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The Senate Committee on Banking, Housing, and Urban Affairs convened Wednesday’s hearing on the FTX crash, just one day after FTX CEO John Ray testified in front of the House Financial Services Committee. While a former crypto billionaire personally confirmed his appearance at the House hearing before his arrest in the Bahamas on Monday evening, he was not too eager even under a threat of subpoena to attend the Senate hearing.
“We have offered Sam Bankman-Fried two different dates for providing testimony before the Senate Banking, Housing, and Urban Affairs Committee and are willing to accommodate virtual testimony. He has declined in an unprecedented abdication of accountability,” the Senate committee’s leaders said in a joint statement.
At 10 am EST on Wednesday, a few journalists walked into the spacious room, G50, in the Dirksen building. You would think that the mainstream media interested in power and access would be camping in front of the hearing room to get the story, since the FTX scandal had broken. This time, despite the insider celebrity investor and a Hollywood star as high profile witnesses, the hearing room was almost empty.
Kevin O’Leary walked in first, in a black suit, holding the red-frame glasses in one hand and the draft of his testimony in the other. Shortly after him, actor Ben McKenzie Schenkkan, who starred in “The OC” and “Gotham,” showed up in a dark gray suit, and walked briskly towards his seat at the edge of the long table covered with the black tablecloth. Hillary Allen and Jennifer Schulp walked in next.
Senator Sherrod Brown (D-Ohio), the Chairman of the Senate Banking, Housing, and Urban Affairs Committee, dressed in a gray suit and light blue shirt, was the first committee member to come out and greet the witnesses.
Sen Toomey: Code committed no crime
Chairman Sherrod Brown opened the hearing by saying that SBF owes an explanation to the American people. He commended the DOJ and SEC for taking a “critical step to hold Sam Bankman-Fried accountable.”
From the get-go, Senator Brown made it clear that he is not a crypto fan, and he especially dislikes celebrity endorsements that tell consumers they are “missing out” unless they get on the crypto bandwagon. He summarized crypto as a TV ad campaign that “ushered in a whole new dimension of fraud.” According to Senator Brown, “making money in crypto seems so easy. Too easy. Every crypto token could double or triple in value in a matter of hours or days.”
Sam Bankman-Fried’s success was “supposed to impress us,” Senator Brown said harshly as he compared him to Bernie Madoff, a reference that could have been heard at the House hearing on December 13, 2022. In his interview with George Stephanopoulos, Bankman-Fried said that such comparison was not the right one, as unlike the Madoff scheme, FTX was an “actual business.”
Chairman Brown said that the legislators are still learning about how SBF “shuffled money” between FTX and his trading firm, Alameda Research. “A name calculated to sound as generic as possible to avoid raising eyebrows while sending money across the world,” added Sen Brown.
He pointed to a new duality of Sam Bankman-Fried, as a “shiny object” then and a “villain” now. However, warned Senator Brown, SBF’s story is “bigger than one person or one firm.”
Ranking Member Pat Toomey (R-Penn.) said that the news of the arrest came to the surprise of no one but possibly Sam Bankman-Fried himself. A Republican Senator said that any “violations of law should be aggressively prosecuted.” He talked of Sam Bankman-Fried’s “unauthorized landing of customer assets,” calling his actions “outrageous” and “unacceptable.”
As Senator Toomey is leaving the Senate next year, he wanted to put on record that there should be a difference between a promise of crypto and illegal activities. “There is nothing illegal with the software, it’s what’s done with it,” he said. “Code committed no crime,” noted Senator Toomey, making a firm stance against the calls for the crypto ban. “This is a profoundly misguided not to mention impossible idea. Short of enacting draconian authoritarian policies, cryptocurrency cannot be stopped,” Toomey said at the hearing. He stressed the need for a new regulatory framework for payment of stablecoins. As Senator Toomey finished his introductory remarks, it was time for the committee chairman, Senator Brown, to introduce the witness.
Hillary Allen, a law professor at the American University Washington College of Law, began by saying that on May 25, 2022, she participated in the CFTC’s roundtable on FTX’s proposal to automate the clearing of margin trades for retail customers. She co-authored a letter opposing that proposal. Allen is a big opponent of crypto: she believes this asset class is “built out of nothing.” She said that regulatory clarity wouldn’t prevent any future FTX from happening and expressed the need for the crypto ban. “A ban on crypto would be the most straight-forward way of protecting both investors and the financial system: it would end the uncontrolled creation of crypto assets and also ensure that crypto assets never require a bail-out,” she said.
Kevin O’Leary opened his remarks by stating how in August of 2021, nearly three years after investing in crypto, he became a paid spokesperson for FTX. He was paid approximately $15, including $3 million to cover a portion of the taxes. According to O’Leary, $1 million was invested in FTX equity and approximately $10 million in tokens held in FTX wallets. “The equity is now most likely worthless and the accounts have been stripped of their assets and financial records. I have written them off to zero,” O’Leary said about the state of his FTX investment. He told the members of the Senate that he “never invested any capital from our partners or LPs.” The FTX loss O’Leary experienced came from an operating company under his ownership.
Despite the FTX collapse, O’Leary reiterated at the hearing what he told The Pavlovic Today in September 2021 that crypto will be the 12th S&P 500 sector and insisted that “bipartisan sensible regulations” are needed.
Jennifer Schulp from Cato Institute offered an open-minded and balanced view on crypto by saying that blocking digital assets that Americans already are participating in, is not the way to go. “Risk is a natural component of markets,” she said.
Hollywood star Ben McKenzie Schenkkan offered a bleak stance on crypto in his testimony. “The economic narrative surrounding cryptocurrency is untrue. In fact, it is a story meant to deceive,” he said. Schenkkan told the Senate that “the entire cryptocurrency industry resembles nothing more than a massive speculative bubble built on a foundation of fraud.” He believes the world is looking at the “largest Ponzi scheme in history by an order of magnitude.” He believes that crypto should be looked at as a gambling industry.
Then, the floor was opened for questions from the Senators. As the Senate hearing on the FTX crash progressed, McKenzie Schenkkan offered a view of crypto as a “zero-sum game” where for someone to win, someone else needs to lose.
“It’s preposterous to say that,” O’Leary shared a different point of view. The Shark Tank investor noted that the analogy of crypto with gambling “was exactly what we described the New York Stock Exchange” as in the past, and what happened was that due to the nature of the risk, it was then regulated. O’Leary said that the potential of blockchain technology in authenticating physical assets and contracts is “incredibly powerful.” What’s missing are the regulations, suggested O’Leary.
O’Leary: CZ put SBF out of business
Why did FTX go bankrupt? O’Leary said that while he does not have records, he has an opinion on what went down with FTX. After his accounts were “stripped of all of their assets, all of the accounting and trade information,” O’Leary couldn’t get answers from any executives at the FTX. He “simply called” Sam Bankman-Fried and asked, “Where is the money, Sam?”
Bankman-Fried told Kevin O’Leary that he had been refused access to the servers and he no longer knew. “I said okay, let’s step back,” O’Leary recalled.
To understand where the money went, O’Leary asked Sam Bankman-Fried to walk him through the past 24 months and tell him where he spent the money. Sam told O’Leary that he was re-purchasing shares from Binance, his competitor. O’Leary did not know at the time that Binance bought 20% of the FTX for seed stock. O’Leary asked Sam what compelled him to spend as much as 3 billion to buy back shares from Chanpeng Zhao (CZ). Sam said that it all happened because every time “we went to get licenses,” CZ would not comply with providing the data for FTX that would clear them for a license and the only option, according to Sam Bankman-Fried, was for FTX to buy CZ out. In O’Leary’s opinion, SBF and CZ “were at war with each other and one put the other out of business, intentionally.”
O’Leary pointed to another aspect of what led to FTX going bankrupt. “All of a sudden, on social media, CZ is asking for another $500 million,” said O’Leary about CZ’s wanting to convert FTT, FTX’s proprietary token, into fiat. “Why would you put that out there? You know it’s going to put downward pressure to push down the value of that coin dramatically. That’s exactly what happened,” said O’Leary. In a leaked House testimony to Forbes, Sam Bankman-Fried noted that “there were, I believe, roughly $4b of client withdrawals per day, starting shortly after Changpeng Zhao (CZ), Binance’s CEO, tweeted on November 6th that he would sell all of his company’s holdings in FTT, a token that Alameda Research had substantial holdings in.”
Binance is a “massive, unregulated, global monopoly and now they put FTX out of business,” O’Leary added. As he continued to delve deeper into reasons for the collapse of FTX, Chairman Brown cut him off by stating that he was three minutes over his allotted time for speaking. Other Senate members were not interested in asking O’Leary more follow-up questions on what he discovered in his conversations with Bankman-Fried.
Binance connection to China Communist Party
The hearing touched upon the underlying threats crypto poses to national security. Senator Bill Hagerty (R-TN) said that Binance is connected with China’s Communist Party, allegations Binance CEO CZ denies.
McKenzie said that Binance is “incredibly murky” but noted that it was an early investor in FTX. He said that CZ and SBF were talking to each other on Signal app, in a private chat group “exchange coordination,” which SBF submitted into Congressional evidence. “They were all talking to each other,” said McKenzie.
“There’s winners and losers in an unregulated zero sum game. You’re either a scammer or a mark,” opined McKenzie.
Senator Lummis said that “digital assets are not on trial.” She called FTX “good, old-fashioned fraud” and said that it’s time to move on to regulate the crypto industry.
The fiery exchange between O’Leary and Senator Warren
The hearing took an explosive turn during a fiery exchange between Senator Warren and Kevin O’Leary after she said it’s easier to do money laundering with crypto. “Currencies have been used for drug trafficking schemes since the ’60s and the American dollar when it was thrown out of a Piper aircraft in a duffel bag: the American dollar is also used by bad actors all the time,” O’Leary told Sen. Warren.
The Massachusetts Democrat asked O’Leary if he thinks crypto is “so promising” that “we should accept weaker anti-money laundering rules and weaker compliance from crypto firms than we require from banks, from brokers and from Western Union?”
“No,” responded O’Leary. “I think we should apply the same regulatory structure that we apply to existing trading of stocks and bonds on exchanges tied to broker dealers. That is not complicated. It’s already been implemented in other countries.”
As Senator Toomey closed the hearing, I asked him why Sam Bankman-Friend did not want to attend the Senate hearing. “You know, I’d be speculating. You’d have to ask him,” responded Senator Toomey.
Today’s hearing offered a window into Sam Bankman Fried’s conversations with O’Leary, the complexity of crypto regulations and how the legislators, policy wonks and celebrities vacillate between the black-and-white solutions for the crypto industry. FTX’s collapse contributed significantly to skepticism of the industry and to loss of trust in digital assets. As the FTX report unfolds, more details will come to light with the passage of time. The pressure to deal with the elephant in the room builds on the Hill. The turbulent life of Sam Bankman-Fried continues. The next chapter will be the extradition battle from the Bahamian Fox Hill to the United States. The news goes on.
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