Senate Banking Committee Chair Calls for Crypto Crackdown

(TNS) — As chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Ohio Democrat Sherrod Brown sounded the alarm on cryptocurrency more than a year before the November meltdown of the FTX cryptocurrency exchange.

“There’s nothing ‘democratic’ or ‘transparent’ about a shady, diffuse network of online funny money,” Brown warned at a July 2021 hearing on the alternative currencies, whose advocates maintain they’re a way to take power back from irresponsible Wall Street bankers who triggered the 2008 global financial crisis.

Cryptocurrencies are not backed by governments, banks or other institutions. Their ownership is tracked through decentralized computer networks based on blockchain technology. There are thousands of different types of cryptocurrency, and their values can fluctuate dramatically. Hackers have stolen billions of dollars in the digital funds.

Previously valued at $32 billion, FTX was forced to file for bankruptcy after a run on deposits left it with an $8 billion shortfall, causing huge losses for investors who trusted the exchange with their money. The run was triggered by a report that questioned the stability of an affiliated company, Alameda Research, whose finances are entwined with FTX.

Brown called the collapse “a loud warning bell that cryptocurrencies can fail, and just like we saw with over-the-counter derivatives that led to a financial crisis, these failures can have a ripple effect on consumers and other parts of our financial system.” He has asked Treasury Secretary Janet Yellen and other federal financial regulators to examine how to regulate cryptocurrencies and their role in the U.S. economy.

A letter he wrote to Yellen observes that FTX failed to exercise basic corporate controls or risk management over its operations and improperly relied on its own proprietary crypto tokens, which led to inflated valuations that fueled irresponsible risk taking. Citing a Financial Stability Oversight Council report that found crypto-asset activities could destabilize the U.S. financial system if they grow without regulation, Brown urged Yellen to work with him and other financial regulators to develop comprehensive crypto legislation.

Over the past year, Brown’s committee has held hearings on the risks of stablecoins, cryptocurrency’s role in illicit finance, and the crypto scams and fraud. The regulations he envisions would prioritize the interests of national security and consumers and national over the crypto industry, he says.

“Crypto firms, and their backers, argued that billions of dollars invested in lending programs, or earning yield, should be exempt from basic oversight and regulatory protections,” Brown said at a December 14 hearing on the FTX collapse. “That’s not how regulation works. The things that look and behave like securities, commodities, or banking products need to be regulated and supervised by the responsible agencies who serve consumers.”

The weekend after the hearing, he told NBC’s Chuck Todd that banning crytocurrency would be possible, but “very difficult because it will go offshore and who knows how that will work.”

According to tabulations by Open Secrets, a non-profit group that tracks money in politics, FTX founder and former chief executive officer Sam Bankman-Fried and his top executives made more than $70 million in federal political contributions during the last election cycle. Bankman-Fried says he gave equal amounts to Republicans and Democrats, telling a reporter that to avoid media criticism, he gave all his money to Republicans via “dark money” groups that don’t require disclosure. FEC records don’t show any of that money went to Brown or his America Works political action committee.

In an interview, Brown said investors in Ohio and elsewhere have lost big money because of cryptocurrency.

“People sort of unknowingly went into this not trusting the banking system, and there is nothing in crypto that protects them,” said Brown.

In addition to lacking basic investor protections and oversight for consumers, Brown warned that cryptocurrency jeopardizes the economy and national security.

“We’ve seen crypto money launderers and gun runners and drug traffickers and rogue regimes invent new ways to hide and move money,” said Brown. “The recent FTX implosion is a warning, but it’s hardly confined just to FTX. It’s an industry-wide issue, potentially, that can harm this economy, not just the investors but the economy as a whole and we have to make sure it doesn’t get to that.”

Brown says that U.S. financial markets “are the envy of the world” because of the way they protect Americans’ money, not in spite of it.

“Supposed ‘innovation’ and ‘opportunity’ don’t mean much if they come at the cost of massive fraud,” says Brown. “New ways to cheat people out of their money is not the kind of innovation most people want in our economy.”

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