Lummis Presses Banking Regulators on FTX Bankruptcy

November 15, 2022

Senator Highlighted How Lummis-Gillibrand Could Have Prevented FTX Collapse

WASHINGTON, D.C. – U.S. Senator Cynthia Lummis (R-WY) today highlighted the core factors that caused the recent FTX bankruptcy, the tenth largest bankruptcy in U.S. history, and highlighted how the Lummis-Gillibrand Responsible Financial Innovation Act would have prevented this insolvency during a Senate Banking Committee hearing.

“My home state of Wyoming saw this problem coming in 2019 and banned banks and digital asset exchanges from relending customer digital assets. That’s probably surprising to many of our witnesses today, but Wyoming has a surprisingly tough set of rules for digital assets,” said Sen. Lummis. “It’s obvious that Congress needs to regulate digital assets and that Lummis-Gillibrand is the legislation that most comprehensively addresses these issues in a way that balances consumer protection and responsible innovation.”

In June, Sen. Lummis introduced The Responsible Financial Innovation Act, alongside Sen. Kirsten Gillibrand (D-NY). This comprehensive digital asset legislation would provide commonsense regulation to the digital asset industry.Under Lummis-Gillibrand, the FTX bankruptcy likely would not have happened because of five core provisions in the proposed legislation:

  1. Clear Property Rights: The bill clearly defines digital assets, establishes which are securities and commodities, and provides for the enforceability of contracts between an exchange and their customer.
  2. Custody and Segregation: The bill requires that an exchange not use customer assets for proprietary trading, and maintains 100% of customer assets for withdrawal at all times. Lummis-Gillibrand also requires use of an independent bank or trust company as custodian, similar to the SEC Custody Rule and CFTC custody provisions.
  3. Lending Activities: The bill places tight limits on digital asset lending activities and leverage, requires customer disclosures and requires affirmative customer consent and full assumption of risk for lending activities.
  4. Bankruptcy: Lummis-Gillibrand provides that customer assets are not part of the bankruptcy estate, provides protection from creditors, and ensures that customers get their assets back if an exchange fails (similar to CFTC provisions for commodities intermediaries). 
  5. Transparency into Affiliates: The bill requires transparency into affiliate relationships between exchanges and other commonly-held businesses, limits affiliate business transactions, and requires an independent custodian for digital assets. 

For video of Sen. Lummis’s questions during the hearing, click here.