[Congressional Record Volume 168, Number 198 (Tuesday, December 20, 2022)]
[Senate]
[Pages S7790-S7791]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
Cryptocurrency
Mr. DURBIN. Mr. President, I come to the floor very briefly to make a
note of an article that appeared this morning in the Chicago Sun-Times.
The article relates to an opportunity that Terrence Duffy, who is
currently the chairman of the Chicago-based CME Group, the Chicago
Mercantile Exchange--Mr. Duffy, in his testimony before Congress and
the Senate, has commented on the situation with the cryptocurrency
exchange known as FTX and its former head, Sam Bankman-Fried.
We are all aware of what happened here. This is a situation wherein
an individual capitalized on the cryptocurrency craze and became a
billionaire. He was a young man who struck a different pose than most
financiers. He spent his time wearing T-shirts and playing video games
when he wasn't making millions of dollars with his crypto investment.
Many people were unfortunately drawn into his portrayal of what
cryptocurrency could result in and lost their shirts. Mr. Bankman-Fried
went from billionaire to bankrupt in a matter of 72 hours.
The question is, Should America have seen this coming? Should we have
done more? That raises serious questions.
The purpose of entering this article into the Record is to make note
of the fact that Terrence Duffy, with the Chicago Mercantile Exchange,
forewarned us of this possibility.
The Chicago Mercantile Exchange is a major part of the economy of
Chicago, of Illinois, and of the Midwest. It is an industry that has
been established over decades, and it is a regulated industry. One
might get the impression that regulation and success in business are
antithetical, but in this circumstance, the Federal regulation of the
Chicago Mercantile Exchange not only gives assurance of its integrity,
it also enhances its reputation around the world--a lesson that the
cryptocurrency world might learn.
If we are going to lead the world when it comes to financial
investment, we have to assure the world that it is on the square, and
the Commodity Futures Trading Commission, for one, which has the
regulatory authority over the Chicago Mercantile Exchange, has set out
on that mission successfully for decades.
I wanted to note the fact that when he appeared before the U.S. House
Agriculture Committee in May, Mr. Duffy warned us about the dangers
that were inherent to the FTX enterprise. He said at one point that he
believed the proposal that Mr. Bankman-Fried was making to create his
business model was fraught with dangers. Mr. Duffy called it at the
time in May a ``risk management light'' that could destabilize
financial markets involved in cryptocurrency.
I am a member of the Agriculture Committee, and we may have some
element of jurisdiction over this cryptocurrency industry as it relates
to commodities. We have had one hearing wherein the chairman of the
Commodity Futures Trading Commission came before us and made a
presentation as to why he believed we had an opportunity and an
obligation to regulate. I agree with him. If this cryptocurrency world
is to continue with any credibility, it needs adequate authorization
and regulation to make sure that the people who are investing in it are
protected.
I have written two separate letters to Fidelity--a major financial
house in Massachusetts--and raised questions as to their assertions
that people should be allowed to include cryptocurrency in their
retirement accounts. I am skeptical of an account, when you should be
making conservative investments for your future, that enters into this
high-flying cryptocurrency world, which, as we see from the experience
of FTX, is fraught with danger.
There is a great effort underway by the cryptocurrency world to
become major players in American politics. I discovered, much to my
surprise, weeks after I had raised questions about the future of
cryptocurrency, that FTX and Mr. Bankman-Fried had, in fact,
contributed to me.
I was asked by a reporter: Have you received any contributions from
this enterprise or industry?
I said: Of course not.
Then I looked to find I had. They had sent money unsolicited by me
and unknown to me until 2 weeks ago. That money, of course, is going to
be redirected to charitable enterprises and not to a political purpose
for me or any of my staff.
It is an indication, though, that they have more money than friends
in the cryptocurrency world and that they are trying to make sure they
have plenty of friends in Congress and on Capitol Hill. It is the
nature of our political campaigns that a massive amount of money is
invested and spent. Oftentimes, candidates can't keep up with the blur
of contributions and expenditures. Well, that happened to me when it
came to FTX and Sam Bankman-Fried, and I think it might have happened
to others.
So let's take care. If we are going to do our duty for the American
people, we have to regulate this industry in a way to protect them from
the disastrous results which we recently saw with FTX.
Mr. President, I ask unanimous consent that the Chicago Sun-Times
article be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the Chicago Sun-Times]
CME Group's Boss Spotted Early Trouble at Crypto Exchange FTX Run by
Sam Bankman-Fried
(By David Roeder)
Sam Bankman-Fried, who sold himself as a T-shirt-wearing,
video-gaming whiz kid disrupting all things financial, has
been arrested in the collapse of his FTX cryptocurrency
exchange.
It's shaping up as the biggest scandal roaring through the
markets since Bernie Madoff's Ponzi scheme and, irrespective
of Bankman-Fried's guilt or innocence, it's making a lot of
supposed sharpies look very bad.
They include funders such as Chicago-based private equity
firm Thoma Bravo, the Ontario Teachers Pension Fund and
Sequoia Capital. Sequoia published a glowing profile of
Bankman-Fried weeks before it wrote off the value of its
investment with him. It described how he Played League of
Legends while on a call with the firm, taking that as a good
thing. By some accounts, federal regulators were quite late
on the case.
Many FTX backers issued statements after its Nov. 11
bankruptcy about the rigor of their vetting processes. It's
puzzling how so many people with advanced degrees and
powerful computer programs missed what John Ray III, the
executive brought in to clean up the mess, called ``just old-
fashioned embezzlement. This is just taking money from
customers and using it for your own purpose.'' Ray told
Congress customers may have lost $8 billion.
Clearly, none of the backers listened to early warnings
from a Chicago business executive who knows something about
risk management.
Terrence Duffy is the chairman of CME Group, the largest
futures exchange in the U.S. It's the amalgam of the Chicago
Mercantile Exchange, the Chicago Board of Trade, the New York
Mercantile Exchange and other assets. He sounded alarms about
possible problems with FTX early on and said in March he
called Bankman Fried a fraud to his face.
A week after the FTX implosion, Duffy went on the On the
Tape podcast to elaborate on the conversation. It started
with talk of a business deal but quickly turned sour when
Duffy said it was clear FTX had no plan to isolate risk in
crypto trading. ``I said, `Your model is crap. Why would I
deploy a model that's going to introduce risk to the system?'
'' Duffy said on the podcast.
At the time, Bankman-Fried was said to be worth $26
billion. As Duffy recounted it, ``I said, `My net worth
doesn't start with any b's. I'll give you a 3 to 1 that I
have more money than you.' I said, `I'll tell you what, I'll
give you a 4 to 1 I got more money in my right pocket than
your net worth.' I said, `You're a fraud, and I'm going to
make sure that we get this out there.' And that was it. So we
went to Congress.''
It sounds like a South Side guy talking. Duffy is among the
longest-serving chairmen in Chicago business, having gotten
there without a wealthy background or an MBA. He grew up in
Mount Greenwood, where his parents had a floral shop. He
tended bar, including at She-nannigan's on Division Street,
thinking of becoming a cop or firefighter.
His parents mortgaged their house so he could lease his
first membership at the old Merc in 1981. He once said he
paid them back in two years. On the trading floor, he made
connections and earned people's trust. After serving on the
exchange's board, he was named Merc chairman in 2002 and has
led it through its absorption of the Board of Trade and
transformative growth.
[[Page S7791]]
He testified before the U.S. House Agriculture Committee in
May about FTX's dangers with Bankman-Fried sitting next to
him. Both were clearly uncomfortable.
Duffy's written testimony was jargony but carefully laid
out what he saw as deficiencies in FTX's operation compared
with futures markets, which has several levels of protections
against trading defaults. CME Group calls the protections its
``default waterfall'' on its website.
Duffy said futures trading firms hold $173 billion to cover
trading risks. FTX was proposing an algorithm that would in
stages liquidate accounts depending on how prices fluctuated.
``The proposal as put forth is fraught with dangers,'' Duffy
said. He called it ``risk management light'' that would
destabilize financial markets beyond crypto.
Since that hearing, the FTX story has gotten worse. Federal
prosecutors have charged Bankman-Fried with running a brazen
scheme to apply customer funds toward real estate purchases
and political contributions and to cover losses at Alameda
Research, a crypto hedge fund he founded. Bankman-Fried has
admitted his operations lacked basic financial controls but
denied an intent to defraud.
Ray, who worked on the Enron case, described the alleged
fraud as years in the making.
Why do people fall for this stuff? Chalk it up to ego, lazy
due diligence and that bane of money managers, the fear of
missing out.
Investors and regulators should have taken to heart Duffy's
clear-eyed Chicago view. Tending bar and making your mark on
the old trading floors can qualify you to spot trouble ahead.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Mr. DURBIN. I yield the floor.
The ACTING PRESIDENT pro tempore. The Senator from Michigan.