Here Come the Crypto Hypocrites

Don’t believe anyone who says the FTX crash was the regulators’ fault.

A profile photo of FTX’s Sam Bankman-Fried
Sarah Silbiger / Bloomberg / Getty

The collapse of the crypto exchange FTX last month, which seems likely to cost customers billions of dollars, stirred up a blamestorm of epic proportions. When Representative Tom Emmer, a Republican who’s been one of crypto’s strongest advocates in Congress, went on Fox Business to talk about the firm’s downfall, his message was clear: What happened at FTX had nothing to do with any problems in the crypto industry generally. Instead, it had been a failure of “government oversight and regulatory procedures.” Regulators in the Biden administration, Emmer suggested, should have spotted that Sam Bankman-Fried, FTX’s founder and former CEO, was a bad actor, and stopped him. Emmer specifically called out Securities and Exchange Commission Chair Gary Gensler, accusing the SEC of “working backroom deals … with people who are doing nefarious things.”

This might have been a powerful dunk on government regulators—except for one inconvenient fact: In March of this year, Emmer was one of eight congressmen who wrote a letter to Gensler complaining that the SEC was overstepping and unnecessarily harassing cryptocurrency firms by having its enforcement division ask them for information about their businesses. One of those firms that the SEC had been inquiring into? FTX.

In other words, when Emmer attacked Gensler last month, he was assailing him for failing to do precisely what Emmer had previously lobbied him not to do. Emmer is not alone in this hypocrisy. In the aftermath of FTX’s collapse, the people who have been the loudest advocates for Washington to take a hands-off approach to crypto have suddenly become the loudest voices insisting that Democrats and the mainstream media were too soft on Bankman-Fried (who was a big donor to the Democratic Party).

Senator Ted Cruz, for instance, who last year insisted that Congress “shouldn’t regulate something we don’t yet understand,” accused the Biden administration of being “complicit” in “fraud.” Warren Davidson, one of the other congressmen who signed that March letter to the SEC, tweeted that the FTX debacle made it “hard to believe that @SECgov hasn’t engaged in selective enforcement” by giving FTX a pass while pursuing other crypto companies. And crypto bros who had long celebrated blockchain-based currencies as a way to free people from the heavy hand of government took to Twitter to complain that the government had not prevented Bankman-Fried’s chicanery.

These were true through-the-looking-glass takes. To be sure, plenty of Democrats in Congress, including most notably Senator Kirsten Gillibrand, have adopted a boosterish—or credulous—attitude toward crypto. And some of the media’s coverage of FTX’s disintegration has arguably been soft on Bankman-Fried, who, it appears, used FTX customer funds as a backstop for big, highly leveraged bets by his hedge fund, Alameda Research. But if you look at who in Congress has been most skeptical of the crypto industry, and most insistent that it needed regulation, they’ve all been Democrats, including in particular Senators Elizabeth Warren and Bernie Sanders. Conservatives, by contrast, have generally been more sympathetic to the crypto industry’s desire to remain relatively free of government interference, in large part because that appeals to their faith in the unfettered free market and their distrust of the state.

As for the regulators who are being assailed for falling down on the job, they have consistently pointed to crypto as an industry that was dangerous for retail investors. Gensler called crypto “the wild, wild West,” and Michael J. Hsu, the head of the Office of the Comptroller of the Currency (which regulates banks), lambasted the industry’s “hype-based, ‘shoot, ready, aim’ approach to innovation and value creation.” And how U.S. regulators were supposed to uncover any alleged fraud at FTX, which as an offshore exchange was largely outside their jurisdiction, is unclear—given that the many big investors who put billions into the company themselves could not.

What lies behind this effort to blame the FTX debacle on the people who have been the most critical of crypto and the most likely to view the whole business as one big Ponzi scheme?

In part, this tendency to project one’s own sins onto an opponent has become a staple of right-wing discourse. Last week, for instance, Elon Musk complained about Apple not advertising on Twitter and suggested that Apple might pull Twitter from its App Store. In response, the satirical site The Babylon Bee, which loves Musk because he ended its ban from Twitter, ran a story implying that Apple CEO Tim Cook would be doing so at the bidding of China’s premier, Xi Jinping. Unmentioned by the Bee was that Musk, not Cook, recently tweeted that Taiwan should give up its independent status and accept Chinese rule, winning praise from China’s ambassador to the U.S.

Something more than mere hypocrisy is at work in the case of crypto, though. Crypto advocates are trying to create the impression that Bankman-Fried got away with his scheme as long as he did thanks to regulatory failures, because they’re worried that FTX’s demise will end up tarring the entire industry as a scam. What happened at FTX, after all, shows that self-regulation is not going to protect investors or traders. More than that, the company’s collapse is damning for crypto as a whole because it demonstrates how fragile these supposed multibillion-dollar businesses can be. FTX fell apart not because of whatever possible fraud Bankman-Fried may have committed, but because a sell-off in the value of its own fake currency sparked a huge run on the bank, which FTX did not have the funds to meet. As a result, any crypto traders on an unregulated exchange have to be wondering now whether their money is safe.

Reframing what happened at FTX as a case of fraudulent behavior that regulators should have caught is intended to accomplish two goals: bashing Democrats and the government, while reassuring crypto traders that the industry has no systemic problems. Such a blatant attempt to rewrite history is unlikely to convince anyone who isn’t already motivated to believe it.

After all, it wasn’t Gary Gensler who, a year ago, praised Bankman-Fried, saying, “Sounds like you’re doing a lot to make sure there is no fraud or other manipulation.” It was Tom Emmer.