The Upside to FTX’s Downfall

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EDITOR’S NOTE:& Each week we cross-post Katrina vanden Heuvel’s column from the WashingtonPost.com. Read the full archive of Katrina’s Post columns here.

If there is a silver lining to the rapid and dramatic collapse of the cryptocurrency exchange FTX, it’s that it might lead to some long-awaited bipartisanship in Congress—to pass long-needed regulation of Big Tech.

FTX filed for bankruptcy on November 11. The company’s founder and chief executive, 30-year-old Sam Bankman-Fried, has stepped down and lawyered up. (His erstwhile attorney, who once represented Bernie Madoff’s sons, dropped Bankman-Fried, citing conflicts of interest.)

This represents a reckoning for cryptocurrency, a market that has gone underregulated for its entire existence. And FTX’s fall is just the latest, most egregious example in a series of Silicon Valley disasters. From Elon Musk’s destructive takeover of Twitter, to layoffs across the industry, to Ticketmaster’s monopoly on Taylor Swift tickets, the long-inflated tech bubble could well be bursting.

The Washington Post Editorial Board has declared this moment a “big reset for tech.” But Big Tech cannot be allowed to reset itself. The Biden administration has the rare opportunity to regulate it through bipartisan cooperation in a closely divided Congress. Taking on cryptocurrency would be a natural place to start.

While FTX’s downfall may be the first cryptocurrency scandal of this scale, the story is all too familiar. Allegedly, Bankman-Fried loaned $10 billion of his customers’ dollars to his investment company, Alameda Research, and used it for risky day trading. When consumers lost confidence and tried to pull their money out, they learned that FTX did not have their funds on hand. FTX covered up the misuse from its customers, its auditors, and its own employees.

Heard that before? John Ray III has. Ray was the man who oversaw bankruptcy proceedings for Enron. Yet, taking over as chief executive of FTX after Bankman-Fried’s departure, Ray said: “Never in my career have I seen such a complete failure of corporate controls.”

If the allegations against Bankman-Fried are true, then he committed a clear violation of securities law. That was possible, in part, because FTX is based in the Bahamas, and has not been subject to regulation by the SEC.

But the United States can still protect consumers from crypto’s instability. Last year, China cracked down on crypto trading. Several countries, including Algeria, Bolivia, and Pakistan, have banned it entirely or implicitly. And now, in a rare moment that transcends American political partisanship, legislators of both parties are eager to act.

The Democratic-led House Financial Services Committee has announced an inquiry into FTX, and Bankman-Fried could testify as soon as next month. Republican control of the House is unlikely to deter the investigation. Representative Patrick T. McHenry (R-N.C.), the committee’s likely next chairman, said of FTX: “There is no sugarcoating it. The collapse has been a dumpster fire.”

The same cooperative spirit is apparent in the Senate. Senators Elizabeth Warren (D-Mass.) and Richard J. Durbin (D-Ill.) have requested documents—and answers—from Bankman-Fried, with support from Republican colleagues. “This is now a front-burner issue,” said Senator Cynthia M. Lummis (R-Wyo.), who introduced a bill in June with Senator Kirsten Gillibrand (D-N.Y.) that would incorporate digital assets into the government’s existing regulatory structure.

This push to tackle crypto also coincides with a broader effort from the Biden administration to strengthen our antitrust laws; it is currently considering two pieces of legislation to prevent Big Tech from stifling competition. This, too, could be a promising opportunity for cooperation; Republicans have demonstrated willingness to take on Silicon Valley before. But it will require Democrats to overcome their financial ties to the industry.

Big Tech and crypto may be bipartisan targets, but, ultimately, Bankman-Fried is a Democratic problem. He was the party’s second-largest donor in the 2022 campaign cycle, spending about $37 million. He had spoken about spending up to $1 billion on the 2024 presidential election in support of Democrats and progressive causes. (Pardon the gambling metaphor, but it seems a safe bet that’s not going to happen.)

Democratic insiders are worried about what this means for the party’s future. Many are returning Bankman-Fried’s contributions, or donating them to charity. And though Republicans take plenty of crypto money themselves, that won’t stop them from tying Democrats to Bankman-Fried’s toxic brand. As Jeet Heer wrote for The Nation (I am its publisher), “Democrats at least pay lip service to the idea that unrestrained capitalism requires some taming. Democrats taking crypto largesse are open, rightly so, to accusations of hypocrisy and worse, corruption.”

This is a crucial moment for Democrats to demonstrate their independence—to show that they are not compromised, even by their biggest donors—and the best way to do that is to lead the regulation revolution.

One former crypto executive put it best: “America should provide oversight rather than sitting on the sideline.” That was Bankman-Fried, speaking to the Economic Club of New York in February. Last week, he changed his tune: “F— regulators,” he wrote. “They make everything worse.”

On the contrary: Bold antitrust action and robust crypto regulation will provide financial security and stability for millions of Americans. The only sort of person for whom regulators will make things worse is someone such as Sam Bankman-Fried.