Election Day featured an unexpected loser: crypto.
Voters were trooping to the polls Tuesday as news broke that Binance was offering to buy FTX. The rescue deal — nonbinding, and itself shaky — came in the wake of a growing scandal over FTX’s opaque finances and a market sell-off sparked by growing uncertainty across the industry.
Kristin Smith, executive director of the influential crypto lobby group Blockchain Association, said she “forgot it was Election Day.” The rapid-fire tweets revealing the deal were “absolutely mind-blowing,” she said.
“I don’t think I’ve ever experienced anything like this,” said Smith. “This was the most remarkable day I’ve had in my career working in crypto.”
For the crypto lobby, the Binance-FTX deal — and its apparent collapse Wednesday — reignited fears about the industry, likely setting back recent efforts to change regulators’ and policymakers’ perception of the young, fast-growing market.
“This is a step backwards in terms of the advocacy in Washington,” Smith said.
Gabriella Kusz, CEO of the Global Digital Asset & Cryptocurrency Association, agreed: What happened with Binance and FTX “will most definitely impact the ability of FTX and the organizations they support to work in good faith with legislators and regulators,” she told Protocol.
“D.C. is not a very forgiving town and people tend to have long memories,” she added. “Integrity is very hard to build and very easy to lose.”
Crypto has been building up its presence in Washington over the past year, as the industry faced heightened regulatory scrutiny and challenges.
The industry found itself in a major battle last year when crypto companies and lobby groups including the Blockchain Association tried to block provisions that would have required miners and node operators to report crypto transactions like brokerages.
While the campaign failed, the issue helped galvanize the industry and its allies in Washington. Over the summer, Sens. Cynthia Lummis and Kirsten Gillibrand introduced the Responsible Financial Innovation Act, which seeks to clarify regulations for crypto. The bill largely endorses the industry view that many cryptocurrencies should not be regulated as securities.
Another bill introduced before the Senate Agriculture Committee, the Digital Commodities Consumer Protection Act, would grant the CFTC greater authority in regulating digital assets, effectively minimizing the role of the SEC.
The industry had high hopes for the DCCPA, which had a chance of getting marked up before the end of the year.
But the FTX collapse has probably derailed that, Smith said. “I think Congress is going to want to incorporate anything they learned from this incident into any regulation going forward,” she said. Perianne Boring, founder of the Chamber of Digital Commerce, said she expects policymakers “will want to take a wait-and-see approach to better understand the FTX-Binance deal.”
Cathy Yoon, chief legal officer at MPCH, said she expects the work of lawyers who have been part of the markup and negotiation process for the different crypto legislation will continue. “But I also think there will be more skepticism from Congress whether there will be another rug-pull-type event where some participants lose credibility overnight,” she told Protocol.
Smith cited another key reason why the push for the DCCPA could lose steam in Washington: Sam Bankman-Fried had been “one of the biggest backers of that legislation,” she said.
In fact, Bankman-Fried has played a critical role in the crypto lobby in Washington. Dubbed the “crypto prince,” Bankman-Fried became famous for saying that he planned to spend $1 billion on political campaigns through the 2024 presidential race, though he subsequently called the statement a “dumb quote.”
Bankman-Fried played such a prominent role representing crypto in Washington that the collapse of his empire will undoubtedly hurt the industry, said crypto critic Molly White.
“SBF was just spending a lot of time in D.C. schmoozing with lawmakers,” she told Protocol. “If I were those legislators, I would be questioning a lot of his suggestions after seeing what was happening behind the scenes at FTX.”
But Smith said Bankman-Fried “was not the only voice in Washington working on these issues.”
“He was a very effective advocate and built a lot of relationships, but there are a lot of us that are working to build the next generation of financial services,” she said.
Crypto still has allies in Washington, some of whom expressed support for the industry in the wake of the FTX collapse. Sen. Lummis said what happened provides “the clearest example yet of why we need clear rules of the road for digital asset exchanges in the United States.”
Mark Hays, a senior policy analyst at the Americans for Financial Reform, said the FTX collapse and the uncertainty it triggered “strike a blow for the credibility of the industry, and for calls to advance regulatory legislation quickly in the name of fostering crypto innovation.”
“We should be prioritizing protecting consumers and investors, not creating safe spaces for crypto magnates to play fast and loose with investors’ assets,” he told Protocol.
Smith said the FTX crisis unfolded so suddenly that it left the crypto community “in shock.” Given what has happened, “I don’t think there’s any chance of legislation at all” this year, and the focus will be “on hitting the reset button and starting over.”
