Blog: Inside FTX’s year-long campaign to shape crypto regulation – Grid

Former FTX CEO Sam Bankman-Fried has become a name-brand liberal mega donor, giving Democrats more money than anyone else besides George Soros for the 2022 midterms.

Regardless of Bankman-Fried’s personal views, those single-party donations are just one side of FTX’s sweeping bipartisan political strategy to get Republicans and Democrats behind its push for light-touch cryptocurrency regulations.

Executives at FTX have poured more than $60 million in the last year not only to Democrats, but also to Republicans, in hopes of shoring up the kind of support necessary to get bills through Congress. That yearlong sprint, however, has come to an end with the collapse of FTX.

“God’s last joke was that Sam was the number one advocate” of the industry’s preferred approach to regulation, said one crypto industry official who spoke to Grid on the condition of anonymity. “Sam became the public face for this. Sam’s view was this would legitimize crypto.”

Up until 10 days ago, when FTX faced a high-profile insolvency crisis, Bankman-Fried and FTX executives had been on an offensive to sway influential people in Washington and key lawmakers to draw up industry-friendly regulations for cryptocurrency. He became a fixture at the Capitol, testifying about the benefits of crypto and his views on regulation to key lawmakers in the House and Senate. His co-CEO at FTX, Ryan Salame, transformed into a major political player in the last year, too: He poured more than $23 million into politics this cycle, mostly to help Republicans win office and prop up crypto-friendly GOP allies in their races.

Salame gave millions to super PACs tied to House Republicans like Rep. Tom Emmer (R-Minn.), a key industry ally, and even formed one of his own, devoted to helping elect “forward-looking Republican candidates.”

Salame stocked his super PAC, American Dream Federal Action, with $15 million and started spending to help Republicans like Rep. Ted Budd (R-N.C.), who was just elected to the Senate. Budd favors FTX’s light-on-regulation approach and has stood up for cryptocurrency in Congress. Salame also gave $2 million to the main super PAC tasked with helping Emmer and others notch a majority in the House of Representatives. FTX donated another $750,000.

Salame’s and Bankman-Fried’s midterms spending sprees demonstrate the two-sided but overlapping nature of Bankman-Fried and FTX’s political strategy, where both Bankman-Fried’s philanthropic vision and FTX’s business interests found ample recipients for cash.

FTX’s approach to pursuing a favorable regulatory framework was more bipartisan than it might seem, given Bankman-Fried’s high profile as a prolific Democratic donor, according to interviews and reviews of spending disclosures by Grid. FTX’s strategy involved wooing Republican and Democratic lawmakers alike with millions of dollars in campaign cash — FTX and its executives spent more than $60 million overall on the midterm elections — in addition to hiring a spate of former regulators and Capitol Hill aides to lobby Congress, and exploiting partisan and ideological splits to achieve FTX’s policy goal of having a light-touch regulation from Washington.

Securities and Exchange contemplation

Much of the debate around cryptocurrency in Washington centers around who will regulate it: the Securities and Exchange Commission, which insists on strict processes for listing financial products, or the less-stringent Commodity Futures Trading Commission (CFTC). In the last year, Bankman-Fried transformed himself into a key activist and expert consultant for lawmakers who were looking for guidance on how to regulate the burgeoning industry. Like many cryptocurrency proponents, Bankman-Fried argued for the latter approach.

FTX spent close to $600,000 lobbying Congress this year, according to disclosures, in no small part to lobby the Senate Agriculture Committee that oversees the CFTC. Bankman-Fried became a fixture around Capitol Hill, meeting frequently with lawmakers and testifying about the promise of cryptocurrency in an Agriculture Committee hearing. He embarked on a public relations campaign of sorts, appearing on think tank panels to share his views on regulation and publicly praising the Agriculture Committee leaders’ work to his 1 million Twitter followers, saying he is “really excited” to see the bill they write.

Salame, meanwhile, gave more than $1 million to a super PAC backing Sen. John Boozman of Arkansas, the Republican ranking member of the Senate Agriculture Committee. One of the few Senate candidates supported by Salame’s PAC, Boozman has proven a strong ally.

Boozman co-sponsored a bill produced by Agriculture Committee lawmakers in August, the Digital Commodities Consumer Protection Act (DCCPA), which would give the CFTC more regulatory power over cryptocurrency. Earlier this year, Bankman-Fried, who has lavished praise on the bill, told the Senate Agriculture Committee that he had “a vision for the CFTC as a digital-assets market regulator for the U.S.”

Technically, the debate over the CFTC hinges on whether cryptocurrency should be treated as a commodity (which is regulated by the CFTC) or a security (which is regulated by the SEC). The notion that cryptocurrency is a commodity is not a given: The SEC has argued that many cryptocurrency offerings are more similar to corporate stock issuance, which falls under the SEC’s purview, and the agency has said it plans to oversee the industry.

“One of the main reasons FTX pushed for the legislation was because it would enshrine their current practices,” Tyler Gellasch, chief executive of the Healthy Markets Association, told Grid. “FTX, Coinbase and other exchanges have already determined that they aren’t trading securities — or else they would have to admit that they need to register with the SEC, which they aren’t doing.”

If cryptocurrency is in fact a security, setting up a cryptocurrency exchange would be more like setting up a stock exchange, a more exacting and restrictive regulatory process than trading commodities.

“The industry saw it as a more friendly regulatory space,” Mark Hays, senior policy analyst at the nonprofit Americans for Financial Reform, told Grid, referring to the CFTC. “That would be more receptive to the business models that it currently used as opposed to what they would use under a security regime.”

While today many crypto advocates and trade group officials are currently lobbing criticism at FTX, their vision for regulation was not all that different from Bankman-Fried’s, especially empowering the CFTC at the expense of the SEC. “The crypto lobby is attempting to gloss over the fact that by and large a lot of the industry wanted many of the same things for the last year or two,” Hays said.

How FTX’s influence could outlast FTX itself

The DCCPA is now widely seen as the most likely piece of cryptocurrency legislation to pass Congress next year, even as proponents of financial regulation, like Sen. Sherrod Brown (D-Ohio), have said the bill “needs major improvement.”

The success so far of the DCCPA is a testament to the newfound influence Bankman-Fried had built before FTX’s financial downfall. In only a year, Bankman-Fried became a fixture in Washington, shuttling across Capitol Hill for frequent meetings and appearing at a House Democratic retreat last March in Philadelphia. He went to the White House twice this spring to speak with Biden administration appointees including Steve Ricchetti, a longtime adviser to the president. Bankman-Fried’s brother Gabriel, who focuses on pandemic preparedness, also made two trips to the White House this year.

“He came in and threw a lot of money around and spoke very eloquently, and showed that crypto can be a grown-up industry,” said a Washington cryptocurrency activist of Sam Bankman-Fried. The activist spoke on the condition of anonymity because of potential professional repercussions. “He had the MIT and Jane Street background, which showed that he understands what he’s doing.”

FTX hired a slate of ex-government officials to help them build their case to lawmakers and regulators, including former members of Congress and regulators themselves. Mark Wetjen, former acting chairman of the CFTC — the agency that FTX wants to regulate cryptocurrency — joined FTX to lead its government strategy. Ryne Miller, a former aide to current SEC Chairman Gary Gensler, became FTX’s general counsel.

“I’m probably spending more than half of my time on regulatory efforts. I’m going to D.C. basically every couple weeks to talk with regulators and policymakers,” Bankman-Fried said in an April interview with the effective altruist organization 80,000 Hours.

As it made inroads on Capitol Hill, FTX hired an in-house lobbyist from the staff of Sen. Pat Toomey (R-Pa.), ranking member of the Senate Banking Committee, one of two key Senate committees considering regulating cryptocurrency. A host of other outside lobbyists, including former Republican Congressman Mike Conaway of Texas, who in the past chaired the House committee that oversees the CFTC, were retained to help make FTX’s case to lawmakers.

FTX hired “scores of outside lobbyists and consultants pushing their positions on Capitol Hill with the regulators and with four other trade associations,” a spokesperson from ADAM, the cryptocurrency trade group, told Grid.

FTX’s effort to push the SEC out of regulating cryptocurrency conveniently complemented Republicans’ displeasure with Gensler, who they had seen as overreaching in his investigations and enforcement actions against crypto companies. To many in Congress and crypto industry officials, the SEC should have almost nothing to do with crypto, because they don’t see crypto assets as “securities,” like stocks or bonds would be.

Blame the player, not the game

On Wednesday, as much of Washington was running full-speed away from the FTX scandal, newly elected Republican House Whip Tom Emmer (R-Minn.) encouraged the industry to look on the bright side.

“This actually might be a failure of character,” Emmer said during a Blockchain Association conference in Washington, D.C., referring to Bankman-Fried. “You are here to stay. You are going to continue to grow. This incident might have put everybody back a certain amount, we’ll see.”

This week, Emmer criticized both Bankman-Fried and the SEC, sending a tweet saying that Gensler, a Biden appointee, “runs to the media while reports to my office allege he was helping [Bankman-Fried] and FTX work on legal loopholes to obtain a regulatory monopoly. We’re looking into this.”

In happier times, Emmer was happy to point to FTX and Bankman-Fried specifically as an example of why the crypto industry did not need SEC oversight. The incoming whip has become one of cryptocurrency’s biggest allies on the hill.

During a December hearing, Emmer praised Bankman-Fried and used FTX’s U.S. operations as an example of why the SEC should not drag its feet in approving a financial product that could be bought and sold like a stock and would track the price of Bitcoin, another industry priority.

“Sounds like you’re doing a lot to make sure there is no fraud or other manipulation, thank you Mr. Bankman-Fried,” Emmer said, in reference to FTX US’s ability to track Bitcoin prices on its exchange.

“Thank you @SBF_FTX for discussing the efforts FTX and other exchanges take to ensure sound spot markets,” he tweeted after the hearing.

As the chairman of the National Republican Congressional Committee during this year’s midterm elections, Emmer has also watched FTX and its executives donate generously to his cause.

Now, in his new leadership role in the House, his past involvement in questions around regulating cryptocurrency could prove consequential. He chairs the Congressional Blockchain Caucus and was one of the first congressional candidates to accept donations via Bitcoin. He’s written legislation to push back on cryptocurrency regulation and stuck up for cryptocurrency to the SEC, which Emmer has accused of placing “burdensome” reporting requirements on cryptocurrency companies and “stifling innovation” in tweets.

As FTX spun from an insolvency crisis to bankruptcy, leading Democrats came to a different conclusion.

In an event Wednesday, Sen. Kirsten Gillibrand (D-N.Y.) said the FTX collapse “makes the case why regulation is so urgent now,” while Emmer said that “people that are trying to protect business as usual are looking at any example they can find to say ‘this is a terrible road you’re going down, this is awful.’”

Bankman-Fried, meanwhile, cast doubt over this whole approach, successful as it may have been.

In a series of DMs, he told a reporter from Vox, “F— regulators, they make everything worse, they don’t protect customers at all.” The next day, he walked back his statements, praising a number of regulators, including the CFTC, who he said had “deeply impressed me with their knowledge and thoughtfulness.”

Thanks to Alicia Benjamin for copy editing this article.

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