the agency has focused on high-profile enforcement actions like indicting famous businesswoman Kim Kardashian for illegally promoting crypto instead systemically take risk in the market. You also said Gensler should clarify the rules for digital assets.

However, the SEC chairman 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 told CNBC last week: “[Crypto] is an area that is significantly non-compliant, but there are regulations, and those regulations are often very clear.” He has also asked Congress to give the SEC more powers to oversee crypto.

Katherine Martin, chief executive of Rock Creek Global Advisors, a policy consulting firm, agreed: “The SEC cannot be relied on alone to solve this problem unless the agency is given a new mandate by legislation and the resources to do so.” implement it.”

Like Gensler, CFTC Chairman Rostin Behnam has argued that the existing laws are clear. He has also backed a bipartisan bill introduced by U.S. Senators Kirsten Gillibrand and Cynthia Lummis that would expand the CFTC’s authority and give it jurisdiction over crypto-cash markets based on the premise that most tokens resemble commodities . (There is no definitive classification of tokens yet.)

Asked if regulators and the industry as a whole were too easily fooled by Bankman-Fried at a conference in Chicago this week, Behnam said, “We always have to question ourselves in order to learn . . . but from my point of view I have done what I could with my authority.”

He added that regulators could “prevent” similar events from happening 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 effectiveness of the commission’s oversight.

Banking regulators also took criticism from some lawmakers, in part for failing to provide detailed guidance to banks on working with crypto companies and providing services like asset custody. Others complained that they were just too smooth.

“I’m disturbed by what I heard from you gentlemen: ‘guard rails, safe and sound ways to deal with crypto,'” Brad Sherman, a Democratic representative from California, told banking regulators speaking at the hearing of the House Financial Services Committee were present on Wednesday. “You sound like Sam Bankman-Fried except you’re wearing pants instead of shorts.”

The debate reveals weaknesses in a complex regulatory network.

“We have three different banking regulators, two different market regulators, ambiguities and sometimes limitations in terms of jurisdiction,” said Kathryn Judge, a law professor at Columbia University. “Part of what reflects the whole fiasco is that such a fragmented regulatory system has ongoing costs.”

The majority of FTX units were not registered with US authorities as the main exchange is regulated in the Bahamas where it is headquartered. FTX.US, the platform’s US counterpart, has not been regulated by the SEC or the CFTC.

However, legal experts argue that it may have fallen within their remit if assets traded on the platform were classified as securities or commodities, or if FTX.US routed orders from US investors to Bahamas-based FTX and thus as broker acted.

Analysts argue that the inaction of the legislature is also to blame for an incomplete crypto regulatory framework in the US. While lawmakers have introduced crypto bills — including one that supported Bankman-Fried — none have yet passed.

According to Aaron Klein, former associate associate secretary for economic policy at the Treasury Department, “all the legislation that was drafted before FTX imploded needs a major overhaul.”

Video: Cryptocurrencies: How regulators lost control US watchdogs blamed for FTX’s demise

Adam Bradshaw

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