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Newsletter | Revolving Door Project Newsletter | December 14, 2022

Real Politicians Stay Bought by Fake Money Tycoons

CryptocurrencyEthics in GovernmentFinancial RegulationSEC

Financialization is a dominant threat to the United States, and crypto is the trend’s apotheosis.

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Sam Bankman-Fried may have been arrested, but his influence campaign in DC is continuing unabated, with Members of the House and Senate looking to use FTX’s collapse to push for SBF’s hand-picked regulatory framework and undermine the work of SEC Chair Gary Gensler. 

Last Wednesday, Congressman Richie Torres [D, NY-15], the crypto industry’s resident millennial hack in Congress, sent a letter to the Comptroller General requesting that the Government Accountability Office investigate the Securities and Exchange Commission for a “failure to protect the investing public from the egregious mismanagement and malfeasance of FTX.” Torres’ letter sought to lay the blame at Gensler’s feet, saying “Chair Gary Gensler, by the logic of his own public pronouncements, is singularly responsible for the regulatory failures surrounding the collapse of FTX and its affiliate FTX US.” Coming from Torres, one of Congress’ most outspoken opponents of the SEC enforcing existing regulatory limits on crypto, this letter was almost comical in its shamelessness. 

In March, Torres was one of eight Members of Congress to send a letter to SEC Chair Gary Gensler alleging that the SEC was overstepping its authority by requesting documentation and conducting investigations into crypto companies, including FTX. The letter accused the SEC of burdening crypto firms with its requests for information, writing “federal agencies must be good stewards of the public’s time, and not overwhelm them with unnecessary or duplicative requests for information.” The gang of eight sought to ensure that SEC investigations were not “not overburdensome, unnecessary, and do not stifle innovation.” 

This letter, clearly influenced by the crypto industry’s rapidly growing lobbying network, was so aggressive in its condemnation of the SEC’s attempts to investigate cryptocurrency companies that Slate’s Alex Sammon asked the Torres office if it had illegally interfered with an ongoing investigation. Unable to confidently declare that they had not just broken the law, the Torres office passed the buck to the lead writer of the letter — Republican crypto defender Tom Emmer [R, MN-6] — saying they hoped Emmer’s office had bothered to consult a lawyer before hitting send. 

Torres isn’t alone in his attempts to scapegoat Gensler and the SEC in the wake of the FTX collapse. The crypto industry’s ongoing fight to supplant SEC regulation with oversight by the weaker CFTC has attracted significant attention in recent weeks. Hack Watch has previously covered how opportunistic politicians like Emmer had launched hypocritical and unsubstantiated allegations of corruption at the SEC. But Torres is the first Democrat to take such an outspoken role in this campaign. 

Torres’ letter this week is a clear attempt to paint the SEC as an institution unable to reign in the crypto industry, while conveniently forgetting his own attempts to undermine the SEC’s authority to do so. This coordinated push is part of the informal crypto caucus’ efforts to sideline the SEC and make CFTC regulation of the crypto market the only solution considered in the wake of the FTX collapse. It would be quite something if the federal government’s response to Sam Bankman-Fried’s frauds and abuses is to give Bankman-Fried everything he ever wanted out of Congress.

As we’ve discussed before, the crux of the CFTC vs SEC debate lies in the ways each agency is funded. The SEC secures much of its funding through transaction fees, allowing it to be only tangentially related to the messy appropriations process. The CFTC, though, is entirely dependent on Congressional appropriations. Therefore, if lobbyists sway Congress to favor lighter-touch regulation of a given industry, the CFTC has little ability to resist Congressional preferences. The agency thus has fewer defenses against making concessions to the once rapidly-growing crypto lobbying apparatus. 

The CFTC’s dependence on Congressional appropriations has resulted in a staff of only 676 employees, despite stating that it would need nearly 200 additional staff to carry out its expanded role post-Dodd Frank. Contrast this with the far more robust SEC, which currently houses 4,658 full-time employees. With a dependence on Members of Congress beholden to the crypto industry, a much smaller staff, and a far weaker budget, it’s clear why Bankman-Fried pushed Torres and Gillibrand to support CFTC regulation of crypto. 

Torres and Emmer’s push to undermine the SEC has also been taken up by their colleagues in the upper chamber. On the Senate side, both Republicans and Democrats joined forces last week for a hearing on the FTX collapse. Joined by the CFTC Chair Rostin Behnam, the Senate Agriculture committee hearing on the issue quickly devolved into a thinly veiled push for CFTC regulation of crypto markets — the very same legislation that was pushed by now disgraced FTX CEO Sam Bankman-Fried in the months leading up to his downfall

While members of the committee were aware of this (Senator Michael Bennet even asked CFTC Chair Behnam why SBF would be in support of this bill, to which Behnam, straining credulity, said he had no idea), it did not slow the calls for passing this legislation urgently or dampen the praise for it. Among the Senators speaking favorably of CFTC regulation was Kirsten Gillibrand, a noted crypto proponent and recipient of crypto campaign donations — although pretty much all congressional crypto proponents took the industry’s money. Gillibrand’s measure would hand the reins of crypto over to the substantially smaller, statutorily weaker, and less independent CFTC, undercutting more stringent regulatory pushes and removing crypto from the purview of the SEC, where it belongs

Standing apart from his colleagues last week, Senator Dick Durbin [D-IL] asked questions those already beholden to the crypto industry were too afraid to ask. After acknowledging that he, like others in the room, has received donations from the industry, Durbin took the opportunity to illuminate the reason why some (like RDP) are critical of the effort to entrust cryptocurrency regulation to the CFTC. After confessing to his donations from crypto, Durbin voiced what Washington normally leaves unspoken – that these donations were part of a coordinated attempt to influence the work of lawmakers on Capitol Hill on behalf of crypto. 

“Mr. Bankman-Fried, my contributor, and people just like him are going to be spending a lot of money to make sure there’s as little regulation as possible. Unfortunately, you [CFTC Director Benham] are a captive of a process that is driven by politicians like myself. What assurances do we have that you are going to have adequate resources… to execute any kind of meaningful regulation?” 

Unable to convincingly argue that the same Congressional appropriators who receive crypto industry campaign donations would provide his agency with the resources needed to regulate crypto, Behman appealed to the hard work of CFTC civil servants. This dodge is a trusted move, used time and again by those in favor of the CFTC leading on crypto regulation, but does nothing to address the core issue: resources. 

While nobody denies that hardworking financial regulators of the CFTC are doing what they can to protect the global economy from risk, the “hardworking” argument should not be persuasive to any beltway insiders. Manpower, appropriations, and independent sources of funding are what make well-functioning regulatory bodies. Plus, such an argument could only be persuasive if the civil servants at the SEC were not hardworking, which they obviously are. They were already trying to take on the work of regulating crypto.

As those seeking to undermine Gensler’s SEC are working overtime to pass CFTC-focused bills while the FTX meltdown is still top of mind, there are rumors that Senator Elizabeth Warren [D-MA] is preparing her own comprehensive crypto regulation package. Her rumored bill would embolden the SEC to take charge of the industry, a repudiation of what SBF and his congressional allies have fought for – and perhaps the reason why Fox News ran stories attempting to tarnish her reputation on this issue weeks ago. Similarly uncaptured by crypto interests, Ed Markey introduced a bill on Thursday to combat the energy use of crypto mining. Markey’s bill shows that there is hope for those looking for a crackdown on the crypto industry if Democratic leaders prioritize the well-being of our climate and the pocketbooks of the American people over their campaign funds. 

Either way, progressives eager to see the cryptocurrency criminality reigned in should be calling out the hypocrisy of those who place the FTX collapse solely at the feet of Gensler and the SEC, even as they worked behind the scenes to prevent the agency from regulating the now-defunct trading platform. Passing the blame isn’t the end goal, it’s merely a tool to enact Sam Bankman-Fried’s agenda after his fall from grace. 

Want more? Check out some of the pieces that we have published or contributed research or thoughts to in the last week:

The Tennessee Valley Authority’s Incentive Structure Keeps Residents Hooked on Fossil Fuels

Constructing an EU Ethics Oversight Authority: A White Paper

How Biden’s FCC nominee became a major campaign target

The Qatar scandal shows how the EU has a corruption problem

The Real Reason Washington Is Silent on the Crypto Scandal

CryptocurrencyEthics in GovernmentFinancial RegulationSEC

More articles by Henry Burke

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