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NOVEMBER
**10, 2022**
Dayen on TAP
Why Is Congress Still Writing Crypto Regulations?
The FTX debacle shows that crypto is less an industry than it is a scam.
While everyone was busily watching election returns, one of the
Democratic Party's biggest donors had an epic financial meltdown. On
Tuesday, Sam Bankman-Fried, the young CEO of crypto exchange FTX (a
company name you might remember from the World Series, as the umpires
wore an ad for it on their uniforms), announced a sale
<[link removed]> of
the exchange to its chief rival Binance, after a "liquidity crunch" (a
neutral term for a run on the bank, or in this case the crypto
exchange). Even on the announcement, Binance chief Changpeng "CZ" Zhao
noted that Binance reserved the right "to pull out from the deal at any
time."
That took about 24 hours; Binance took one look at FTX's books and
pulled out of the acquisition
<[link removed]>.
FTX, at one point valued as a $32 billion company
<[link removed]>,
has had to pause withdrawals
<[link removed]>,
and Bankman-Fried has told investors that the company is $8 billion in
the hole
<[link removed]>
and might have to declare bankruptcy. FTX's legal and compliance team
quit
<[link removed]>.
You can no longer describe SBF as a crypto billionaire; his net worth
has fallen below that mark.
What appears to have triggered this is a news report in Coindesk
<[link removed]>
revealing that most of the assets in SBF's private hedge fund, Alameda
Research, were made up of FTX's own digital token, FTT. This
shouldn't have necessarily affected FTX, which is an exchange: People
hand in deposits and trade crypto, and the exchange holds those deposits
and executes the trades, making money on fees. But FTX has been lending
to customers to buy crypto, hasn't been holding very much reserve
capital to cover withdrawals, and worst of all, didn't segregate the
accounts
<[link removed]>,
instead using customer money to make a bunch of bets.
SBF essentially copped to this
<[link removed]> in a long
Twitter thread, but he's very, very sorry about it. The proper
response to that is handcuffs.
Some of these machinations worked through FTT. So when CZ at Binance
questioned FTT
<[link removed]> after the
Coindesk report, that worried investors
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and sent FTT's price straight down. And that worried more investors,
who scrambled to get their money out
<[link removed]>
of FTX-money that FTX didn't have. "The problem is that FTX took its
customers' money and traded it for a pile of magic beans, and now the
beans are worthless and there's a huge hole in the balance sheet," as
Bloomberg's Matt Levine
<[link removed]>
put it.
This is a typical vicious cycle for, well, a Ponzi scheme. Or a more
reputable institution shot through with fraud, like in the financial
crisis. Of course, it's also the vicious cycle we've seen throughout
crypto this year, when the main institution bailing out the lenders
being ... Sam Bankman-Fried
<[link removed]>.
So if the entity that bailed out half of crypto is now himself so toxic
that he has to be bailed out, I think we can confidently say that this
asset class is vaporware. (Binance, which resisted the lender of last
resort role, may not be in such great shape
<[link removed]>
either.)
All of which begs the question: Why is Congress just plodding along on
industry-friendly crypto regulation right now? We could see action on
the Senate Agriculture Committee's legislation
<[link removed]>
to move some jurisdiction to the Commodity Futures Trading Commission in
the lame-duck session. There are bunches of bills
<[link removed]>
in Congress to exempt this or that crypto asset.
This is absolutely deranged. We have a volatile product that basically
blows up every few weeks, and members of Congress, fattened with crypto
money from before the billionaires went bust, are just following the old
program, seemingly unaware of what reality has presented over the past
few months. Putting together a weak regulatory and tax regime for crypto
right now is like putting together a prescription drug benefit for
fentanyl.
Regulations should be prophylactic, if anything. "If the digital asset
industry has a real future, they must meet at least the minimum
safeguards which exist for traditional financial institutions so as to
prevent or mitigate such fiascos," Mark Hays, senior policy analyst at
Americans for Financial Reform and Demand Progress, said in a statement.
But I doubt that's even viable. My two cents (or 0.000001 of bitcoin,
and rising) is that the only entities that should be working on crypto
in Washington right now are law enforcement authorities.
~ DAVID DAYEN
Follow David Dayen on Twitter <[link removed]>
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Maine Didn't Get Fooled Again
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Janet Mills thwacked Trumpist Paul LePage on a good night for Democratic
women in New England. BY GABRIELLE GURLEY
Red Wave to Repro Wave-and What's Next
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In blue states and red, voters backed reproductive freedoms in the
midterm elections. BY FELICIA KORNBLUH
Reconciliation Is Available to End Debt Limit Hostage-Taking
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With the GOP likely to take over the House, Democrats can use the lame
duck to effectively eliminate the debt limit and the leverage
Republicans would wield. BY DAVID DAYEN
Dems Snatch Up Colorado's Toughest Race
<[link removed]>
A Latina pediatrician running on protecting abortion rights, creating
renewable-energy jobs, and expanding health care access beats a former
state secessionist. BY JAROD FACUNDO
Lina Hidalgo Prevails Against Republican Offensive in Harris County
<[link removed]>
In face of high-profile GOP push to claw back power in Texas's largest
county, Democrats expanded their power. BY JUSTIN MILLER
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