FTX and the danger of Reactive Regulation

Episode 10 FTX

[00:00:00] Hello and welcome back to another episode of the Lex Con Crypto Show. We are excited that you're here today. We are gonna jump into, uh, neck deep into, uh, the FTX debacle. I believe we're gonna take a, a unique angle, at least from what I've seen so far, uh, in, in the crypto verse. Though there have been many takes and, uh, probably most I have either ignored.

Decidedly continue to scroll through. Um, but hopefully we could give you a, a perspective and some thoughts, uh, from the angle of, uh, bad reactive regulation. Really thinking about reactive regulation and how, uh, uh, government officials, regulators, and Congress are, uh, rattling their swords now, uh, claiming that, uh, they need to be acting and do something to, to help the, the retail investor.

We wanna talk about that a. Uh, today. Before we do that, I'm happy to introduce for the very first time, uh, our sponsor of this show, uh, electro Analytics. Electro [00:01:00] Analytics, uh, is a leading DC based software company. Uh, they empower public affairs teams of all sizes to work faster and retire. Uh, their scalable software features legislative and regulatory tracking, stakeholder engagement.

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So once again, it's elect analytics. We're so grateful for them to be sponsoring us, and we hope that you will, uh, visit their website and, uh, check them out and learn more. Now, today in the studio, Alex and I wanna jump into, uh, the fdx debacle. But again, like I said, from the angle, Uh, reactive regulation.

And Alex, I know that, that a lot of times when these things happen, Enron happens. Uh, Congress a lot of times reacts afterwards. Very rarely do we see proactive, uh, regulation, and a lot of times we see reactive. And I think this is one of those scenarios where over the last couple of days, Congress is blasting ftx and you see these headlines, regulators get serious.

And, uh, I'm always saying to myself [00:03:00] like, where were you guys a couple years ago? Right? Like, this didn't just happen overnight. Um, so today, today we wanna talk a little bit about, uh, this sort of idea of reactive regulat. Yeah, I saw Senator Ron Wyden, who was reelected this year. Um, you know, say that, oh, there's gonna be oversight and he's gonna call a number of people in for, for different hearings.

And, and he dropped in that quote, two of the committees that he's affiliated with and one that he chairs. So, almost suggesting, um, those people who really, really care about consumer protection or, or other aspects of. Crypto, they might have multiple bites at the apple. Apple, and they're gonna use not only their bully pulpit, but their bully pulpit's, plural if possible, to show how much they care.

Yeah. And uh, I actually saw just now, um, Maxine Waters and Patrick McHenry both announce that they were going to be holding in December. Hearings, uh, from the Financial [00:04:00] Services Committee in the house. Um, so even before the new Congress takes over, uh, they're saying they're, they're, they wanna start investigations and, uh, start looking at things.

Most, most hearings and testimony. In Congress is really very lightly attended. Pre covid, you could just show up as a member of the public and walk right in. And it's a largely empty room. Not only is the audience, uh, sparse, but committee membership is usually sparse. You'll have a few people up there, people coming in, coming out.

Uh, so while hearings may sound that like a group is being taken seriously, like when you report that a hearing is gonna happen, you know that sounds like a zing when you look at the reality of it. Um, it communicate. Sort of the, maybe the limited interest in crafting questions to, to do much of anything.

Now, I've been very, uh, critical of the approach that the s e c under Gary Gensler has, has taken towards crypto. [00:05:00] And, um, and, and I've been mostly in favor of the way that the CFTC has been handling it, though the Uey Dow case, I think is, uh, could, could be called into question. My, my point being, you know, I believe that a lot of the action, the regulatory action that Gary Gensler has taken to date, um, shutting down tornado cash, uh, other, you know, other examples which we could go into have not necessarily been about the.

The perpetrators of these so-called indiscretions, but rather their effort to raise the, the, the flag and cause congress to act. Um, and, and in an effort to try and highlight specific aspects that they, that, that they want to regulate or that they want laws to be made about. Um, and, and creating sort of a, a environment of reactive regulation.

Yeah, I think, um, I know you're a political [00:06:00] and government junkie and you know, intimately involved in this space, but it bothers me in some ways that you even know Gary Gensler's name. You know, sometimes if you're working in a government capacity, you rule number one is you never want to be the story. Um, sometimes the public wants to be able to associate an authority with some sort of a problem solve that something's under control.

You know, Dr. Fauci obviously became. Synonymous with government public health with respect to, to covid. I think, um, Gensler as an individual with opinions is, uh, a little bit problematic. He is not an elected official. He is not a constitutional officer in any way. And of course, there, there. Opportunities where we want our executive branch to execute and our regulatory agencies are, are there to regulate.

But it's never a good idea when it seems like our commissioners or our [00:07:00] chairs are just making things up. Yeah. Well, and especially when they are, when it, when it appears that they are taking overt actions to try to get someone else to do something that they want them. So the way that tornado cash was handled, as an example, um, was a, was a, they froze accounts.

They froze what they knowingly legitimate legal transactions. They, they went in and, you know, sort of carte launch, stopped, froze everything. And, um, It was done in an attempt to cause such a stir that, that there would be some action taken and I believe when Gary and the team from the SCC did that, I believe it was intentionally to try and get action.

Before the new Congress would come in, that that obvi clearly didn't happen. Um, the nature of crypto is so bipartisan that, uh, it's actually one of the few issues in DC that [00:08:00] you see lawmakers really collaborating and working together on. Um, it's Do you think that's because of a sense of inevitability of it?

No, I think it's just that, it's, it, it is truly, it's the complex nature and the, the vastness of its, So, um, there's even debates about which committee is supposed to be the one, or, or which agency is supposed to be the one that regulates it. Is it the banking agency? Is it the cftc? Are these commodities, are these, um, securities under the scc?

Right. There's a, there's even legitimate debate about how to define, uh, what a token is. There. There's probably pretty good member to member education going on, and I think I like this idea. Um, sometimes folks talk about, uh, Members spending too much time in the swamp and not being in their districts. I probably have a contrarian opinion to that where I wish, um, US House members spent more time in DC getting to know their colleagues, and I am hoping that [00:09:00] on this issue, and we can ask some members about this, whether they get together over dinner and say, Can you explain Ethereum to me?

Um, and I think there's a good chance that that's happening. That's exactly what's happening. I, I, yeah, I know that that's, that is what's happening for me, that's, I mean, that's, that's actually kind of wonderful cuz if you think about different committee assignments, everybody can't be experts on everything and you would hope on certain matters that there's some sort of, I wouldn't say deference necessarily to other members being bigger experts.

So you vote in lockstep with them, but, um, yeah, you know, peers, Educate one another, and if they know a little bit more about something, explain it to their colleague. Yeah. Yep. So, so in, in light of the, so, so all of that to say that what, what seems to be happening with, or what seemed to happen with ftx, which we don't need to rehearse, I know our audience is well aware of that.

What has happened over the last, you know, week or so, seems to be playing directly [00:10:00] into Gary Gensler's. Uh, yeah, I, I agree. Objective FTX has become synonymous with the entire crypto industry. Yes. And I had somebody who knew that we were working on this enterprise and came to me recently and said, Hey, I saw this news about crypto, and they almost like trailed off like mid-sentence that what they were really asking was like, how does this.

you and almost assuming that, um, everybody in any way involved in crypto web three blockchain, that, that all of a sudden perhaps, uh, it's over. Yeah. And, and, and ftx we should probably like, disclose, or disclose that we don't have to disclose. Um, really any conflicts of interest or interactions with ftx.

None of the, the work that I've done in investment FinTech. Has Necessitate did engaging in FTX in really any way? I've never, I've never even had an account. Uh, yeah, me neither on fdx, which is kind of, I haven't avoided it, but I just [00:11:00] haven't had to there, there are so many service providers out there.

Yeah. I just have always just used someone else. I've never really. Um, did it, even though my, my propensity towards, uh, anything that Tom Brady would recommend, would've you would think would've influenced me here, but it, it, uh, it did not. Oh, that's actually, let's talk about Tom Brady for a second. Not only cuz we're, you know, new Englanders, but, um, there were some reports, uh, some paranoid reports that s bfs, uh, Twitter.

Account was being, um, zapped of, uh, followers or tweets were being deleted. And, and, uh, apparently it was just folks who had retweeted him. Yeah. Had un retweeted. And I mean, some of those are going back, you know, months and years at this point. Oh, they went through and cleaned them out. Their PR firms got to work on everybody's account.

Well, see, I I'm glad that after you said they, which is my least favorite word, there is No, they Right. Let's, part of our role for you listeners is to, uh, demystify. Who the, who's are on this stuff, and you're absolutely right. There are PR firms [00:12:00] and it was their job to literally scroll back and to disassociate themselves with him.

You probably did see though the very awkward TikTok of, of Tom Brady and him where he kind of like, I think, I think it's a joke. Some people didn't get that. It's a joke where SPF says, Where Tom Brady says, oh, we're gonna do a bunch of ticks together. And he's like, oh, grown. And he's like, I'm a nerd. I don't like being on camera very much.

This isn't my jam. Um, it wasn't that he awkwardly walked away. He was playing the part of somebody who was awkward Yeah. About being telegenic face of a business. Yes. No, I mean, they, yeah. I mean, their relationship was clearly. Transactional was very transactional, and it was just dropped off as soon as the checks, uh, stopped coming.

Yeah. Or as soon as the PR damage was greater than the value of the checks that were being delivered. And that's helpful in this era of influencers to show how loose. Relationships are, if you have a, if you're a celebrity and you have a TikTok video with somebody, and you say, I'm here with my very good friend.

Yeah, [00:13:00] my very good friend means this is the first time I'm meeting this person and I'm getting paid. If you're, yeah, if you're a serious crypto trader, though, I can't imagine a Tom Brady commercial really tipped your hand. I, I, I have a hard time believing that they were heavily influenced, agreed by, by those things.

But let's, let's, let's sort of think about a little bit of a, a bigger picture as the FTX thing unfolds. You know, of course, regulators in order to appear that they're doing their job, have to start to say, Dramatic things I hate, so I hate all the artifice related to that. Um, what it means is even when they're walking in the hall, when press is around and they're known to be on this committee, they need to like, sort of be shaking their heads Yeah.

And to look like, oh, I'm very upset. Yeah. I, I, I can't stand that. So do you think that, or, or, or, let me ask you a different way. [00:14:00] Why do you think the S E C sat. Dormant inactive. Why do you think the CFTC sat inactive? Why do you think these regulatory bodies lawmakers Congress, why are they now upset when it was pretty well known before this that things weren't necessarily all on the up and up there?

I don't, I don't know if it's the steep learning curve where, you know, government is always gonna be a few moves. Behind the private sector, and in some ways that's by design In America, you know, we have no ex post facto laws. We, we are going to be reactive to an extent in terms of how we establish laws and regulations.

Yeah. Um, we don't preemptively stifle in, in America for the most part, but when it comes time to enforcing laws, I mean, you can always say that they're short staffed or they don't have the resources or the expertise [00:15:00] Necess. To understand even what's happening and just because government doesn't understand what's happening in, in a company, well, they don't, they don't get to invite themselves in to be told what to do.

Yeah. There, there, there are certain disclosures that have to be made by companies, but uh, for the most part, they don't know what's going on behind closed doors and that's. Not them not doing their job, but that's them obeying other things that limit their access to interfering with the operations of private enterprise.

So the personalities of Alex and I are, are displayed here in this, in the answer to this, uh, this question. Um, Alex is much. Educated, my shirt has buttons and he's wearing a hoodie and diplomatic. Uh, he also is much more fair minded where I am, um, much more cynical and, and perhaps tend towards [00:16:00] a conspiratorial.

Um, and I, I have a, my answer to this is money. And I have money on two fronts. One is the very now disclosed. Um, disgustingly muddy ties that Fdx leadership had to the S sec. Mm-hmm. , uh, including, you know, of course the, the CEO of Alameda. Her father was the former director of the s e C and the boss of Gary Gensler, you know, in previous lives.

Um, the, the idea that, um, Sam's mom is a Democratic fundraiser, the idea that, um, you know, a week after announcing the launching of ftx, the Democratic Party, and their largest donors were the very. And Abraham Lincoln and John Kennedy's secretary had the same name. I'm, I'm messing with you. I, I think, cuz I do think that you can tell that story as a cynical, conspiratorial person.

That's, that's all I'm saying. Yes. There [00:17:00] are enough facts to grasp that. So the other, the other facet to this money debate argument though less conspiratorial is, is in a more factual way simply this Congress, the SCC and the CTC have known about crypto since 2000 and. It is, this is not a new idea or a new thing.

We don't have a suddenly an overnight 3 trillion industry. It's been 12 years in the making, and it has been a topic of conversation, but there's been no action, literally no action whatsoever until the last 12 months that that correlates directly with no crypto lobbying until the last 12 months. Only in the last 12.

You know, sure. Maybe outside of that 18 months, but very, very little sparse action has been taken around money actually coming into dc. So I won't call it an inside job, but, [00:18:00] um, it is interesting in terms of the structural interests of certain organizations where you never let a. A catastrophe go to waste?

Or what is it that Ram Manuel said sort of a thing. You never let a disaster go to waste. Right. And so in some ways, if you think about it, um, if you're at the s e and some of this stuff happens, you know, the reaction of um, either the big government side being Democrats or the law and order side being Republicans, you probably stand to get more funding, more attention.

It's not so pernicious that if you work for the National Institutes for Health, that you don't want diseases to be. But there is kind of this like structural interest in some ways. If you, if you were a, a, a lifer at the S sec, you kind of want stuff to like regulate. Yeah. Well, otherwise you're outta business.

Well, I, I, I think that there's an actual real turf war that's created between the CFTC and the S sec. I think we've seen that play [00:19:00] out where they're literally like, no, crypto should be regulated by us. No, crypto should be regulated by us. Right. That's driven by political appointee. Who are appointed by the president and their goal is as a political, you know, appointee to show and demonstrate their authority and their swelling.

You know, agencies in areas of regulatory control and in the short to midterm, which is all that we as humans have to live. If you're a career minded person working at either of those places, the controversy of it and the turf war of it in the short term midterm is going to mean more funding for both.

That's. I mean that, that's literally it. It's, they get to expand their budgets and a political appointee at the end of the day. What do they get to say? Oh, they took action against tornado cash. They helped grow the s e c, they, and guess what? They get to move on a Fed reserve position, or they get to move onto some, you know, whatever the next, and when they're telling the story about what they do and their role [00:20:00] at a lower information audience.

So when they're at the Thanksgiving table, and you know, they're throwing some shade at the other side that didn't do something in their framing and justifying what they're doing as, you know, doing the, the most ethical work. You know that the rest of the family is there. Oh, well, you know, they wanna be, um, solved.

They want to know that their family members are on the good side of things. So everybody with an involvement in this is framing to their immediate social networks that. Know they are doing all that they can do. Yeah. And I, I mean, I blame the, the Ft Fdx debacle squarely on the scc. Um, the fact that they have to retroactively say, oh, yes, uh, things need to be done.

It demonstrates that they, that they didn't. An interesting tidbit is there was a division of ftx, which was being regulated, the FDX derivative. , [00:21:00] they were, um, they were an, an entity obviously of fdx, um, regulated by the cftc, the FTX derivatives has full reserves, has full, full, you know, funding. They've been totally compliant because the CFTC has regulated them and forced them to do so.

The s e C has been totally negligent in an area that they, for the last 10 years have claimed they have oversight. And yet multiple times now have done nothing. Yeah. Things, things that are watched do, perform better. And that's true not only in government oversight, but that's true in the private sector.

You know, there are some of those wonderful studies about, uh, do people, you know, uh, perform better in the office If it's hotter, it's cold, and uh, you know, you'd make all these like little adjustments. And if people know that what they're doing is being measured, they improve and they, they keep improving, you know.

Is the best disinfectant in many ways. [00:22:00] Um, again, I'm okay with some of some of the reactive stuff because if you're proactive, you know, that can be violative of other democratic values that we have, lower case D. Um, and but you're right though, to the extent that one of the things that's really, really awful about reactive legislation is, uh, a lot of times it overly describes.

Or, um, carves out a certain specific type of company. Like some of the big box legislation that you have in zoning. Yeah. Where it's like, you know, the, the minimums for this, or if that, or the maximums. I mean, they're talking about Walmart. Exactly. And when you design a law around Walmart, if you design a law regulation around ftx, you're wasting your time.

Well, you, I mean, so this is a great illustration in the real estate world because that's just true. You know, even at the, even at the state and local. Uh, they hear about Walmart, perhaps looking in their area. They rush to create some sort of zoning regulations, [00:23:00] which Walmart ultimately ends up passing.

You know, it says saying like, oh, we're not gonna work in your town. And unfortunately the town now for the next decade has this oppressive regulation, which is keeping the small guy from being able to operate and function in a way that he can and has to play to these Walmart standards. Now it's a disaster.

Reactive regulation is almost always. Uh, created to solve one specific issue. So, for me, what I would say the most proactive thing to do, like I'm always looking for, um, Congress to do more, like clearly make it illegal to do certain things or incentivize or disincentivize certain things. I'm always looking for congressional action over.

Uh, the administrative state. So for me, the most proactive way to clean up some of this stuff is to elect thoughtful policy minded politicians. And it's gonna be a while before we have an [00:24:00] even number year. We just had. Uh, elections. So it's gonna be some time before we have the opportunity to weigh in on who we have in Congress.

I do know that some of what we're gonna be doing is evaluating, uh, that next Congress and determining some of the fresh faces and, you know, who is the most. Up on this stuff because this is a, this is an opportunity for us to take a look at the talent pool that we have in the Congress. You know, who's up to understand and improve an industry that we care very much about.

Yeah. No, I think there's gonna be a lot, there's gonna be a lot that that happens here. Um, especially in light of, uh, our first presidential candidate already announcing his, uh, candidacy. So the, the season for the, the presidential campaign has officially. And, uh, is only gonna get, um, more and more heated as we move forward in, in the backdrop of that, that spectacle will be, you know, the work that Congress does, the work the [00:25:00] Senate does, you know, so there, I dunno, there's, it is gonna be a lot that is gonna occurring, especially around crypto regulation, especially around how they're gonna handle this FTX situation.

Um, what other situations in the next two years are gonna. I would be willing to, to wager that there will be more crypto companies who will also be having insolvency issues. Um, and, and there'll be more work I think, to do from a lawmaker's perspective. So lots of things to, uh, to consider. We wanna thank electro analytics for supporting us in this, uh, in this.

And I want to thank you the listener for, uh, participating and coming along with us. We'd love to hear from you if you have comments or, uh, even questions, things like that we're very easily found on, uh, LinkedIn under Lexicon Crypto. Or you can visit our website, www.lexiconcrypto.com. We'll see you soon.