Senator Loomis: FTX has “Ponzi scheme-like behavior”

Sen. Cynthia Loomis (R-NY) has likened some aspects of the FTX collapse to a Ponzi scheme, as the bankruptcy of a cryptocurrency exchange prompted a review of a cryptocurrency regulation bill that she and Sen. Kirsten Gillibrand (D-NY) introduced in June.

Certainly when you pull customer assets out of FTX, send them to support Alameda, these hybrid assets that belong to your customers, that you hold on their behalf — you take and use for your own purposes — borrow from Peter to pay Paul,” the senator told Yahoo Finance in an interview Tuesday. “There are indications. Behavior similar to a Ponzi scheme. I think we’ll see regulators look into this.”

FTX has reportedly used its clients’ assets to support the commitments of sister hedge fund Alameda Research. Alameda held a large portion of the illiquid FTX FTT, which plunged in value after the world’s largest cryptocurrency exchange, Binance, said it dumped the token, causing the token to run and thus the international FTX.

“It was clear that an activity that fell within the regulatory parameters of the Lummis-Gillibrand bill that would have been illegal would have been regulated,” she said of the events leading up to FTX’s bankruptcy on Friday.

Sen. Cynthia Loomis (R-YY) listens during a panel titled “Make the World’s Greatest Economy Work for All Americans” at the Institute for American First Policy’s America First Agenda Summit in Washington, US, July 26, 2022. REUTERS/Sarah Silbiger

Lummis, along with Gillibrand, introduced comprehensive legislation in June to regulate crypto that addresses consumer and privacy protections and provides a standard set of definitions for how cryptocurrencies should be regulated.

In light of FTX’s bankruptcy and the behavior that led to its collapse, Loomis says she will reexamine the bill.

“We will definitely review the bill under this to see that we adequately protected consumer assets during bankruptcy, protected consumer assets from being mixed together and made sure that our definitions are sufficiently stringent,” Loomis said.

Loomis said the bill would require separating customer assets from non-customer assets, more consumer protections, and more disclosure. The bill would also require customers to have 100% support in the event of bankruptcy.

But Loomis said that even with FTX peaking in one of the largest cryptocurrency bankruptcies with over 1 million creditors and calls to pass legislation to protect investors, the best course of action is not to rush, but to evaluate legislation to make sure it closes. Gaps that allowed FTX behavior.

“I don’t think we need to do a kind of semi-angry reaction, do it right away during the session that started this week,” Loomis said. “I think we have time to move very carefully and deliberatively in 2023.”

Loomis said she will work with the Securities and Exchange Commission and the Commodity Futures Trading Commission on this legislation, which could be broken into pieces given its scope and sent to different committees of jurisdiction.

“We want to make sure that we cover all the bases with not only this bankruptcy, but the ability to protect consumers in the future, while at the same time allowing for innovation in this country,” Loomis said.

Jennifer covers the Federal Reserve, cryptocurrency, and the intersection of business and politics. Follow her on Twitter @tweet.

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