Nearly nine months after a bipartisan group of U.S. House members sent a letter questioning the Securities and Exchange Commission’s investigation into cryptocurrencies, including the failed FTX exchange, lawmakers are maintaining their position that the agency’s approach to regulating crypto is very flawed.
In public comments since FTX’s collapse last month, members of Congress, led by Minnesota Republican Tom Emmer, have largely called the demise of FTX a unique issue that deserves investigation.
They argue the episode only reinforces their point that the SEC’s regulation of cryptocurrencies is arbitrary and ineffective.
FTX co-CEO Ryan Salame was a major campaign contributor to the Congressional Leadership Fund, the political action committee that Emmer controlled as the head of the House Republican campaign arm in the 2022 election cycle.
U.S. Rep. Ted Budd, a North Carolina Republican who also signed the letter, also received significant support from Salame in his U.S. Senate bid this year.
The members say letter is dated March 16 and objected to the SEC’s enforcement division taking steps to collect information from crypto companies. Since the information collection was not publicly known to be related to any active investigation, the role was better suited to other departments within the commission, they wrote.
Citing sources familiar with the situation, the progressive news magazine The American Prospect first report that FTX was one of those from whom the SEC sought information.
The March letter was addressed to SEC Chairman Gary Gensler. In addition to Emmer and Budd, it was signed by Florida Democrat Darren Soto, Florida Republican Byron Donalds, Ohio Republican Warren Davidson, New Jersey Democrat Josh Gottheimer, Massachusetts Democrat Jake Auchincloss and New York Democrat Ritchie Torres.
The members told Gensler that the SEC might be overstepping its jurisdiction by directing its enforcement division to seek information from firms not previously regulated by the commission and that investigations could have violated the federal Paperwork Reduction Act that requires that federal agencies privately “did not overwhelm.” entities, according to the letter.
“There appears to have been a recent trend to use the Enforcement Division’s investigative functions to collect information from unregulated cryptocurrency and blockchain industry participants in a manner inconsistent with the Commission’s standards for initiating investigations ,” the letter reads.
After FTX, which was the third largest crypto exchange, declared bankruptcy last month, the signatories of the letter made public statements condemning FTX.
FTX failed after founder Sam Bankman-Fried improperly used another business he founded, trading house Alameda Research, to hold a large number of FTX’s tokens.
FTX collapse just proves point, members say
But the central thesis of the March letter — that the SEC’s straw enforcement of crypto firms has been unpredictable and ineffective — was reinforced by the FTX example, members said.
They denied the letter sought to shield FTX from federal regulators.
In a series of tweets on Nov. 26, Soto said he believes the SEC should investigate FTX. The March letter was not about FTX, he said, but the crypto industry writ large.
“The letter sought clarification on SEC positions regarding its document request authority for crypto firms in general,” he said tweeted. “The letter was not specific to FTX, did not reference FTX, nor did our office have any contact with FTX regarding the letter. The letter did not stop or delay any investigations into FTX. Rep. Soto also received no contributions for FTX.”
A spokesman for Donalds said in a written statement that he “remains concerned about the SEC’s approach to regulating digital assets in the absence of congressional legislation” and still questions why the SEC used its enforcement division for voluntary information requests.
“The SEC has openly engaged in regulation through enforcement with little guidance as to which assets are legally subject to the SEC’s jurisdiction,” the spokesperson added. “The congressman feels that this combination is seriously hampering the market and is an unsustainable method of management.”
The spokesperson was adamant that Donalds never attempted to influence any of the SEC’s ongoing investigations.
Emmer said the FTX episode did not undermine the idea of decentralized cryptocurrencies, but rather a failure by Bankman-Fried and federal enforcement. FTX, a centralized exchange, fought against the idea of decentralization, he said.
“FTX’s Crash Is Not a Crypto Failure,” Emmer tweeted Nov 22 “It’s a failure with [centralized finance],
@GaryGensler, and Sam Bankman-Fried. Decentralization is the point.”
In a Nov. 13 tweetDavidson also said the fallout showed the SEC’s enforcement approach wasn’t working.
“At this point, it’s hard to believe that @SECgov hasn’t engaged in selective enforcement,” he posted on Nov. 13. “They have worked closely with the largest entities (such as FTX) for years while engaging in endless discovery requests. It is clear that Gensler and perhaps the SEC structure is not up to the task at hand.”
Associates at Emmer, Davidson, Gottheimer and Budd did not respond to messages seeking comment.
Representatives for the SEC did not respond to a message from State Newsroom seeking comment.
A relatively new phenomenon, there are few explicits in federal law about how cryptocurrencies should be monitored.
Gensler said that cryptocurrencies, which can be traded like stocks, should be regulated like securities.
“Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities,” he said wrote to Treasury Secretary Janet Yellen in October. “Offers and sales of these crypto-security tokens are covered by the securities laws.”
Four of the letter’s signatories received campaign contributions from people associated with FTX.
Emmer raised $8,700 in his most recent re-election campaign from individuals who listed FTX or FTX US as their employer, including $5,800 — the maximum allowed by law — from Salame, the co-CEO, according to the records of the Federal Election Commission. Emmer’s re-election campaign raised a total of $1.9 million from individuals in the 2022 cycle.
Emmer also headed the House Republicans’ campaign organization, which was not subject to the same limits on campaign contributions as his own re-election, and that group received $2.75 million from FTX employees, according to data from Open Secrets, a nonprofit that campaign tracking spending. The bulk of that figure, $2 million, came from a single contribution Salame made in September.
Salame’s political action committee, American Dream Federal Action, also spent $517,000 on television ads for Budd’s successful Senate campaign. Salame was the sole funder of American Dream Federal Action, according to FEC records.
Bankman-Fried had its own political action committee, Protect our Future, which contributed to Democratic candidates, although it did not support anyone who signed the March letter. Bankman-Fried contributed $27 million of the $28.5 million the committee raised in the 2022 cycle, according to FEC records.
Gottheimer received $11,600 from FTX employees in the 2022 cycle, including the maximum $5,800 from Bankman-Fried.