The criminal fraud trial of cryptocurrency bad boy Sam Bankman-Fried got underway last week, while at the same time, the crypto crowd went missing in action at the Futures Industry Association conference in Chicago.
Not long ago, “SBF,” as he’s widely known, dominated the city’s annual financial-market confab, parading around the Sheraton Grand Chicago with his scruffy pals like he owned the place. And considering how much his FTX trading firm had paid for sponsorships, he practically did.
At this year’s conference, crypto was all but invisible. With the heat turned up from the SBF trial, and trading volume languishing, this once-hot industry has gone underground. There are no flashy television ads, lavish sponsorships or ham-handed attempts to scrap the checks-and-balances of prudent risk management.
But crypto is a long way from dead, and even as its most famous spokesman tries to avoid being locked up for decades, an industry with an image problem is laying the groundwork for a comeback.
We’re rooting for it, and Chicago’s business community should be rooting for it, too.
Cryptocurrencies are digital files that can me thought of, to quote one of Bankman-Fried’s prosecutors, as “a kind of money that exists on the Internet.” They rely on blockchain, a digital ledger that permanently records transactions. That useful technology enables participants to trade with each other, person to person, without a central counterparty to guarantee the trades, as in Chicago’s more traditional financial markets.
The industry is crying out for strong, clear rules so that mainstream financial firms can participate in it without getting a bad name. This year, even as this trial loomed, crypto lobbyists have made quiet progress in the U.S. House to establish a long-sought regulatory framework for digital assets.
House Republicans have championed legislation that would clarify oversight of crypto markets in the U.S. by giving more extensive authority to the Commodity Futures Trading Commission. The CFTC is not the popgun regulator of years past, and it makes sense for crypto to be overseen by the same derivatives experts who have long kept track of Chicago’s futures markets.
The legislation is attracting some welcome crossover votes from Democrats, and similar legislation in the Senate is being sponsored by Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., so some rare bipartisan cooperation is in the offing.
Making the CFTC the No. 1 regulator would be a dream come true for the crypto industry, not least because the rival Securities and Exchange Commission has taken a harder line against it. SEC Chairman Gary Gensler has maintained that crypto needs to conform to existing securities laws, and he is pursuing a string of enforcement actions against some of the leading crypto operators.
We’re hopeful the legislation will perform a public service by defining these digital assets once and for all and giving regulators stronger tools for oversight. But nothing is close to being approved. The ongoing SEC enforcement cases could change the landscape, and getting any legislation through the hot mess that is the GOP-controlled House will be a challenge at least until the next election.
Overshadowing any serious discussion of crypto’s future is the spectacle of the SBF trial, which is already underway and expected to last about six weeks. On Tuesday, Caroline Ellison, Bankman-Fried’s sometime lover, close business partner and now a star cooperating witness for the prosecution, is expected to take the stand and attract an outsize share of press coverage.
On Capitol Hill, the crypto industry has tried to portray the 31-year-old Bankman-Fried (who has pleaded not guilty) as a rogue outlier. That’s a laugh, considering how he served as its very public face while spreading around tens of millions in political contributions to both Democrats and Republicans. Skeptics such as Democratic Sen. Elizabeth Warren of Massachusetts can be counted on to use the SBF trial’s daily drumbeat of salacious scandal to remind everyone about the dirty downside of unregulated crypto.
The dirt is real. The collapse of FTX cost customers a fortune and badly tarnished what was an exciting new marketplace. In his opening statement, federal prosecutor Thane Rehn said Bankman-Fried “lied to the world” about the security of customer funds under his care and knowingly stole “billions of dollars from thousands of people.”
Bankman-Fried attorney Mark Cohen told the jury his “math nerd” client acted in “good faith,” saying, “Sam didn’t defraud anyone. Sam didn’t intend to defraud anyone.” That’s a hard sell with billions of dollars missing. And even if Bankman-Fried were to walk free, the crypto industry still would need to prove that it’s not a haven for fraud where customer funds can readily disappear.
Here’s hoping our dysfunctional Congress can get its act together and approve legislation to help clean up crypto, which is a lot bigger and more important than the man currently on trial.
The U.S. badly needs some sensible new guardrails so the crypto market can develop responsibly — including in Chicago, which has a proud history of taking market innovations like this one to the next level.
— Chicago Tribune
