Livetweets of the December 14, 2022 Senate Banking Committee hearing on FTX

by Molly White on

Here's an easier-to-follow version of my tweet thread of the December 14, 2022 Senate Committee on Banking, Housing, and Urban Affairs hearing on the FTX collapse.

I also recapped this hearing in an issue of my newsletter.

The FTX hearing by the Senate Committee on Banking, Housing, and Urban Affairs is beginning shortly. I'll be livetweeting it here, and will be publishing a recap of it in my newsletter later.

Hearing stream (YouTube)

I'll use the #FTXhearing hashtag throughout, so feel free to filter it out if I'm clogging your feed or you'd rather catch up later.

Statements by witnesses—Prof. Hilary Allen, Kevin O'Leary, Jennifer J. Schulp, and Ben McKenzie—have already been published at the link above.

Sen. Brown (D-OH) opens with a very critical statement, where he talks about Facebook's Libra project (shut down by gov't.) which he describes as a "shiny tool" to try to extract money from consumers

"Crypto doesn't get a free pass because it's shiny and bright, or because venture capitalists think it might change the world." – Sen. Brown
Brown urges that this hearing is not just about FTX, but will focus on the crypto industry and consumer protection.

Sen. Toomey (R-PA) says largely the opposite to Brown, and echoes the crypto industry's line that we must separate FTX's wrongdoing from all this promise that supposedly exists in the industry.

"There's nothing intrinsically good or evil about software, it's about what people do with it... Code committed no crime..." – Sen. Toomey

[sigh]
Toomey says some Senators have suggested "pausing cryptocurrency" while hearings go on.
The crypto industry clearly has a strong spokesperson and salesman in Senator Toomey.
Sen. Brown introduces the witnesses. Prof. Hilary Allen and Ben McKenzie Schenkkan (better known as Ben McKenzie) will be critical of crypto; Kevin O'Leary and Jennifer Schulp are both pro-crypto.

First up is Professor Hilary Allen. Her statement is challenging crypto's claims they are decentralized. She has suggested that "a ban on crypto would be the most straightforward".

She says that if legislators are not willing to proceed with a ban, then they must be very careful not to enact laws that would make crypto "too big to fail".

Now Kevin O'Leary (note the laser eyes in the PFP) is up. He was a paid spokesman of FTX. He's now listing his crypto entanglements, and talking them up 🙄

O'Leary echoing Toomey in his statements that Bitcoin "isn't a coin, it's software".

This is a recently popular argument, which seems to seek to lean on "code as speech" precedence.

O'Leary explaining how HE will be the one to do the detective work on what happened at FTX.

He characterizes skeptics as "entrenched businesses" who "abhor competition".

Now Jennifer J. Schulp, who's in camp "this is an FTX problem, not a crypto problem". She's talking up defi.

She characterizes various regulatory suggestions from the crypto-critical as "taking technological choices out of people's hands."

"Risk is a natural component of markets, and failure is often necessary for development."

Now Ben McKenzie, who says the crypto industry depends on "misinformation, hype, and, yes, fraud".

McKenzie is outlining how he does not believe that cryptocurrencies are currencies, and how he believes that every cryptocurrency is a security.

"In my opinion, the cryptocurrency industry represents the largest Ponzi scheme in history."

Sen. Brown asks if this kind of fraud exists at other crypto firms.

Allen: Yes

O'Leary: Yes, at unregulated exchanges

Schulp: Most likely

McKenzie: It's endemic.
McKenzie outlining the cross-pollination between execs at online gambling and fraud enterprise Ultimate Bets and the crypto industry: Stuart Hoegner at Tether and Dan Friedberg at FTX
O'Leary not great at yes or no questions. He claims the comparison to gambling are outdated and like early comparisons of the stock market to gambling.

Sen. Toomey pushing back on McKenzie's claim that all cryptocurrencies—including Bitcoin—would be securities.

Not surprised there.

He's having Schulp make that argument for him.

The argument, a common one, is that Bitcoin is too decentralized to be classed as a security.

O'Leary outlines the potential for blockchains, saying that 1/3 of the MIT class wants to work in the crypto industry.

Maybe not the best argument given that SBF was an MIT grad...
O'Leary is blaming FTX's collapse on Changpeng Zhao (CZ) of Binance.
Ben McKenzie's soul leaving his body while O'Leary talks
Ben McKenzie, wearing a grey suit, sitting in front of the Senate. He is staring into the middle distance with a blank look on his face.

Hilary Allen explains how "proof of reserves" and other crypto industry attestations don't replace proper auditing.<//p> Allen also says that arguments that crypto needs to be regulated completely differently from existing systems because "it's decentralized" doesn't hold water, and explains how the Bitcoin software and mining pools are highly centralized. </div>

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Sen. Menendez (D-NJ) asks O'Leary if he might not have lost money if FTX had complied with existing regulations.

He says absolutely, but FTX wasn't regulated.

Compelling.
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Sen. Menendez says he is worried about the extent to which crypto might be integrated with traditional finance, adding contagion risk

Mendendez asks McKenzie how we could combat the advertising.

McKenzie says we should use the right terminology, classify cryptos as securities, possibly treat crypto as gambling and restrict advertising, and require disclosures.

Sen. Tester (D-MT) opens with skepticism, asks Allen how her concerns expressed in front of the Senate last year have developed.

Allen expresses her gratefulness that banking regulators have largely siloed crypto, and limited FTX's explosion from affecting traditional finance.

But she expresses concerns over how crypto and traditional banking are increasingly intermingling, and she says we need to "firm up" the separation between the two.

"We have to think about how much of this we're willing to tolerate in the name of innovation."

Allen explains how the subprime mortgage crisis exposure was around $1.3T, and the reduction in the crypto industry "market cap" (which she also expresses skepticism about) was on that order, so if crypto and tradfi had not been segregated, its failure could've been catastrophic.

Sen. Tester asks if, had the two been closely coupled, the government might have had to bail out crypto like it had to bail out banks in 2008. Allen says yes.

O'Leary points to LedgerX as the "only entity that didn't go to zero" in the FTX collapse as proof that proper regulation could have protected FTX investors.

He conveniently ignores the other US-based entities involved the bankruptcy.
Sen. Hagerty (R-TN) is concerned about a "similar implosion by Binance", which he says would be catastrophic for the crypto industry and for consumers. Asks how US regulators could work with global regulators to bring transparency to Binance.
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O'Leary: "In one phone call we could solve this problem"

my god, he's done it
Sen. Hagerty outlines ties he believes exist between Binance and the CCP, seems very concerned about that. Schulp decides to sidestep discussing those ties.

Sen. Warner (D-VA) is up. He's also concerned Binance and possible ties to the CCP.

Talks about the "clunkiness" of Bitcoin, lack of scalability, environmental cost.

Warner worries that "FTX is just the tip of the iceberg".

You and me both, my man.
Allen says we're sort of partway down the iceberg, points to the earlier Terra/Luna collapse.
McKenzie points out the existence of the "Exchange coordination" Signal chat which included both CZ of Binance and SBF of FTX, describes it as an example of centralization in the industry.
McKenzie making sure to raise his concerns about the connections between Alameda and Tether.

Sen. Lummis (R-WY) is up. She's been among of the biggest crypto advocates in the Senate.

"Digital assets are not on trial. Fraud and organizations are on trial. Let's separate digital assets from corrupt organizations."

She namedrops Kraken, Coinbase, and Bitstamp as shining stars of the crypto exchange industry.

Wonder how those donations are looking.

Her first question might as well come from a talking Bitcoin.

Lummis: "Why do digital assets and DLT have the power to make our capital markets safer and more efficient?"

Shamelessly plugs her and Gillibrand's bill, the "Responsible Financial Innovation Act", which she says she'll reintroduce next year.
Sen. Warren (D-MA) is up. Hold on to your butts, this is going to be a stark difference from Lummis.

Warren characterizes crypto as a tool for crime. She asks Allen about claims from the crypto industry that blockchains are uniquely transparent. "Does the fact that the blockchain is public mean it is more difficult for criminals to launder money using crypto?"

Allen explains that blockchains are "the worst of both worlds", and enable criminals to launder money while also making it difficult for average people to maintain privacy.
Allen explains that the claims that crypto could be more efficient, made by Schulp but also many others, rely on crypto sidestepping regulations on things like anti-money laundering. She describes crypto as "regulatory arbitrage".
Warren asks O'Leary if we should accept weaker KYC/AML in crypto because it is "so promising". He says no.

O'Leary: "I take issue, Senator, with your concept that it makes it easier to do money laundering. Currencies have been used for drug trafficking since the 60s."

wat

Argues that "USD is used for money laundering too". Warren isn't having it, saying yes—that's why the same rules should apply to crypto as to traditional finance.

"No!" - O'Leary

Sen. Van Hollen (D-MD) asks Allen what she would do if she was queen for a day.

Allen: "If I were queen for a day I would ban it. But if I was someone who was dealing with multiple constituencies..." she would strengthen banking law and prevent banks from touching crypto. Give SEC more money. Pass legislation classing all cryptos as securities.

Sen. Cortez Masto (D-NV) asks how we would regulate crypto.

O'Leary objects to Allen's suggestion that we ban banks from interacting with crypto, says it would "make US banks the most uncompetitive financial services industry in the world".

O'Leary starts to shill crypto, Cortez Masto cuts him off (thank god)
"If we allow crypto to infect our banking system, we will be back here, and not in a good way." - Ben McKenzie

Cortez Masto asks about the claims that this was an issue of centralization not crypto, asks if defi would've helped.

Allen states that defi is a marketing term, it's not very decentralized.

Allen distinguishes decentralization of networks from decentralization of power and economic decentralization.

Louder for the people in the back!

Sen. Smith (D-MN) characterizes FTX collapse as shocking but not surprising.

Says people should be allowed to invest however they like, but they should be able to trust that the market is fair and have transparency.

Smith outlines externalities of crypto mining, speaking of proof of work mining (used for Bitcoin and some others). Describes energy & pollution impact.

"The technology is bad." - Ben McKenzie
Sen. Sinema (something-AZ) is up now. She's another huge crypto promoter, and is talking up crypto's appeal to those skeptical of governments and centralized control.
Sinema refers to Prof. Allen as "him". Did she just now start listening?

Sinema is challenging Allen's and others' statements to "let [crypto] burn", saying they're advocating for burning average retail investors.

🙄

Sinema ostensibly asked Allen a question, but she's just grandstanding.
Sen. Toomey is back and shilling. "We haven't talked as much as we ought to about some of the, I think, really exciting and terrific applications that the crypto ecosystem makes possible".

Sen. Brown talks about "regulatory clarity", asks if crypto platforms could even comply with regulations if that had the clarity.

Allen says no.
And with that, the hearing is over.