With help from Ari Hawkins
CRASH LANDING — After the collapse of the crypto exchange and hedge fund FTX — it nosedived from a $32 billion valuation to near-zero in a day — and the subsequent arrest of its founder, Sam Bankman-Fried, much anticipated hearings on crypto finally took place this week.
Everyone from Jennifer Schulp of the libertarian Cato Institute to former “O.C.” star Ben McKenzie (he’s a vigorous crypto-skeptic who’s writing a book on the industry) testified about crypto, with the latter calling it “the biggest Ponzi scheme in history.” The Senate Banking Committee’s chair, Sen. Sherrod Brown (D-Ohio), has called directly for legislation that regulates crypto.
To make sense of the implications of FTX’s fall on the global economy, the murky future of crypto as an investment prospect and Washington’s role in all of this, Nightly spoke with Sam Sutton, a financial services reporter for POLITICO, who has focused on crypto markets. This interview has been lightly edited.
For those of us who haven’t been following every beat of the crypto news this week, can you give an overview?
[Takes deep breath…] FTX founder Sam Bankman-Fried was arrested in the Bahamas this week at the request of U.S. prosecutors. Indictments filed by the Justice Department, SEC and Commodity Futures Trading Commission on Tuesday charged the former political mega donor — he and colleagues at the Bahamas-based crypto exchange gave at least $73 million to campaigns and independent expenditure committees during the midterms — with fraud, money laundering and campaign finance violations.
Multiple agencies launched investigations into Bankman-Fried in early November after FTX blew up amid allegations that SBF had used customer accounts to backstop losses at his hedge fund, Alameda Research. FTX and its affiliates filed for bankruptcy and the company’s new CEO John Ray III — who previously steered Enron through its restructuring — has told Congress that the lack of internal controls and record keeping at FTX are unprecedented.
FTX’s collapse put tremendous strain on other crypto markets. The market contagion sparked by Bankman-Fried’s downfall has already forced other businesses into bankruptcy and threatens the viability of major crypto institutions that offer lending and brokerage services.
There’s also a lot of heat on other crypto giants. Customers have pulled billions of dollars worth of assets from Binance — the world’s largest crypto exchange and an early backer of FTX — over the last week. Binance and its top executives are also reportedly under investigation by the Justice Department for money laundering and sanctions violations. [In a statement, Binance said that it’s “actively working with regulators around the world on regulation” and that it’s committed to being in full compliance. The company also says it has “more than enough assets” to fulfill withdrawal requests.]
There’s clearly a lot going on very quickly. What does the FTX collapse mean moving forward? You mentioned the strain it has put on other crypto businesses. Could these ripple effects plausibly lead to further collapses throughout the sector and have broader effects on the U.S. economy?
It’s already led to collapses in the crypto space. BlockFi, a crypto lending platform that Bankman-Fried saved from insolvency during a previous market crash, has already filed for bankruptcy. The crypto brokerage/lender Genesis Global Trading is facing a severe financial crunch, which forced Gemini — a trading platform owned by the Winklevoss twins — to suspend customer redemptions for its yield-generating accounts.
To the point of the broader U.S. economy, the silver lining to all of this is that it hasn’t had much of an effect on traditional markets. Because crypto exists in a regulatory gray area in the U.S., Wall Street institutions and banks don’t have a ton of exposure to the chaos that we’re seeing in the digital asset space.
That said, lawmakers from both parties are starting to hone in on the handful of small and midsize banks that provided services to FTX and other crypto firms.
So how would more regulation — an increasingly desperate call from some members of Congress — change the space? And what have hearings revealed?
The hearings that Congress have held on this so far hammered home a lot of what was already known (or, what was known as of a month ago). 1) FTX was an absolute mess and Bankman-Fried’s claims about being a responsible actor in the space — which a ton of people in Washington, Wall Street, Silicon Valley and media circles bought — were a complete ruse. 2) Crypto customers aren’t protected. 3) There’s not a clear consensus on how to move forward with policies that address these markets.
As for regulation, I was really struck by a comment that Sen. Chris Van Hollen (D-Md.) made during Senate Banking’s hearing earlier this week — which also goes back to how we haven’t seen any of this spill over into the mainstream economy. “The question is where do we go from here?” he said. “On the one hand, the impulse is to protect consumers. On the other hand, we want to make sure that in the process of trying to do that we don’t give a government imprimatur to a system that’s so inherently risky.”
That’s really interesting. From a government regulation perspective, are there no good options? Where would regulation take the crypto market? Boiled down, where do you think we go from here?
There’s certainly momentum behind setting disclosure and consumer/investor protection standards. The fact that Senate Banking Chair Sherrod Brown is now talking about legislation here — which was not something he was doing before — is a sign that the level of pain caused by FTX’s collapse has scared the bejesus out of a lot of people.
But the specifics of what’s ultimately required, what market regulators have jurisdiction and the categories of crypto businesses — or decentralized finance networks — that would have to comply? That’s the same fight Washington’s been having for the last year.
Welcome to POLITICO Nightly. Reach out with news, tips and ideas at [email protected]. Or contact tonight’s author at [email protected] or on Twitter at @calder_mchugh.
DRAGGING IT OUT — Kevin McCarthy’s imperiled speakership bid is threatening to incapacitate Republicans during a crucial planning period, virtually guaranteeing a sluggish start for the new House majority, write Olivia Beavers, Jordain Carney and Sarah Ferris.
The GOP leader today took the unusual step of punting conferencewide races for committee leadership slots until after his speaker election on Jan. 3, a maneuver that could help insulate him from disgruntled members who fall short in those contests and their allies.
But that delay will also mean days, if not weeks, of uncertainty for GOP committees as they begin their stint in the majority. Some of the most important panels, including those charged with tax-writing and border security, won’t be able to prepare bills, tee up hearings, or even hire staff. While some House committees already have uncontested leaders in place, those chairs won’t be able to choose their member lineup or potentially pay staff. The GOP’s subpoena power, too, will be frozen.
“Without question, delays in selecting chairmen and committee members put a lot of pressure on the agenda,” said retiring Rep. Kevin Brady (R-Texas), who led the influential House Ways and Means Committee the last time the GOP had the majority.
— D.C. legal panel finds Giuliani violated attorney rules in bid to overturn 2020 election: A bar discipline committee in Washington, D.C., has concluded that Rudy Giuliani violated at least one professional rule in his efforts to help former President Donald Trump challenge the results of the 2020 election — a preliminary finding that could result in the suspension or loss of his law license. The three-member disciplinary committee agreed that Giuliani’s handling of litigation in Pennsylvania crossed ethical lines. Their finding came after a week of testimony by Giuliani — who said Trump waived attorney-client privilege to permit him to testify — and some of his allies, including Trump advisers Bernie Kerik, Christina Bobb and Corey Lewandowski.
— Senate sprints to avert government shutdown: The Senate is racing to clear a one-week funding patch that would avert a government shutdown on Friday at midnight, but timing remains uncertain as any one senator could delay the legislation. The House on Wednesday night passed the stopgap measure, which extends federal cash until Dec. 23, as leading lawmakers scramble to wrap up a broader $1.7 trillion year-end spending package. But with less than 48 hours until federal funding lapses, any one senator can hold up the stopgap in exchange for concessions or amendment votes, and Senate conservatives on Wednesday were ambiguous about their plans.
— Intelligence agencies didn’t move fast enough to collect Covid data: The intelligence community was not prepared for the Covid-19 pandemic and did not move quickly enough to gather information about the spread of the virus, according to a report released today by Democrats on the House Intelligence Committee. The report looks at the intelligence community’s response to Covid-19, particularly in the early days of 2020. The intelligence agencies’ clandestine collectors largely focused on analyzing data about the virus that was already being discussed openly by public health officials and experts across the world, the report said, arguing that they moved too slowly to collect clandestine information.
— Massachusetts Gov. Charlie Baker next NCAA president: Massachusetts Gov. Charlie Baker, a former Harvard basketball player, will be the next president of the NCAA. Baker, a Republican, will leave office on Jan. 5 after declining to seek a third term. Baker will succeed Mark Emmert. And he will be succeeded in the Massachusetts governor’s office by Democrat Maura Healey, a former basketball player and the state’s attorney general. Rep. Lori Trahan (D-Mass.), a former volleyball player said in a statement that Baker’s “experience as a college basketball player coupled with his extensive career spanning both the public and private sectors will serve him well in this position.”
UNCHURCHED — How often have you attended a religious service in the past three months?
If your answer is “never” you’re in the majority, at least in Ottawa, according to a new survey of Canadians from EKOS Research Associates. In fact, only 19 percent of survey respondents said they’d joined a service more than once during that time frame, writes Phillippe J. Fournier.
The federal government recently announced its plan to bring almost 1.5 million immigrants to Canada in the next three years, and an average of 500,000 per year until the end of the decade. Many of those newcomers will come from countries where religion occupies a far greater aspect of everyday life. The EKOS poll reveals the landscape as they arrive.
In Quebec, three in four respondents said they had not attended worship in the period surveyed. Just 10 percent said they’d been more than once, while elsewhere in the country, a majority said they’d been no-shows. The majorities were lowest in Alberta (61 percent) and the Atlantic provinces (60 percent).
The same poll asked respondents about their federal voting intentions — this at a time when Conservatives hold a narrow lead over the Liberals and here’s what the survey tells us about the Canadians who said they’d not attended service: Eighty-one percent were NDP voters; 71 percent were Liberals; 57 percent were Conservatives.
TURN DOWN THE HEAT — NASA and its international partners plan to launch a satellite dedicated to scanning the world’s water. The device will provide critical information on changing coastal areas that can help future communities react to climate-induced natural disasters like rising sea levels and devastating hurricanes, and will be able to survey about 90 percent of the water on Earth. The Surface Water and Ocean Topography satellite will officially launch Friday morning as part of a joint mission with the space stations from the U.S., France, Canada and the United Kingdom. WIRED’s Ramin Skibba has the full report.
PUTIN’S PROPAGANDIST — Notorious Russian arms dealer Viktor Bout, recently returned to Moscow after a prisoner swap with the U.S. last week, has arrived back home with a bang. He’s taken no time at all to get reacclimated — Bout is eagerly putting his suddenly enhanced celebrity status and newfound political clout to work, writes Ari Hawkins for Nightly.
While WNBA star Brittney Griner, the American imprisoned in Russia who represented the other half of the swap, continues to recover privately at a medical facility in the United States, Bout was ushered into the media spotlight by pro-Kremlin forces from the moment he touched down at Vnukovo airport in Moscow. The man known as the “Merchant of Death” gave an interview to an aggressively pro-Putin outlet not long after landing and has barely stopped airing his views about the moral decline of the U.S. — and the West in general — since then.
His opinions, not surprisingly, tend to echo and validate those of Russian President Vladmir Putin. In a flurry of media interviews and sympathetically written profiles, he has expressed support for the war in Ukraine, his nationalist pride and his disdain for Western social mores, winning the hearts of ultra-nationalist Russians and emerging as a symbol of opposition to the West.
One widely read state-controlled publication called URA.RU claimed that the U.S. offered the arms dealer a green card, but only if he “slandered” Putin — which Bout says he refused.
“I’m proud that I’m a Russian person, and that Putin is our president,” Bout said in an interview in which he also expressed his support for the war in Ukraine. He also claimed a photo of Russian President Vladimir Putin was table-side in his prison cell and helped lift his spirits during solitary confinement.
Pro-Kremlin voices portray the exchange as a win for Moscow and an example of Putin’s negotiating savvy — the framing of a trade of a patriotic entrepreneur for an African American lesbian arrested on drug charges ties into a broader Russian narrative about the corrupted nature of American priorities.
“What is happening in the West is just a suicide of civilization,” said Bout in a television interview with Russian lawmaker Maria Butina, who herself was detained in an America prison after being found guilty of spying for Moscow. “If this suicide is not prevented… the whole planet will [die]. This is probably going in all directions: it’s both drugs and LGBTQ+,” he said.
Bout’s value as a propagandist was underscored earlier this week when he spoke to an audience of ultranationalists. Leonid Slutsky, the leader of the ultranationalist Liberal Democratic Party of Russia who celebrated the official entrance of Bout into the party earlier this week, described him as a “courageous man who has become a symbol of the struggle for principles, for the spiritual and moral foundations of today’s Russia,” according to a translated version of Russian media.
“Putin’s war is not going well. There is dissent in society. So part of what he’s attempting to do with this is to keep people believing in the mission of the war,” said Jill Dougherty, a professor at Georgetown University’s Center for Eurasian, Russian, and East European Studies. “Viktor Bout was like a shot in the arm for the average Russian, who might identify with someone portrayed to be an ordinary businessman held unfairly by Americans for more than a decade.”
Bout, who was convicted in U.S. federal court in 2011 on terrorism charges for supplying weaponry to terrorist groups and conspiring to kill American civilians, was believed to have done business in Angola, the Democratic Republic of the Congo, Liberia, Sierra Leone and Sudan before his arrest. Yet across the pro-Kremlin media, he is framed in highly sympathetic terms as he bolsters ultranationalist political messaging and delivers unflinching praise for the Russian president.
“There has been a substantial change in the Russian PR strategy from years ago when he was arrested, where he was presented as an independent businessman, not an arms dealer, but still kept at arm’s length,” said Dylan Myles-Primakoff, a senior manager at the National Endowment for Democracy, an organization aimed at promoting democracy abroad.
“But as the Russian government has become more authoritarian and as their relationships with the West have deteriorated, that mask has really come off and Moscow is happy to embrace [Bout] as a hero.”
To the Kremlin, much of the value of Bout’s message is in its implicit and explicit criticism of Western culture and identity. In one interview, ostensibly about his prison stint, the arms dealer offered this take: “First-graders are told in class that there [are] 72 sexes,” he said, pointing to his experience in an American prison as evidence of his familiarity with the American education system. In the same interview, he claimed “there is reverse racism in America now. It’s very hard to be a white man.”
Brian Taylor, a professor of political science at Syracuse University and a Russia expert, said Bout could also be trying to influence the minority of far-right Americans sympathetic to the arms dealer’s perspective: “The shared language used both among far right American conservatives and Russian state actors is not accidental. The Russian state has a long standing record of trying to appeal to extreme actors in the West as a way of trying to divide the West against itself.”
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- Calder McHugh @calder_mchugh
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