In carving out his crypto fiefdom, Sam Bankman-Fried focused much of his attention on Washington D.C., donating tens of millions of dollars to campaigns and frequently flying from his home in the Bahamas to the capital to meet with lawmakers about his vision for a regulated industry.
Bankman-Fried is scheduled to make his (likely virtual) homecoming to Washington on Tuesday, where he’s said he will testify at a House Financial Services Committee hearing on the collapse of his exchange, FTX. After several years of serving as the face of the crypto’s regulatory efforts, Bankman-Fried will find a much chillier environment after revelations that he directed customer funds to his trading firm, Alameda Research, losing billions of dollars in the process.
FTX’s bankruptcy not only altered the trajectory of crypto but also how lawmakers will approach the industry. Through interviews with 11 current and former congressional staffers, industry leaders, and policy experts, Fortune has learned how the events of the past month have shaped the current thinking on crypto legislation, which is likely to come to the forefront of policy discussions during the next congressional session.
“Every good crisis creates an opportunity for us to be able to have clarity on what happened in the past—but also the need to create stability in the marketplace,” said Denelle Dixon, CEO and executive director of the blockchain-focused Stellar Development Foundation.
‘The driving force’ in Washington
The crypto industry lacks any meaningful regulation in the U.S., which everyone from Commodity Futures Trading Commission chair Rostin Behnam to top crypto lawyers frequently bemoan. The result is a lack of clarity around regulatory oversight, with the biggest question remaining which cryptocurrencies are securities, and under the purview of the Securities and Exchange Commission, and which are commodities overseen by the CFTC.
The past year saw a flurry of activity across different committees in both the House and Senate to propose legislation to solve this fundamental issue, as well as other key questions such as how to regulate centralized exchanges and stablecoins.
Reports of a turf war between the SEC and CFTC emerged, with the scrappier CFTC fighting for more resources and oversight, while SEC chair Gary Gensler repeated that the current regulatory environment was sufficient, declining to issue clearer rules that the crypto industry clamored for and claiming that nearly every cryptocurrency was a security, with the sole exception of Bitcoin.
As Congress debated legislation to create guardrails for the industry, Bankman-Fried established himself as a frequent presence in Washington, appearing at congressional hearings and meeting with lawmakers and regulators in the background. As Behnam testified after FTX’s collapse, he met with Bankman-Fried 10 times over a special clearinghouse application—Bankman-Fried estimated that he spent “tens of thousands” of hours with the commission.
SBF’s aim was to not only advocate for his companies’ applications but to push legislation favorable for the industry. In particular, he helped shape and support a bill out of the Senate Agriculture Committee called the Digital Commodities Consumer Protection Act—introduced by Sens. John Boozman (R-Ark.) and Debbie Stabenow (D-Mich.)—which would have expanded the CFTC’s oversight and funding.
“The driving force behind the DCCPA was Sam Bankman-Fried and FTX,” said Kristin Smith, executive director of the Blockchain Assocation.
The CFTC—and commodities, which include at least Bitcoin and possibly Ether—falls under the jurisdiction of the Senate Agriculture Committee because of the history of grain markets. The DCCPA intentionally narrowed its scope to CFTC’s role in regulating crypto, with the idea that it would be easier to shepherd a bill that fell under the jurisdiction of one committee, rather than introducing a sprawling piece of financial legislation like Dodd-Frank.
Brett Quick, head of government affairs for the trade association Crypto Council for Innovation, said that of all potential crypto legislation, the DCCPA had the most momentum and broadest support, although she said passing it by the end of the year “was always going to be a heavy lift.”
The events of November, and the bill’s association with Bankman-Fried, have hurt its chances. The Senate Agriculture Committee was the first to hold an FTX hearing, with committee members emphasizing the need to re-examine the entire bill. Meanwhile, regulators and lawmakers publicly criticized it, with Gensler describing it as “too light-touch.”
The chance of the bill passing before the end of the year has essentially evaporated, according to a person with direct knowledge of the matter, although it’s expected to be introduced again next year with updated text and potentially merged with similar legislation.
Lummis-Gillibrand and stablecoins
While the DCCPA looked most likely to pass, other proposals jockeyed for position. One of the most prominent was the Responsible Financial Innovation Act sponsored by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.), often referred to as the Lummis-Gillibrand bill.
The bill was wider in scope than the DCCPA, including more clarifications about the distinctions between the SEC and CFTC, as well as the establishment of an “Advisory Committee on Financial Innovation,” which would include industry leaders, policy experts, and regulators.
“It can be challenging to move a bill of that magnitude and size by itself,” said Quick, adding that it likely would be broken into pieces and sent to different committees before reassembled as a broader package.
One of the biggest unknowns has been the support of two key Democratic senators—Sens. Sherrod Brown (D-Ohio) and Elizabeth Warren (D-Mass.)—with both raising doubts on the need for new legislation amid broader skepticism of the industry.
As one person familiar with the matter told Fortune, the biggest question mark moving forward is whether Brown and Warren are winnable. In the aftermath of FTX’s collapse, Brown has called for comprehensive regulation, both during the Senate Agriculture Committee hearing and in a letter to Treasury Secretary Janet Yellen—actions some have taken to be a pivot in his approach.
For skeptics like Brown and Warren, the Lummis-Gillibrand bill is a hard sell. Like the DCCPA, it has the perception of being close to the industry, from Lummis and Gillibrand posting it for comment on the developer platform GitHub to Lummis adding Bitcoin laser eyes to her Twitter profile picture.
Gillibrand is also working with Lummis and Sen. Pat Toomey (R-Pa.) on a stablecoin bill, with the hope that it’s added to the omnibus spending bill before the end of the year. In a recent interview with Bankless, Toomey also mentioned two other bipartisan bills that could move by the end of 2022, including a “de minimis” exception to simplify the use of digital assets for smaller purchases, and a fix to the definition of “brokers” from the 2021 infrastructure law.
Stablecoins, the cryptocurrencies pegged to an underlying asset such as the U.S. dollar, have long been viewed by lawmakers as a necessary—and simpler—avenue for regulation.
The draft of a stablecoin bill from the House Financial Services Committee, sponsored by chair Maxine Waters (D-Calif.) and ranking member Patrick McHenry (R-N.C.), has been floating around all year, although there are still obstacles on key provisions including states’ regulatory authority.
With a Friday deadline and a Republican effort to block the omnibus bill, the likelihood of any crypto provisions being attached to a larger vehicle before the end of the year are diminishing. But with the shift of power in the House and McHenry becoming chair of the House Financial Services Committee, stablecoin legislation likely will become a major focus for lawmakers.
‘The crypto Congress’
The last missing piece of the legislative puzzle is the Digital Commodity Exchange Act, a bill proposed in the House Agriculture Committee that’s similar to the DCCPA but untainted by Bankman-Fried.
According to a person with direct knowledge of the matter, the DCEA will likely be reintroduced during the next Congressional session. Like the House Financial Services Committee, the House Agriculture Committee will beckon in a new chair with a crypto focus, Rep. Glenn Thompson (R-Pa.). With a recognizable path forward, the DCEA could become one of the leading crypto bills.
Rep. Ritchie Torres (D-N.Y.), a second-term congressman sitting in the House Financial Services Committee, introduced two bills of his own in December to address the failures of FTX, although he will be in the minority next year.
The next Congressional session likely will include a concentrated push from both sides of the aisle for crypto regulation. Ron Hammond, director of government relations at the Blockchain Association, predicted an aggressive push from House Financial Services after Republicans take over.
As several people told Fortune, while the collapse of FTX likely stalled bills such as the DCCPA, it also increased the overall appetite for comprehensive legislation. Whether that’s to the liking of the crypto industry, especially when it comes to tricky sectors such as decentralized finance, remains to be seen.
“The 118th Congress is really going to be the crypto Congress,” said Quick.