FTX contagion would be worse if banks were ‘dangerously intertwined’ with crypto

Contagion spreading through the crypto industry could have been worse if federally-insured banks were “dangerously intertwined” with crypto, according to Sen. Elizabeth Warren, D-Mass.

Warren laid into the crypto industry during a Senate Banking Committee hearing, slamming troubled crypto exchange FTX as “not much more than a handful of magic beans.” The hearing focused on several Biden administration nominees, including Martin Gruenberg, the acting chair of the Federal Deposit Insurance Corporation. Biden nominated Gruenberg to serve as chair of the agency.

“Our banks stayed safe even as crypto imploded because many of President Biden’s regulators, like Acting Chairman Gruenberg, fought to keep crypto from becoming dangerously intertwined with our banks. And he did this despite the Trump administration’s and crypto boosters’ aggressive efforts to bring crypto and all its risks into traditional banking,” Warren said.

Washington lawmakers and regulators are taking a closer look at crypto after the FTX catastrophe. The company filed for bankruptcy protection in Delaware earlier this month, sending a shockwave through the industry. Crypto lender BlockFi recently filed for bankruptcy protection, citing its exposure to FTX. 

Warren pressed Gruenberg on whether the banking system would be “less safe” if FDIC-insured banks were fully involved in the crypto market. Warren’s examples included if banks held FTX tokens on their balance sheets or accepted crypto tokens as collateral for loans.

“I would think so,” Gruenberg said. “The evidence is clear now. We had companies that were engaging in highly speculative activity, highly leveraged and vulnerable to a loss of confidence in a run. They did not have direct exposures to the insured financial institutions and as a result the failure of those firms was really limited to the crypto space.”

The Massachusetts Democrat warned that integrating “toxic crypto assets” into the banking system in the future could cost taxpayers money. 

“Some industry boosters still argue that these toxic crypto assets should be more integrated into the real banking system, which would mean that the next time crypto stumbles, taxpayers would be on the hook to bail out these banks,” Warren said. “No thanks on that one.”

Senate Democrats have raised similar concerns about SoFi’s crypto arm, warning in a recent letter that taxpayers could be forced to bail out the firm if it faces a crisis. SoFi received Federal Reserve approval to be a bank holding company and be treated as a financial holding company earlier this year, on the condition that it divest SoFi Digital Assets or conform its activities to the law in two years.

Later in the hearing, Sen. Pat Toomey, R-Pa., the top Republican on the committee, came to the industry’s defense.

“I think there’s a danger that some of us confuse bad behavior by individual people with the instruments they use to conduct their bad behavior. There is nothing that I’m aware of — and I’ve studied this pretty closely — about what happened with FTX that requires us to blame crypto,” Toomey said. 

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