Crypto is facing a crisis of confidence amid the FTX collapse

Cryptocurrency is facing a crisis of confidence as popular crypto exchange FTX heads for bankruptcy, the latest and most significant failure in a series of high-profile collapses.

FTX loaned billions of dollars in user deposits to an affiliate trading firm that suffered huge losses on risky bets. That left FTX with a deficit of up to $10 billion, raising the question of whether users will lose everything.

It’s a shocking turn of events for a respected firm run by Sam Bankman-Fried, a Capitol Hill darling who cultivated deep relationships with lawmakers and helped them write industry-friendly legislation.

Lawmakers on Thursday asked Congress to prioritize legislation to regulate crypto, which is not covered by the same consumer protections as more traditional financial products.

“Now more than ever, it is clear that there are major consequences when cryptocurrency entities operate without robust federal oversight and protections for customers,” House Financial Services Committee Chair Maxine Waters (D-Calif.) said in a statement.

Sen. Elizabeth Warren (D-Mass.), a longtime crypto critic, said the U.S. needs “more aggressive enforcement, not ineffective rules that the crypto industry is trying to write for itself.”

White House Press Secretary Karine Jean-Pierre added to the chorus of calls for regulation on Thursday, telling reporters that crypto “risks harming everyday Americans” without proper oversight.

Crypto industry leaders were quick to join these conversations after FTX’s collapse. But it’s unclear whether Congress will continue to lean on the industry to write legislation after its leading voice in Washington gambled away user deposits.

“It’s only fair that many of these lawmakers would ask some questions,” said Brett Quick, head of government affairs at the Crypto Council for Innovation, an industry lobby group that brought FTX on as a member last month and cut ties on Thursday. “And there may be a period of meeting to restore some of the trust that has been built by the industry.”

Bankman-Fried was instrumental in creating the first major crypto bill, unveiled by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (DN.Y.) in June, which would instead hand crypto enforcement over to the Commodity Futures Trading Commission. by the more powerful and aggressive Securities and Exchange Commission (SEC).

His nearly $40 million in political contributions during the 2022 midterm election cycle raised eyebrows among some in the crypto industry who believed Bankman-Fried was trying to dominate the conversation in DC around crypto regulations.

“Everything he was involved in is tainted now, in my opinion, and I think people need to take a step back and ask themselves, why would FTX have this bill?” said Lee Reiners, executive director of Duke University’s Global Financial Markets Center.

“Why do cryptos want the CFTC to be their regulator?” he continued. “And is it compatible with investor protection and minimizing risks to financial stability?”

The SEC and CFTC are investigating whether FTX mishandled users’ funds, according to Bloomberg. The SEC’s investigation began months ago, the outlet reported.

Bankman-Fried tweeted on Thursday that US users will not be affected by the funding shortfall, a claim that drew skepticism from crypto experts. International users face the biggest threat of losing all their deposits if FTX declares bankruptcy.

FTX has tried to raise money in a last ditch effort to close the deficit. Binance, the largest trading platform by volume, initially agreed to buy out FTX, but pulled out after reviewing its balance sheet.

Rival crypto leaders said Thursday that FTX’s collapse will cause lasting reputational damage, arguing that the industry has failed to root out bad actors who undermine crypto’s credibility.

“This is not about aiming high and missing. This is about recklessness, greed, self-interest, hubris, sociopathic behavior that causes a person to risk all the hard-won progress this industry has made over a decade, for their own personal gain. chirpinged Jesse Powell, CEO of crypto exchange Kraken.

Still, FTX was considered one of the more reliable firms in the crypto industry, joining a growing list of crypto firms collapsing amid falling crypto values.

Crypto lender Celsius Network declared bankruptcy in July after it blew user funds on risky games, leaving the company with a $1.2 billion deficit. It came shortly after fellow crypto lender Voyager also declared bankruptcy. Both companies blocked users from withdrawing their money.

FTX’s demise could upend other crypto firms. BlockFi, which received a line of credit from FTX to remain operational in June, halted withdrawals on Thursday, citing a “lack of clarity” surrounding FTX.

The Consumer Financial Protection Bureau released a report on Thursday that points to an increase in complaints about crypto scams, hacks and bankruptcies.

“Our analysis of consumer complaints suggests that bad actors are exploiting crypto-assets to perpetrate fraud on the public,” Rohit Chopra, the agency’s director, said in a statement.

Rising interest rates and historic inflation drove investors away from crypto and other risky assets, wreaking havoc on an industry that was betting on continued growth.

Crypto values ​​began plunging in May after TerraUSD, a stablecoin that was supposed to stay constant with the dollar, lost most of its value in a matter of days, wiping out about $60 billion in investor funds. Do Kwon, the coin’s creator, is currently wanted by Interpol.

The collapse saw crypto hedge fund Three Arrows Capital lose its $10 billion in assets. Officials have been unable to locate the firm’s founders Su Zhu and Kyle Davies.

Bitcoin, the most popular cryptocurrency, is down 74 percent from its all-time high last year, while lesser-known coins have been hit even harder.