Sen. Ron Wyden (D-Ore.) wrote letters to six cryptocurrency exchanges yesterday demanding to know how they operate and what safeguards they have in place for customers as the bankruptcy of FTX roils the lightly regulated industry.
Wyden, the chairman of the Senate Finance Committee, asked the exchanges 13 questions, including how many subsidiaries they have, how they separate customer assets from those held by other institutions, and whether any of the reserves that back up customer deposits are made up of crypto tokens issued by the exchange or any of its affiliates.
FTX, the Bahamas-based crypto exchange founded by Sam Bankman-Fried, failed in large part because investors lost faith in FTT, a coin that FTX minted in-house. FTX customers got a discount on FTT trades, making the coin more attractive relative to other cryptocurrencies. Customers also could use FTT for collateral in trades. An FTT share traded above $50 a year ago. Now, it trades at $1.32.
Deposits at banks and securities firms are usually protected by federal agencies, including the Federal Deposit Insurance Corp. and the Securities Investor Protection Corp. Crypto investors have no such federal protections.
“As Congress considers much-needed regulations for the crypto industry, I will focus on the clear need for consumer protections along the lines of the assurances that have long existed for customers of banks, credit unions and securities brokers,” Wyden said in the letters. “If these protections had been in place before the failure of FTX, far fewer retail investors would be facing precipitous financial harm today.”
Wyden sent letters to Binance, Bitfinex, Coinbase, Gemini, Kraken and KuCoin.
BlockFi, a New Jersey-based crypto bank, followed FTX into bankruptcy Monday.
One of the big promises of crypto was that holders wouldn’t be vulnerable should a bank, brokerage or exchange fail because blockchains, the public ledgers that guaranteed ownership, can operate without a central authority. Crypto proponents said there would be no crisis like the one that shook financial markets in 2008 when Lehman Brothers collapsed, leaving customers to scramble for assets.
FTX proved them wrong.