By Rohan Upadhyay

Photo by Maxim Hopman on Unsplash

Sam Bankman-Fried’s arrest, following FTX’s bankruptcy, has disrupted Washington’s relationship with the cryptocurrency industry. Bankman, who pleaded not guilty to charges of fraud, has lost allies in Washington as lobbyists have severed ties. This may affect lawmakers’ treatment of cryptocurrency. 

This is significant because Bankman was a major lobbyist for cryptocurrencies, so the industry has lost a key figurehead. In the 2022 election cycle, the industry spent $73 million on donations to federal political candidates. Of this, FTX alone spent $72.1 million, of which Sam Bankman-Fried personally spent $39.9 million. Bankman alone gave 54.7% of the industry’s contributions. 

The crypto industry is pushing for regulations that define what crypto is and who has jurisdiction. According to Professor Yasha Yadev at Vanderbilt Law School, “companies have thought to offshore themselves… because they’ve argued that the US does not provide clarity.” 

One point of confusion is whether cryptocurrencies are securities or commodities. This decides whether the Commodities Future Trading Commission (CFTC) or the Securities Exchange Commission (SEC) regulates crypto. Thus, there is confusion over which agency has jurisdiction and to whom the industry should listen. 

Professor Yadev explained “the definition of a commodity in the Commodity Exchange Act [is that it’s] a hard asset, like milk or wheat, affected not by future cash flow rights, but by supply and demand.” While cryptocurrencies are not physical, the Chamber of Digital Commerce – a crypto advocacy group – argues that this definition has been expanded to include digital assets like computer memory and can include cryptocurrencies, which are fungible like commodities and are affected by supply and demand. 

However, fungibility also applies to securities. Cryptocurrencies may instead be classified as securities, which have more defined traits. The Howey Test states that securities must (1) have an investment of money, (2) invest in a common enterprise, (3) have an expectation for investors to profit, and (4) have profits stem from the actions of a third party. 

The CFTC and SEC have had a turf war over cryptocurrencies. SEC Chairman Gary Gensler has called for crypto companies to register with the SEC, while CFTC claimed that bitcoin is a commodity. Lawmakers haven’t settled this issue. Interestingly, Professor Yadev claims “the [industry’s] preference would arguably be for the CFTC… it has already greenlit some derivatives on bitcoin… [it] created spaces for digital innovation… [such as] LabCFTC.”

Notably, the industry only recently grew in Washington, as it donated just $13 million in 2020 compared to $73 million in 2022. The industry has recently increased lobbying for favorable regulations, such as the Responsible Financial Innovation Act proposed by Senators Cynthia Lummis and Kirsten Gillibrand. This proposes a regulatory framework for digital assets and may satisfy the industry’s desire for clarity while exempting it from taxes and other regulations. 

Because the industry is relatively new, it has likely had little time to convince lawmakers that cryptocurrency is safe for commercial investors, potentially explaining lawmakers’ wariness and their lack of decisive action. Professor Yadev noted that “Dodd-Frank took ages to negotiate and pass and implement. Some of that implementation went on for… five or six years. But we need solutions fairly quickly to protect consumers in crypto.” 

Thus, it may take time to get concrete regulations as lawmakers take time to understand cryptocurrencies. Sam Bankman-Fried’s arrest could lengthen this process and make D.C. more skeptical. However, this could cause inaction that lets the industry operate unfettered, which could – in a worst case – cause a second FTX. While consumers deserve thoughtful regulations, they need swift action to be shielded from future cases of fraud.