Senate Banking Hearing Targets FTX and Crypto Industry: ‘The Biggest Ponzi Scheme in History’

Sen. Sherrod Brown, D-Ohio, ranking member of the Senate Banking Committee, speaks at a hearing in Washington, D.C. on July 16, 2019.

Andrew Harrier | bloomberg | Getty Images

On Wednesday, the Senate Banking Committee holds the second day of hearings this week on the collapse of cryptocurrency exchange FTX, examining how the company’s collapse could affect the nascent industry.

On Tuesday, new FTX CEO John J. Ray testified before the House Financial Services Committee accusing former executives, including founder and former CEO Sam Bankman Fried, of misappropriating client funds.

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“This is really just old-fashioned embezzlement,” Ray said within four hours of testifying before the House Financial Services Committee. “This is just taking money from customers and using it for your own use. It’s not complicated at all.” “Sophisticated, maybe in the way they’re hiding something, frankly, in front of their eyes. That’s just old misappropriation. Old school, old school.”

U.S. prosecutors, and securities and commodities regulators, say Bankman-Fried used billions of dollars in FTX clients’ money for his personal use, to invest in other projects, to donate to politicians and political action committees, and to pay off billions of dollars in loans owed by Alameda Research. , the cryptocurrency hedge fund he also founded.

“That’s the main breakdown, right here. The money from FTX.com, which was an exchange for non-US citizens, that money was used at Alameda to make investments and other payments,” Ray said of House Financial Services chief Maxine Waters, D-California. . Bankman-Fried, who was set to testify, was arrested in the Bahamas Monday night instead. FTX filed for Chapter 11 bankruptcy last month.

Federal prosecutors in the Southern District of New York charged Bankman Fried with a variety of offenses including wire fraud, securities fraud and violation of campaign finance regulations. The SEC separately charged that Bankman-Fried ran nothing less than a “brazen” years-long scam on cryptocurrency exchange FTX “from the start,” allowing him to funnel billions of dollars in client funds into his hands to grow his sprawling empire.

“This was not a case of mismanagement or poor oversight, but of willful fraud, plain and simple,” U.S. Attorney General Damian Williams said in a statement unveiling the indictment.

Although Ray and Bankman-Fried will not be part of the Senate banking hearing on Wednesday, four cryptocurrency experts will testify instead, including Kevin O’Leary, a longtime paid FTX spokesperson.

Previously released opening notes by witnesses indicate that the hearing will focus not only on FTX but how the company’s collapse could affect the industry as a whole.

“We need to get to the bottom of what happened at FTX, but we cannot allow its collapse to cause us to abandon the great promise and potential of cryptography,” O’Leary says in his opening remarks.

Ben McKenzie Schenkkan, an actor who speaks regularly about cryptocurrencies, says in his prepared testimony that the industry is a “huge speculative bubble.”

“I present to you today that the entire cryptocurrency industry is nothing but a huge speculative bubble built on a foundation of fraud,” Schenkan said. “In my opinion, it is the largest Ponzi scheme in history by volume.”

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