WASHINGTON -- The sudden collapse of one of the world's largest cryptocurrency exchanges rattled the nation's capital last week, as lawmakers grappled with the wide-ranging fallout -- and began to confront the consequences of neglecting the surging financial sector.
Only a few weeks ago, top Democrats and Republicans alike had been cashing campaign checks and working side-by-side with the vanguards of the industry, including FTX founder Sam Bankman-Fried, as they labored to craft new regulation in the frenetic, cutting-edge digital space.
At the same time, Bankman-Fried appeared to place risky bets that incinerated his fortune, jeopardized billions of dollars in Silicon Valley capital and upended an entire ecosystem of cryptocurrency start-ups. The lawyer tapped to lead FTX in restructuring, who previously oversaw the bankruptcy of Enron, described the situation Thursday as a "complete failure of corporate controls."
Investigators in the United States and abroad have opened investigations into Bankman-Fried and his holdings. The Treasury Department has placed calls to other large crypto exchanges to assess the risks of a broader contagion. And a slew of congressional committees have readied their own reviews, including a House inquiry announced Wednesday that could see Bankman-Fried testify under oath next month.
In the process, federal policymakers have been left to ask themselves a familiar, if uncomfortable, question: Could they have prevented a crisis if they had paid close attention sooner?
"Over the years, the regulators ... sorta invited them in, these crypto companies, and we've seen the damage they've caused," said Sen. Sherrod Brown (D-Ohio), the chairman of the Senate Banking Committee.
INDUSTRY LOBBYING
Brown said he is exploring the need for comprehensive cryptocurrency legislation, something that Congress repeatedly has proposed as the sector grew, yet time and again has failed to achieve in the face of staunch industry lobbying. In that time, a wide array of crypto firms have experienced meteoric rises -- and once-unfathomable collapses -- on the promise of great wealth that didn't always materialize.
Still, Brown remained bullish that Congress could rein in cryptocurrency companies that have put investors large and small at risk: "They need to be held accountable."
In some ways, the tumult around FTX tells the story of a Capitol often outpaced by the deft technology giants ostensibly under its watch.
From the burst of the dot-com bubble at the turn of the millennium to the rampant privacy mishaps at Facebook decades later, federal policymakers historically have been slow to anticipate the troubles of the digital age. Only after costly scandals have lawmakers and regulators been stirred to action.
The new world of cryptocurrency -- where digital tokens replace dollars, investments and payments, all without the need for traders, governments or banks -- has presented perhaps the most complicated challenge to date. As an entirely new financial system has come online, Washington has been forced to choose whether to institute stringent rules on crypto or stay out of Silicon Valley's way.
THE LATTER APPROACH
The U.S. government largely has adopted the latter approach, much to the relief of crypto companies, executives and investors. That has enabled the rapid growth and soaring valuations of bitcoin, a wide array of related currencies and an entire ecosystem of firms to support them. Until recently, that included FTX, a marketplace for buying and selling tokens that boasted its own currency -- an exchange that at its height was the third-largest in the world.
But the peril of that approach came into sharp relief as FTX began to unravel. Questions about its finances -- and whether Bankman-Fried used FTX deposits in potentially illegal ways -- prompted large investors to sell off their FTX-issued tokens, known as FTT. With nowhere to turn and losses mounting, Bankman-Fried filed for Chapter 11 bankruptcy, setting off a cascading effect that has hammered Silicon Valley venture firms and start-ups that depended on FTX. Other crypto exchanges soon after found themselves at risk, with their own assets tied up in the fallout.
John J. Ray III, who became chief executive of FTX in bankruptcy, told a federal court Thursday that he had never seen in his career "such an absence of trustworthy financial information as occurred here." He couldn't figure out what assets the company owned; he struggled to calculate what the firm owed, and to whom; he could not even cobble together a full list of employees who had worked there.
Ray previously supervised the $23 billion dissolution of Enron and its recovery of funds for creditors, yet he suggested the FTX meltdown was in some ways worse.
'SITUATION UNPRECEDENTED'
"From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented," he wrote in the court filing.
On Capitol Hill, the fiasco quickly captured unexpectedly wide, bipartisan attention.
The shift began Tuesday, as lawmakers sorted out the repercussions of the 2022 elections. At a news conference normally reserved for Democratic leaders to lob political barbs and issue policy announcements, Rep. Hakeem Jeffries (D-N.Y.), the caucus chair, said the party had plenty of priorities in the waning weeks of the year -- and "the situation related to the cryptocurrency industry will be one of them."
The House Financial Services Committee, led by Rep. Maxine Waters (D-Calif.), on Wednesday announced plans to hold a hearing on FTX, potentially featuring Bankman-Fried's testimony. "Unfortunately, this event is just one out of many examples of cryptocurrency platforms that have collapsed just this past year," lamented Waters, describing an "urgency" to act.
FALLOUT FROM FTX
Across the Capitol, the fallout from FTX quickly overshadowed what normally might be a somnambulant hearing in the Senate Banking Committee about credit unions. Sen. Patrick J. Toomey (R-Pa.), its soon-retiring top Republican, seized on the moment to highlight "several high-profile collapses of crypto companies, including one prominent example last week" -- a reference to FTX, if not explicitly by name.
Toomey previously has bought cryptocurrency assets, his personal financial disclosures show. But he focused on the repercussions when a firm like FTX, which was based in the Bahamas, can run roughshod over the U.S. economy.
"As a general matter, the failure of Congress to pass legislation in this space and the failure of regulators to provide clear guidance has created ambiguity that has driven developers and entrepreneurs overseas," he warned. "And we've just once again seen how that ends."