The real reason Washington is keeping quiet about the crypto scandal

“Federal agencies must be good stewards of the public’s time, not overwhelming them with unnecessary or duplicative requests for information,” the letter concluded, warning against bureaucratic red tape that could “stifle innovation.” The letter, written when the likes of Sam Bankman-Fried were riding high, somehow failed to suggest that watching out for fraud or protecting the wider financial system might also be worth the effort.

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The American Prospect, which reported on the letter this spring and followed up last month with a report noting that one of the firms the lawmakers protected was FTX, called them the “Blockchain Eight.”

It’s a bit of nice populist branding. However, what is notable about the Blockchain Eight is that four of them are Democrats and four are Republicans. Like the Keating Five at the center of the infamous savings and loan scandal of 1989, the group is bipartisan: The letter’s signatories included Republicans Tom Emmer, Warren Davidson, Byron Donalds and Ted Buddas well as Democrats Darren SotoJsled Auchincloss, Josh Gottheimer and Ritchie Torres.

“It’s cross-ideological,” says Aaron Scherb, who keeps track of Congress for Common Cause, the good-government watchdog group. “All kinds of crypto players are throwing their money around, for progressive causes, conservative causes.”

“There’s a huge bipartisan element there, which certainly can’t be said” of most other recent legislative claims, said Robert Maguire, research director for Citizens for Responsibility and Ethics in Washington, which filed a campaign finance complaint against Bankman-Fried yesterday.

To be clear, no one is accusing the eight of breaking the law. Rather, they are under fire for advocating questionable government actions that benefit a deep-pocketed industry whose public reputation has just gone sideways. It’s about roughness, not crime. (They have denied that they tried to get the government to withdraw.)

“The whole FTX fiasco is nothing more than the latest example of how a certain company, but really an industry, uses all the levers of the lobbying industry to hijack the agenda and put its narrow self-interest at the top and subordinate public interests at the same time,” says Dennis Kelleher in the advocacy organization Better Markets.

In the grand scheme of things, a cute letter isn’t the biggest deal. But, Kelleher says, the bifurcated nature of the Blockchain Eight — and crypto’s legislative fans more generally — is actually a big deal. “The point of these letters, and incidentally the unreported phone calls that almost always accompany such letters, is not to get a particular response. It’s bullying regulators in the hope that they’ll back down because of the political pressure and the political control, especially when it’s bipartisan.”

Whatever effect the authorship of that March letter may or may not have had on the SEC, the bipartisan cast of crypto’s legislative support has likely had a major impact on another Beltway institution: Washington’s scandal-industrial complex.

An optimist might think that in this age of constant political warfare, a good old-fashioned both-sides-do-it scandal is just what an exhausted country needs – a chance to sing kumbaya and remind ourselves that no matter how much we disagree had to be. When it comes to business, greed is an enemy we can all fight together.

But the political maneuvering over crypto in recent weeks suggests that the modern capital’s polarized political-media ecosystem can’t do much about a potential scandal if there’s no partisan advantage driving it.

Partisanship, it turns out, is the secret ingredient that turns a mere outrage into the kind of scandal that has a name and a cast of characters and a chance to propel Capitol Hill news cycles, wreck careers or earn media stardom. A Democratic administration’s disastrous weapons tracking program. A Republican president’s attempt to create foreign problems for a domestic rival. A disproportionately GOP group of senators accused of acting on advance Covid information. The degrees of outrageousness vary. But it takes nothing away from them to note that all were hyped up by people with an obvious partisan interest in throwing tomatoes at the other side.

Conversely, what are the incentives for current pols to hyperventilate for the cameras about the letter to Gensler? Hakeem Jeffries can take to the floor to demand serious consequences for these perpetrators of impunity from the financial industry. But he would hit four prominent figures in his own caucus. A backbench Republican can make a name for himself by asking for resignation or censure or some other improbable, excessive punishment. But she would call out her own party’s incoming majority whip, Emmer, and slim a member who has since been elected as a GOP senator, Budd.

Rather than backstabbing colleagues as a way to ride the crypto meltdown to political fame, ambitious members appear to be giving FTX-adjacent colleagues cover. As POLITICO’s Lisa Kashinsky reported in Massachusetts Playbook this week, Assistant House Speakers Katherine Clark told “Meet the Press” that she won’t require other Democrats to return contributions from Bankman-Fried, giving cover to her fellow Massachusetts lawmaker Auchincloss, a recipient of $5,800 from the FTX executive and thousands more from other people in the company. (IN an MSNBC interviewAuchincloss denied that the signatories asked the SEC to withdraw.)

In a political system more ideologically sorted than ever, even the topic of a scandal or pseudo-scandals suggests its partisan impact. Of course a scandal over subsidies for solar panels — like Solyndra, which briefly captured the GOP’s attention during the Obama years — will hit Democrats. Likewise, of course a scandal over an energy trading company, like Enron in the Bush years, is going to be used against the Republicans. But in the case of crypto, the money arrived before the partisan valence did, leaving Washington uneasy.

That’s why the political system spends a lot of energy trying to fix a partisan overlay at the top of the industry, or at least at the top of its most high-profile disaster. As it happens, it’s a pretty obvious target: Bankman-Fried has been a huge funder of Democrats and left-wing causes. In the year and a half before FTX exploded, he donated nearly $40 million to campaigns and PACs, almost all of it in support of Democrats. He had promised to drop $1 billion before the 2024 election. Sure enough, some pols quickly returned the donations, including former Rep. Beto O’Rourke, whose failed Texas gubernatorial campaign received $1 million. But many more did not.

And it doesn’t take much digging to see that the FTX money ended up in many Republican coffers as well. Bankman-Fried’s partner Ryan Salame’s $23 million went mostly to conservative causes. In an interview with a crypto reporter last month, Bankman-Fried said he had sent about as much money to Republicans as Democrats, but had treated it as dark money because, as Guardian reported, “Reporters will be pissed as hell if you donate to Republicans. They’re all super liberals, and I didn’t want that fight.”

Bankman-Fried’s big persona—combined with our cultural fascination with alleged fraudsters—has continued to make FTX a huge story, one that has included plenty of strong reporting on the crypto king’s courtship of Washington. But without the organized chorus of voices calling for heads to roll, it’s harder to understand the outrage and what it’s supposed to lead to. Even the $3 million Capitol Hill townhouse that a Bankman-Fried nonprofit had bought to host lavish parties for Washington players had a Democratic night and a Republican night, according to a sweeping Insider story.

Ultimately, the incoherence has real implications for ordinary people. After all, crypto’s liberation from Washington posed a concrete question before Congress: Which part of the government should keep tabs on the industry? Should it be the bigger, more aggressive SEC? Or the smaller Commodity Futures Trading Commission, which skeptics believe could be more easily captured by the industry (and several of whose veterans have gone to work for crypto)? Bankman-Fried and other crypto bigshots wanted the latter.

Absolutely nothing that has happened suggests that the goal has been derailed. A Bankman-Fried sponsored bill to codify the CFTC’s role, supported by Democratic senators Debbie Stabenow and Republican colleague John Boozman, remains in the Senate. At a hearing last week examining the FTX bankruptcy, Stabenow pushed back against the notion that the bill would cut the SEC out of the picture. But the scandal had not weakened the efforts. Nor has it killed another bill, from the Democrat Kirsten Gillibrand and Republicans Cynthia Lummiswill also give the CFTC more leverage and is also viewed skeptically by crypto critics.

It is hard to imagine that happening if one party – it hardly matters which – had decided to arm the FTX for political advantage.

“There’s definitely been a disappointing response in terms of, like, you still see Gillibrand trying to push her bill,” said the Revolving Door Project’s Jeff Hauser, whose organization has tracked the flow of public employees into the industry. “No one shows any shame.”

Ironically, thanks to the ongoing development of the two parties, there is a scenario where elements of both could combine to do just that. Among Democrats, notables such as Elizabeth Warren has predicted economic doom as a result of crypto. My colleague Zachary Warmbrodt reported back in March on tensions between her group of mostly older, left-leaning Democratic crypto-skeptics and younger Democratic colleagues like the letter signers. And emerging elements of the GOP have also turned against the casino fixation of the economy. During the hearing last week, Kansas Senator Roger Marshalla conservative who voted against certifying the 2020 election came out swinging toward crypto.

When I asked him about the problem, Oren Cass of American Compass, a think tank dedicated to reforming markets from the right, expressed his sentiments this way: “Free markets are not enough – public policy must prevent senseless financialization of the economy and ensure that our markets are productive .”

But right now, the absence of partisan advantage makes it still feel like a car without gas in the tank.

That’s a notable difference from the bipartisan fallout from the Keating Five, the group of senators accused of improperly interfering in the regulation of a politically connected savings and loan. Bartlett Naylor of Public Citizen, who was a Senate Banking Committee investigator at the time, said the shame John McCain felt over his role pushed him toward a reformist political stance. “Among the positive byproducts of the Keating Five scandal is that John McCain went from your standard bad Republican on the bench to one of the outstanding reform guys on the bench,” he says. “He saw Jesus.”

Members of the Blockchain Eight, for their part, don’t seem to act as if their warmth toward the industry is a political liability that requires a visit with the almighty. In a letter this week to the US Comptroller General, Torres sharply criticized the SEC for not being vigilant enough. “If the SEC had done the due diligence to thoroughly investigate the finances of FTX, it would have been more likely to expose the crypto exchange for what it really is: a house of cars built on monopoly money written out of thin air,” he wrote.