The fallout of the FTX collapse has left U.S. lawmakers spinning two distinct narratives: Democrats hail their financial regulators as heroes whose caution saved the disaster from threatening the wider financial system, and Republicans argue it proves resistant agencies chased crypto firms away from the U.S. and into dangerous, unregulated territory.
Both positions were on display at a Tuesday hearing of the Senate Banking Committee, which opened with Chairman Sherrod Brown (D-Ohio) recounting this year’s disintegration of much of the cryptocurrency industry and saying that the tokens themselves still don’t offer “anything useful or beneficial.” He thanked the officials testifying – including Democratic appointees from the Federal Reserve and other banking regulators – “for your skepticism about cryptocurrencies.”
Another Democrat, Sen. Jon Tester (D-Mont.), similarly praised the cautious watchdogs, saying if they’d given the industry more credibility, “We’d be cutting another check,” as the government did to bail out financial firms during the mortgage meltdown in 2008. “Thank you for what you’ve done,” Tester said.
Republicans were quick to separate the concept of crypto from the actions of FTX and its management, and to argue that if such firms weren’t pressured to operate outside the U.S., its regulators may have been able to prevent such misdeeds.
What happened had “nothing to do with the technology underpinning crypto itself,” said Sen. Bill Hagerty (R-Tenn.)
And one of crypto’s most reliable Senate advocates, retiring Sen. Patrick Toomey (R-Pa.) echoed that idea, saying “this is fundamentally not about the kind of assets that were held by FTX; it’s about what individuals did with those assets.”
Toomey, who is leaving the Senate at the end of the year, blamed the ambivalence of regulators unwilling to provide clear guidance for how crypto could safely mesh with the existing banking system, saying it “has helped to push crypto activities into foreign jurisdictions with weaker or no regulatory regimes.”
Michael Hsu, the acting chief of the Office of the Comptroller of the Currency, said he doesn’t want banks to take on any business they can’t prove will be safe, though Toomey argued that “some of the obligation” is on Hsu and others to clarify how banks can provide custody of digital assets like they do for other financial holdings.
Hsu maintained that “the custody of crypto is different.”
However, Michael Barr, the vice chairman for supervision at the Federal Reserve, said he’s open to working on further crypto guidance for U.S. banks. So far, he said “few banks” are coming forward with plans to offer custody services.
Congressional inaction
For his part, Hagerty said some fault lies with a Congress that’s failed to come up with legislation to provide rules for crypto in the U.S.
“We shouldn’t take the wrong message from what happened last week,” Hagerty said. “No amount of poorly considered, knee-jerk overregulation here in the U.S. would have prevented a foreign-domiciled company like FTX from doing what it did.”
During his turn with Tuesday’s witnesses, Sen. John Kennedy (R-La.) asked the regulators whether any of them would – at this point – hire former FTX CEO Sam Bankman-Fried “to manage a food truck.”
“Do you know who was watching these chuckleheads?” he asked the officials, adding that the company’s leaders seemed to have been “engaged in stealing.”
“That’s under investigation now, senator,” replied Martin Gruenberg, the acting chairman of the Federal Deposit Insurance Corp.
