With the digital asset market tumbling, the industry's best-known face in Washington, D.C. in serious trouble, and control of the Senate in limbo, crypto policy advocates scrambled to chart a path forward on Wednesday.
The credibility crisis they face comes at a key moment, as policymakers consider writing new rules for the industry and a new class of lawmakers prepares to join Congress.
“Recent developments show that even the crypto companies that fashion themselves as the most responsible and legitimate actors in the industry appear to be selling the public false goods. Policymakers and regulators should strengthen rules to protect consumers and should be skeptical of the industry’s efforts to write their own regulations,” Sen. Elizabeth Warren, D-Mass., said in a statement to The Block.
Securities and Exchange Commission Chair Gary Gensler weighed in on the FTX turmoil, calling it part of a pattern that hurts investors. The Biden administration also has encouraged regulators to use existing rules to bolster its enforcement actions against crypto firms.
Adding to industry tensions Wednesday, news broke that Binance pulled out of its letter of intent to effectively bail out troubled rival FTX, renewing fears of contagion in the crypto markets.
“There are a lot of unknowns right now,” said Kristin Smith, executive director of the Blockchain Association, an industry trade group.
The shock decline of an industry powerhouse is front-of-mind for digital asset advocates, who are also waiting to see which party will control Congress after unexpectedly close midterm elections.
“A lot happened in just the last 24 hours, so people here are still trying to digest the news,” said Paul Brigner, the head of U.S. policy and strategic advocacy at Electric Coin Company.
The saga playing out between FTX and Binance will surely draw additional scrutiny from regulators. A spokesperson for FTX.US Head of Policy Mark Wetjen declined to comment.
Digital asset industry advocates are on edge. Rumors that Binance would back out of the deal to buy FTX sent whispers through a breakfast meeting of crypto policy buffs on Wednesday morning. By the afternoon, Binance had walked away from the deal.
Meanwhile, it’s not clear whether Democrats or Republicans will control Congress next year. Republicans are on track to win a slight majority in the House of Representatives, but that outcome is uncertain. Votes for crucial Senate races are still being counted in contests in Arizona and Nevada, and the Georgia race between Sen. Raphael Warnock, D-Ga., and football star Herschel Walker is headed to a runoff in December because neither candidate cleared 50% of the vote.
Regardless of which party wins control of the House and Senate, any crypto-related legislation will likely need bipartisan support to become law.
Even industry proponents are warning that the FTX fallout could damage crypto’s reputation on Capitol Hill. Bankman-Fried had been a vocal supporter of a digital commodity regulation bill filed by Sens. Debbie Stabenow, D-Mich., and John Boozman, R-Ark., and was pushing lawmakers to pass the proposal as part of a larger legislative package before the end of the year.
“It will become increasingly difficult to convince already skeptical members of Congress and regulators of the good intentions of the industry when one of its best-known advocates in D.C. is impacted so visibly,” said Alex Grieve, a vice president at Tiger Hill Partners, an advocacy firm that represents clients in the digital asset industry.
Gensler, the SEC chair, seemed to throw cold water on Bankman-Fried’s priority bill at a conference on Wednesday. Gensler said that “some of that legislation was promoted by some of the same folks that failed in the last day or two. And you sort of wonder why. Because it was too light touch.”
The FTX implosion could also serve as a catalyst for regulators to beef up enforcement of existing rules, Prometheum Founder and Co-CEO Aaron Kaplan said.
"It's becoming more and more apparent that centralized exchanges need to be operating under a federal framework, which is meant to protect customers, to protect investors, to segregate customers' funded securities. And it's my belief that the best framework for that is the federal securities laws,” Kaplan said. Prometheum recently began offering digital securities trading on a platform regulated by the SEC.
“As a result of the events that we're seeing when it comes to FTX particularly, I think we'll see an additional degree of government oversight,” Kaplan added.
It’s unlikely that the Bankman-Fried-backed commodities bill will pass before the end of the year, but advocates say the exchange’s failure could be a catalyst for lawmakers to draft more crypto legislation.
“The work of educating policymakers is going to continue. I think it's incumbent upon us to tell them good stories, and to differentiate the good actors from the bad actors. And that's not an ideal place to be, but it's the place that we're in,” said Smith, the Blockchain Association head.
“We've got our work cut out for us, but I'm confident that it will get there and we'll be able to move forward,” Smith added. “We might not all make it, but most of us are gonna make it.”
With additional reporting by Kollen Post.
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