FTX gives Congress a reason to rein in crypto. The question is how.

The precipitous collapse of the cryptocurrency platform FTX has given Congress the imperative to take action on the digital-asset industry, but done little to foster consensus about what a bill should do and how far it should go.

In the absence of consensus, the demise of the world’s second-largest cryptocurrency exchange has only made the existing factions dig their heels in deeper. 

Industry supporters have doubled down on their efforts to give crypto firms similar rights to banks, while skeptics have called for all crypto activity to be rooted out. Those in between still favor some form of regulation but, for the most part, have not decided what it should look like, said Aaron Klein, senior fellow for economic studies at the Brookings Institution.

“Each of the three sides have seen something in the FTX collapse to reinforce their prior,” Klein said. “The left’s prior was that crypto produces limited value and is a scam. The right’s prior was regulation isn’t going to stop it so we need a more decentralized system. The center is that crypto is really becoming important and more regulation would prevent actors like FTX from getting this big and scamming what looks like billions of dollars from people.”

Much of the debate around crypto regulation centers on whether and to what degree participants and products from that industry should be able engage with the regulated banking system.

One proposal floated over the summer by Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., would make it easier for certain digital asset banks to get access to Federal Reserve accounts. This is a contentious topic, as Custodia Bank — a Wyoming-chartered depository and digital asset custody bank — is suing the Fed over access to a so-called master account.

Bank advocacy groups are not pleased with the idea of granting master accounts to groups that deal in crypto or other digital assets. In the immediate aftermath of the FTX collapse, the Bank Policy Institute said keeping such groups out of the regulated banking system prevented more serious fallout from the episode.

“The lesson: don’t bail out a failing industry by giving it access to Fed accounts and providing it a new business model, thereby linking it to the regulated financial system and heightening the risk that the next cryptoverse crisis actually could harm financial stability,” the BPI said on Twitter.

Once valued at $32 billion, FTX filed for bankruptcy late last week after being engulfed in a self-dealing scandal related to its trading firm, Alameda Research. The revelation that Alameda had substantial holdings of FTX’s in-house token, FTT, led to a $6 billion run on the bank, a botched sale to rival firm exchange Binance and a liquidity crisis. Upward of $1 billion of depositor funds have gone missing in the ordeal, according to Bloomberg and other outlets, making it likely the largest collapse in the crypto industry to date.

Along with FTX’s size, the strong ties company founder Sam Bankman-Fried had formed with regulators and lawmakers are likely to amplify the effects of the company’s failure and the scandal surrounding it. 

“FTX CEO Sam Bankman-Fried was elevated as one of the industry’s leading voices, and politicians from both sides of the aisle were more than happy to put their arms around him and accept his beneficence,” Isaac Boltansky, a director of policy research for the financial services firm BTIG, wrote in an analysis brief. “Those policymakers now feel betrayed by the man and burned by the digital asset ecosystem, which makes the already difficult act of advocating on behalf of a fledgling industry exceedingly more difficult.”

Bankman-Fried testified in front of the House Financial Services Committee last December and he made two appearances in front of the Senate Agriculture Committee earlier this year. The Agriculture Committee oversees the Commodity Futures Trading Commission, which monitors crypto exchanges. FTX is registered and licensed with the CFTC and, until last Friday, it was seeking to register its subsidiary, LedgerX, as a derivatives clearing organization.

Seen as a good actor in the crypto market because of his philanthropic pursuits, Bankman-Fried was consulted by a number of legislators as they put together regulatory proposals for the industry. Now, anything he touched is “politically radioactive,” Boltansky said.

One such bill is the Digital Commodities Consumer Protection Act, drafted by Sens. Debbie Stabenow, D-Mich., and John Boozman, R-Ark. While the legislation has not been withdrawn, the senators are taking another look at it because of the FTX collapse.

“In light of these developments, we are taking a top-down look to ensure it establishes the necessary safeguards the digital commodities market desperately needs,” Boozman said in a written statement.

Klein said this is the appropriate response given what has transpired in the past two weeks.

“Everybody needs to fundamentally rethink their proposals in the wake of FTX,” he said. “The level, the magnitude and the breadth of the misdeeds are only now starting to come to light. Everyone should be equally chilled that the person who came into FTX to handle their bankruptcy is the same person who did Enron’s and he said the FTX thing is way worse than everything he’s ever seen before. That ought to scare everyone, and make them pause and rethink.”

But not everyone is taking that tack. Lummis and Gillibrand are both championing their proposal as being well equipped for the moment, arguing that it would have prevented the type of failure seen at FTX.

“Without a doubt, digital assets will continue to play a role in our financial system, and for that reason, we must move forward with the Lummis-Gillibrand Responsible Financial Innovation Act,” Lummis said in a written statement. “The bottom line is that we need comprehensive regulation in place to weed out the bad actors and ensure consumers have faith in the institutions they are trusting with their hard-earned money. Lummis-Gillibrand is the best comprehensive option that we have on the table that balances both consumer protection and innovation.”

Lummis and Gillibrand have also begun working with Sen Pat Toomey of Pennsylvania, the ranking Republican on the Senate Banking Committee, on a targeted bill that would solely address stablecoins. It is unclear if that bill would have a master account component. Representatives for all three senators did not immediately respond to requests for comment Friday afternoon.

The Lummis-Gillibrand bill released over the summer has not had a hearing in front of the Senate Banking Committee nor a markup — neither has any other digital asset related bill. Both would have to happen before any legislation could be advanced and signed into law, which is a tall order for a lame-duck session with many other priorities left to address.

Sen. Sherrod Brown, D-Ohio, chair of the Senate Banking Committee, is keen to delve into the facts of the FTX collapse as well as the demise of other digital-asset firms, such as Voyager and Celsius, a spokesperson told American Banker, adding that Brown hopes to convene a hearing on the matter soon. 

When it comes to policy responses, Brown favors regulations for the crypto industry, but he has not settled on a specific approach.

“My focus has always been on the fraud, scams, volatility, and outright theft in the crypto industry,” Brown said in a written statement. “FTX’s bankruptcy and the many other recent instances of instability have proved why we need a comprehensive regulatory approach that protects consumers and our economy from the risks of crypto.”