FTX has ‘Ponzi scheme-like behavior’

Sen. Cynthia Lummis (R-WY) liked some aspects of FTX’s collapse to a Ponzi scheme, with the crypto exchange’s bankruptcy prompting her to review the crypto regulation bill she and Sen. Kirsten Gillibrand (D-NY) put forth in June.

Certainly when you’re taking customer assets out of FTX, sending them over to shore up Alameda, that’s co-mingling assets that belong to your customers, that you are custody-ing for them— taking them and using them for your own purposes— borrowing from Peter to pay Paul,” the senator told Yahoo Finance in an interview Tuesday. “There are indications of some Ponzi scheme-like behavior. I think we’ll see regulators looking into this.”

FTX reportedly used its customer assets to shore up sister hedge fund Alameda Research’s liabilities. Alameda held a chunk of FTX’s illiquid token FTT, which plummeted in value after the world’s largest crypto exchange, Binance, said it was offloading the token, causing a run on the token and in turn FTX international.

“It was clearly activity that is within the regulatory parameters of the Lummis-Gillibrand bill that would have been illegal, and they would have been regulated,” she said of the events that led to FTX filing for bankruptcy on Friday.

Senator Cynthia Lummis (R-WY) listens during a panel titled ”Make the Greatest Economy in the World Work for All Americans” at the America First Policy Institute America First Agenda Summit in Washington, U.S., July 26, 2022. REUTERS/ Sarah Silveriger

Lummis, along with Gillibrand, introduced comprehensive legislation in June to regulate crypto that addresses consumer protection and privacy and offers a standard set of definitions for how cryptocurrencies should be regulated.

In light of FTX’s bankruptcy and the behavior that led to its implosion, Lummis says she will re-examine the bill.

“We’ll definitely review the bill under this to see that we have adequately protected consumers assets during a bankruptcy, protecting consumer assets from being co-mingled and making sure that our definitions are sufficiently tight,” said Lummis.

Lummis said the bill would require that there be separation of customer assets from non-customer assets, more consumer protection, more disclosure. The bill would also require customers to have 100% backing in the event of bankruptcy.

But Lummis said even as FTX culminates in one of the largest crypto bankruptcies with over 1 million creditors and calls to pass legislation to safeguard investors reach a fever pitch, the better course of action is to not rush, but evaluate legislation to ensure it has closed the gaps that allowed FTX’s behavior.

“I don’t think we need to do some sort of near-jerk reaction, do it immediately during the session that began this week,” Lummis said. “I think we have time to move in a very careful and deliberative manner in 2023.”

Lummis said she will be working with the Securities and Exchange Commission and the Commodity Futures Trading Commission on this legislation, which could be broken up into pieces given its breadth and sent to various committees of jurisdiction.

“We want to make sure we’re covering all of the bases with not only this bankruptcy, but the ability to protect consumers going forward, while at the same time allowing innovation to occur in this country,” Lummis said .

Jennifer covers the Federal Reserve, cryptocurrencies, and the intersection of business and politics. Follow her on Twitter @Jenniferisms.

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