Our Crypto Congress

When the multi-billion-dollar crypto house of cards, FTX, along with founder Sam Bankman-Fried’s ego, deflated like a dollar-store party balloon, no one was more disappointed at Sam’s arrest than Congresswoman Maxine Waters. She lamented, "I am surprised to hear that Sam Bankman-Fried was arrested in the Bahamas at the direction of the United States Attorney for the Southern District of New York.” Ms. Waters was sadly robbed of an opportunity to showcase the hallowed halls of Congress echoing with recriminations over the shock and outrage felt by our saintly representatives.

But House Member Waters and her sanctimonious associates can undertake a very effective investigation into this sad affair by looking in the closest available mirror. “Why?” you ask.  Well, young Sam had been feted as a financial genius, not only by every media outlet short of Mad Magazine, but most notably by our own Congress. 30-Year-old Sam not only pulled off a scam against thousands of investors, large and small, but his greatest sleight of hand may have been with our own government.

Before the collapse of FTX, Sam Bankman-Fried had spent many months lobbying for crypto regulation. As a general rule, whenever the head of a large business pleads with lawmakers to “please regulate me!” it is time to keep your hand on your wallet. This is because when the Zuckerberg’s of the world beg to be managed, they usually have two goals in mind, and neither of them help you or me.

The first goal is to suggest regulation that is convoluted and costly. “Why would they do that?” you ask. Because establishing difficult benchmarks helps to keep new competitors out of the market. When you are the size of a Microsoft or Apple, you can afford teams of in-house lawyers and accountants, but smaller firms and start-ups are frozen out of your business.

The second (but more important) goal is to manipulate regulators into creating rules that you prefer. The median age of the 117th Congress is 60 years old. These are people who grew up without the internet, who upon first hearing the word ‘crypto’ thought maybe it was a rock that makes Superman feel queasy. This allowed Sam to push for outlandish regulatory ideas that some members of Congress remain sold on today.

Here's an example. When it became clear that some form of regulation was imminent for FTX and others, Sam wanted to avoid any possibility of involvement by the Securities Exchange Commission. He argued that crypto regulation should be handled by the Commodity Futures Trading Commission. In fact, Sam was so interested in pushing this plan that he personally met with the CTFC ten times over a fourteen month period!

At face value, this seems like an odd thing to push. The SEC, after all, regulates securities. While it is arguable whether the crypto world can or should be regulated at all, if it happened, then it would seem logical to assign that to the agency that oversees investments. But how about the CFTC? What do they do?

The CTFC was formed in the 1800s to oversee traders of corn oat and cotton, among other commodities. They have a strong interest in butter and eggs, so they have a lot to say about the price of our breakfasts. But why would the head of a thirty-billion-dollar crypto scam want to be associated with regulators who deal in peanut oil?

The answer is simple. The SEC is a very large and powerful government agency that has experience in financial regulation and understands market manipulation. The CTFC, in contrast, is a much smaller organization with little experience in these matters. Sam knew that if he could get Congress to approve the CFTC as his appointed watchdog, the agency would have tremendous difficulty getting up to speed. They would need to hire new teams of experts and would likely take years to propose regulation of a financial channel that few understood.

This scheme would not only buy FTX lots of time to go about their business unregulated, but they would have an excellent opportunity to ‘guide’ regulators towards rules favorable to FTX. While the SEC protested that having a soybean agency oversee crypto investment was ridiculous, the CFTC loved the idea. More relevancy! More power! Less meetings about flax seed – we would be one of the cool kids!

The CTFC so loved this chance of new power that they have continued to lobby Congress for this new plan. Their chairman, Rostin Benham appeared before the Senate Agriculture Committee in December to push for these new powers. He argued to have his agency have an ‘expanded role’ (and expanded budget). As is usual in Washington, success is measured by the accumulation of personal power.

In hindsight, regulation of a potentially vast company being driven by a thirty-year old working with a small team of inexperienced 20-somethings running multi-billion-dollar investment and currency trading schemes sounds patently absurd. Yet many members of Congress were completely taken in by Sam and his cronies. As recently as last November, Representative Tom Emmer of Minnesota whined on Twitter, “My office has received numerous tips from crypto and blockchain firms that SEC Chair @GaryGensler’s information reporting ‘requests’ to the crypto community are over burdensome, don’t feel particularly … voluntary … and are stifling innovation.”

Why the concern? Does Congress really need to shield billion-dollar crypto traders from onerous oversight? What can the motivation be? (You get only one guess). Congratulations, you guessed right – the answer is money. In fact eight members of Congress (split evenly with both parties) wrote a letter begging the SEC to stop asking embarrassing questions of companies like FTX.

It turns out that the majority of these Congressional letter writers were recipients of campaign donations from FTX. In fact, FTX had been actively shoveling funds to various members of Congress, to the tune of millions of dollars. Seventy million dollars, to put a number on it. These funds were sprinkled almost evenly between the major parties.

But how could Sam spend that much money on Congressional campaigns, given the legal maximum donation limits in place? Well, for an experienced currency manipulator, it wasn’t that difficult. One trick was to put money into SuperPACs and allow them to issue millions to support election campaigns. FTX even had their own Political Action Committee with the innocuous name, West Realm Shires Services, Inc. West Realm spend millions on recent elections.

Another scheme was to provide funds to FTX employees as ‘loans’ that could be used for campaign donations within the legal limits. The combination of individual donations and SuperPAC funds generating a staggering amount of good will and influence in Washington. No wonder Sam was protected and fawned over by our representatives. The list of donations is staggering.

A financial company collapses after providing huge donations to members of Congress. Sounds familiar, doesn’t it? You may be thinking of the implosion of Enron. Enron was one of America’s largest energy commodities firms that like FTX, committed accounting fraud so large that it brought about the collapse of the company, and ruining the finances of thousands of investors. Like FTX, Enron bought time and favors by donating to our representatives. (Coincidentally, the person hired to sort out Enron’s mess was John Ray, who has been hired to do the same with the FTX mess).

In the case of Enron, politicians were embarrassed enough by the bad publicity that most of them returned their donations back to the bankrupt company. These funds became part of the partial settlement given back to the defrauded investors.

It remains to be seen if our current Congressional representatives will do the same. While lawmakers appear outraged, many were strangely silent on the funds they had happily pocketed. But the continued spotlight on the FTX collapse is beginning to force some to scurry to distance themselves from the tarnished funds.

The big question remains, how will this affect the future action of Congress? As we have sadly seen, our representatives were easily manipulated into supporting and defending someone they suddenly realize was a crook. They continue to support the idea that companies like FTX should be regulated by a corn futures agency. Yesterday it was Enron. Today it is FTX. Tomorrow, I fear, will just be another schemer ready to take advantage of elected officials with their hands out for political favors to purchase.

The only reliable body of regulators is the voting public. The voters can demand transparency in campaign donations. They should expect their representatives to make certain that their PAC donations pass the smell test. Because between a politician and a voter, we know who can be more reliably trusted.