Can Congress Actually Legislate Crypto?

Plus, some movement on payment-for-order-flow.

Number of the Week: $3 billion (explanation below)

Can Congress Actually Legislate Crypto?

Congressional committees are drawn to financial scandal; it makes legislators look serious, and can occasionally provide excellent political theater. But as the world witnessed in the aftermath of the GameStop/Robinhood tornado, there’s not necessarily much that Congress can do to prevent future scandal, especially in an atmosphere that is allergic to new legislation.

Congressional hearings following the FTX meltdown are evoking a similar pointlessness. Yes, there is a widespread sense that “more regulation” is needed. But in part because the underlying regulatory structure is so rickety, there is little consensus about where and how cryptocurrency regulation could be effectively increased.

Moreover, a hearing about FTX at least implies that Congress can somehow wave a legislative wand to prevent a future Sam Bankman-Fried from bilking customers out of billions of dollars. But it’s far from clear that many of the actors in December 13’s House Financial Services Committee hearing actually believe that. Nydia Velásquez (D-NY) asked John Ray III, the CEO who’s taken over FTX in its bankruptcy period, if there was anything particular he’d learned that he would urge the committee to consider in drafting new legislation. Ray declined to offer any advice beyond an almost tongue-in-cheek: “You need records, you need controls, and you need to segregate people’s money.”

Of course, even if Congress can’t prevent fraud by passing a new law—by definition, everything the US Attorney’s indictment accuses Bankman-Fried of is already illegal—it could in theory require more stringent registration and reporting requirements for companies that want to run exchanges and other crypto transactions. But here, too, satisfaction is elusive.