The crypto industry's meltdown – punctuated by the bankruptcy of one of the industry's most prominent firms — has not shaken Minnesota Congressman Tom Emmer's faith in private digital currencies.
"I still think for digital assets in general, they are the future, and the future has arrived," said the Delano Republican, one of Congress' biggest crypto boosters and now the third-ranking House Republican.
But the collapse of FTX Trading has sparked new tensions in Congress and in Washington about how to handle the industry — without clear agreement on a solution.
During an interview with the Star Tribune, Emmer focused on Congress' role in overseeing regulators, rather than in passing legislation to regulate crypto.
"Congress has to start doing its job in making sure by way of our oversight function that we make sure our regulators do the job," he said.
Emmer has been highly critical of the U.S. Securities and Exchange Commission's handling of the crypto industry, saying the agency has been ineffective and opaque — and demanding that its chairman, Gary Gensler, appear before Congress.
Clashes on Capitol Hill seem more likely than the passage of sweeping legislation to address the many regulatory uncertainties over cryptocurrency. Whatever plays out in Congress, Emmer will probably have a strong say.
And after four years of running the House GOP's campaign arm, Emmer's new leadership post as House majority whip gives the Minnesotan far more visibility on legislation. Rep. Patrick McHenry, R-N.C., an Emmer ally, leads the House financial services panel that Emmer is serving on again this year.
The crypto calculus is complicated by stark political realities. Republicans narrowly hold the U.S. House while Democrats run the U.S. Senate and control the White House. And the inherently complex nature of cryptocurrency presents its own challenges if Congress decides to take a hard look.
"There are not many members of Congress that have the expertise or understanding of the crypto markets and those dynamics to effectively do so, which makes them very susceptible to lobbyists on the outside," said Rep. Dean Phillips, D-Minn.
Cryptocurrency is digital money that is created on a decentralized computer network. As crypto's value grew, industry players got bigger and boosted their lobbying efforts and campaign contributions.
The implosion of FTX, one of the largest crypto exchanges, raised particularly awkward questions for Congress. Co-founder Samuel Bankman-Fried and others within the FTX empire gave hefty political donations before the collapse.
Young industry but growing
Speculators in cryptocurrency have minted — and lost — fortunes. But its use in everyday commerce is still limited.
To its proponents, cryptocurrency protects investors' wealth through a decentralized financial system, one free of intervention from central banks and commercial banks.
At its core is "blockchain," a digital technology meant to ensure both security and anonymity for transactions.
To skeptics, cryptocurrency is a financial medium for internet criminals, and at worst akin to a Ponzi scheme. Plus, they note the industry consumes enormous amounts of electricity to power its computerized coin-minting.
One thing is certain: As a new financial asset, cryptocurrency has spawned a host of questions about how it should be regulated.
Congress began paying more attention in recent years as cryptocurrency's market value rose to $3 trillion and small investors jumped in, getting burned along with hedge funds when crypto prices crashed last year. A host of crypto companies began filing for bankruptcy last summer, culminating in November with FTX.
FTX lacked even rudimentary internal corporate controls and accounting; its customers lost billions of dollars, while Bankman-Fried faces federal fraud and money laundering charges.
Crypto legislation in Congress may be a tough sell after FTX's collapse. Last year, bipartisan bills that established a regulatory framework — but ultimately did not pass — were largely supported by the crypto industry.
Hilary Allen, a financial regulation professor at American University's law school in Washington, D.C., and a crypto skeptic, said she thinks that this year, it is "much less likely that Democrats will go along with crypto-friendly legislation."
More likely than legislation, she said, "is a showdown in the [House] Financial Services Committee over the SEC being more aggressive."
Last month, Emmer tweeted that Gensler "must testify before Congress and answer questions about the costs of his regulatory failures."
Debate over regulation grows
Emmer has long been a critic of the SEC's regulation of the crypto industry. FTX's failure gave him more ammunition.
"We've got Gary Gensler running the SEC that has the tools to protect investors in cases like this [FTX] and they are choosing not to exercise them," Emmer told the Star Tribune. "Gary Gensler's regulatory strategy has been entirely ineffective."
The SEC, which declined to comment, has been castigated on many fronts since FTX's collapse.
Still, while Allen said the SEC could have been more aggressive, it has been "one of the toughest crypto regulators."
"A lot of regulators and lawmakers have uncritically accepted the crypto industry's claims of innovation, efficiency and financial inclusion," she said. "The SEC under Gensler has not just accepted these claims at face value — it has prioritized investor protection."
Much to the crypto industry's disapproval, Gensler has made it clear that he sees cryptocurrencies as securities, with the exception of Bitcoin. An arm of the SEC dedicated to crypto has lodged more than 90 enforcement actions against crypto companies for alleged infractions, according to the agency's website.
In March 2022, a bipartisan group of eight House members — including Emmer — wrote a letter to Gensler questioning an SEC inquiry into cryptocurrency and blockchain companies, specifically about information that the agency requested.
The House members said the SEC's solicitations may violate the Paperwork Reduction Act, which regulates how federal agencies collect information from the public.
Emmer, asked whether the letter is at odds with his criticism of the SEC as weak, said his position "is entirely consistent."
Gensler has chosen an "opaque" method of regulation, Emmer said. That includes "having certain industry participants come into his office and negotiate for regulatory advantages rather than rely on the open rulemaking process," he said, referring to Gensler's meetings with Bankman-Fried and other FTX executives in October 2021 and March 2022.
Gensler, asked about the March meeting with Bankman-Fried in an interview with Yahoo Finance, said the SEC generally meets with "market participants," and the "basic message" is to "come into compliance."
Gensler isn't alone among regulators who met with Bankman-Fried and FTX leaders.
Rostin Behnam, head of the U.S. Commodity Futures Trading Commission, told a Senate committee in December that he and other CFTC representatives met with Bankman-Fried 10 times over 14 months about LedgerX, a still solvent crypto derivatives subsidiary of FTX.
The CFTC has some regulatory authority over crypto. Emmer hasn't criticized Behnam's meetings with Bankman-Fried, saying "the head of the CFTC was not negotiating regulatory advantages for FTX."
A complicated Congress
Emmer's stance on crypto has put him at odds with some Democrats.
"Republicans in the House appear poised to try to blame Biden administration departments for lax oversight. But that's funny to me when they have also, on the other hand, been arguing for a very, very light touch on regulation before the FTX decline," Sen. Tina Smith, D-Minn., said.
Before FTX's collapse, some of Smith's Democratic colleagues joined Republicans in supporting legislation that critics described as a soft approach to regulation.
The crypto industry has given campaign money to both parties. While Bankman-Fried was a prolific Democratic donor, he also donated to the GOP, including the National Republican Congressional Committee (NRCC) chaired by Emmer.
Minnesota Democratic Rep. Angie Craig's campaign received money from Bankman-Fried and FTX Director of Engineering Nishad Singh, which a spokeswoman confirmed will be given to a bankruptcy fund.
Smith's spokesman said donations the Democrat received from Bankman-Fried and Singh have been donated, while a separate contribution from another prominent FTX figure has been set aside in case it's clawed back.
Emmer did not receive a donation from Bankman-Fried, but his campaign got money from two others involved in the FTX empire, including Ryan Salame, co-CEO of FTX Digital Markets. Salame was a significant Republican donor who also gave money to the NRCC.
Emmer's campaign did not comment on the FTX donations. Republican Rep. Brad Finstad also received campaign money from Salame, but a filing shows his campaign returned the donation in late November after the FTX collapse.
Emmer's campaign and another arm of his political operation also received thousands of dollars from a leader of the crypto lobbying group Blockchain Association, according to federal records. His campaign also got donations from prominent people at companies with significant crypto investments: Digital Currency Group, Andreessen Horowitz and Blockchain Capital.
"I've been a strong believer in crypto's technology long before it was mainstream," Emmer said in a statement to the Star Tribune. "This issue is far too important to me to let any perception of self-interest get in the way, which is why I decided years ago to not buy crypto."
For Emmer, crypto is a cause. In a recent tweet, he said that "crypto is more than a financial investment: it's about restoring liberty and choice to individuals."