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Key House lawmaker calls collapse ‘a dumpster fire’

Rep. Patrick McHenry, a Republican of North Carolina and ranking member of the House Financial Services Committee, speaks during a hearing in Washington, D.C.

Andrew Harrer | Bloomberg | Getty Images

Calling the collapse of cryptocurrency exchange FTX “a dumpster fire,” House lawmakers called on U.S. bank regulators Wednesday to step up oversight of the industry as they investigate just how Sam Bankman-Fried’s $32 billion company collapsed within a matter of days.

“There is no sugarcoating it. The collapse has been a dumpster fire. Users left out to dry. Ecosystem in limbo,” Rep. Patrick McHenry, the top Republican of the House Financial Services Committee, said at a hearing examining the safety of the U.S. financial system.

McHenry, who will likely be the incoming chair of the committee if Republicans seize control of the House as expected, announced a bipartisan hearing on the FTX collapse along with current committee Chair Maxine Waters, D-Calif., earlier Wednesday.

We'll be fortunate if we can avoid passing bad crypto legislation, says Rep. Brad Sherman

After a deal to shore up its liquidity fell through last week, FTX filed for Chapter 11 bankruptcy protection Friday along with 130 affiliated companies, including Bankman-Fried’s crypto trading firm Alameda Research and FTX.us, the company’s U.S. subsidiary. Bankman-Fried has since stepped down as CEO of the company he founded — the collapse of which is causing a cascading chain of events throughout the industry.

A spokesperson for Sen. Sherrod Brown, D-Ohio, chair of the Senate Banking Committee, said the panel also plans to hold its own hearing.

In addition, the Securities and Exchange Commission, the Department of Justice and the Commodity Futures Trading Commission are opening their own probes into FTX’s bankruptcy and Bankman-Fried’s “misconduct.” 

Treasury Secretary Janet Yellen also called for “more effective oversight of cryptocurrency markets” in remarks released Wednesday. She said the impact from the FTX bankruptcy on the broader financial system has been limited. However, a recent report from the Financial Stability Oversight Council, which Treasury chairs, warned that any more intermingling between the traditional financial system and crypto markets “could raise broader financial stability concerns.”

Cryptocurrency lender BlockFi Inc. is reportedly weighing bankruptcy, telling investors it has “significant exposure” to the FTX failure. And earlier Wednesday, cryptocurrency lender Genesis Global Trading told clients in a series of tweets that it was pausing new loans and customer redemptions as it sought out new sources of liquidity. “We have hired the best advisors in the industry to explore all possible options,” the company said.

“Given the failure of FTX, it is more important than ever that Congress update our laws,” Waters told Michael J. Barr, vice chair for the Supervision Board of Governors of the Federal Reserve System, who testified before the committee. “And it’s time for the regulators to update the rulebook to strengthen protections for consumers and investors as well as safeguards for our financial system and the risk of the digital-access ecosystem.”

Barr said few banks are involved in or trade crypto assets, but the Federal Reserve will soon release “guidance and clarity” to financial institutions that engage in crypto-related activities. “To date, there are very few banks that have engaged in this activity, and so we want to make sure we get those rules in place while the level of activity is relatively muted,” Barr said.

He said he welcomed new laws that would require an additional layer of regulation and supervision for financial institutions that offer stablecoin, a type of cryptocurrency whose value is tied to a fixed instrument, like the U.S. dollar.

“Because private money can create enormous financial stability risks. Unless it’s appropriately regulated,” he said.

Crypto billionaire bros

Rep. Brad Sherman, D-Calif., called the witnesses’ proposed regulation for cryptocurrency firms “vague pablum.”

“The crypto billionaire bros are now desperate for the patina of regulation as they continue to try to build a system that will allow them to make more trillions while facilitating tax evasion and sanctions evasion,” said Sherman, D-Calif., who chairs the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets. He said the crypto players want the “appearance of regulation” while undermining the SEC.

Rep. John Rose, R-Tenn., who sits on the consumer protection panel, also said SEC Chair Gary Gensler needs to answer some questions about “what role he played, and what he knew in the lead-up to the collapse of democratic megadonor Sam Bankman-Fried’s crypto exchange FTX.”

The committee plans to call FTX founder Bankman-Fried as well as other executives from FTX, Alameda Research, Binance, among others, to testify in December at the hearing about FTX’s failure.

“I’m just concerned about crypto and where we go, and you know, we make sure that we get it right.” said Rep. Gregory Meeks, D-N.Y.

Martin J. Gruenberg, acting chair of the Federal Deposit Insurance Corporation; Todd M. Harper, chair of the National Credit Union Administration; and Michael J. Hsu, acting comptroller of the currency, also testified.

CNBC’s Mary Catherine Wellons and MacKenzie Sigalos contributed to this report.

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