Guest Editor: In the world of cryptocurrencies, the Sam Bankman-Fried trial is an absolute nightmare | Editorials and opinions

The criminal fraud trial of cryptocurrency villain Sam Bankman-Fried began last week, at the same time as the crypto crowd went missing from the Futures Industry Association conference in Chicago.

Not long ago, “SBF,” as he is commonly known, dominated the city’s annual financial markets gathering, strutting around the Sheraton Grand Chicago with his scruffy friends like he owned the place. And considering how much his FTX trading firm paid for sponsorship, he practically did.

At this year’s conference, crypto was all but invisible. As the SBF process has become more heated and trading volumes have waned, this once hot industry has gone underground. There are no flashy television advertisements, lavish sponsorships, or clumsy attempts to override the checks and balances of prudent risk management.

But crypto is far from dead, and even as its most famous spokesman tries to avoid a decade-long ban, an industry with image problems is laying the groundwork for a comeback.

We’re for it, and so should Chicago’s business community.

Cryptocurrencies are digital files that I can think of, to quote one of Bankman-Fried’s accusers, as “a type of money that exists on the Internet.” They rely on blockchain, a digital ledger that permanently records transactions. This useful technology allows participants to trade with each other on a person-to-person basis without a central counterparty guaranteeing the trade, as in Chicago’s more traditional financial markets.

The industry is crying out for strict, clear rules so that established financial firms can participate without getting a bad reputation. This year, as that process looms, crypto lobbyists in the U.S. House of Representatives have made quiet progress toward creating a long-sought regulatory framework for digital assets.

Republicans in the House of Representatives have pushed for legislation that would clarify oversight of crypto markets in the U.S. by giving broader powers to the Commodity Futures Trading Commission. The CFTC is no longer the popgun regulator of years past, and it makes sense that crypto would be overseen by the same derivatives experts who have long kept an eye on the Chicago futures markets.

The bill is drawing some welcome opposition from Democrats, and similar legislation in the Senate is sponsored by Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., so rare bipartisan cooperation is on the horizon.

Making the CFTC the No. 1 regulator would be a dream come true for the crypto industry, not least because the rival Securities and Exchange Commission has been cracking down on it. SEC Chairman Gary Gensler maintains that cryptocurrencies must comply with existing securities laws and is pursuing a series of enforcement actions against some of the leading cryptocurrency operators.

We are confident that the legislation will provide a public service by defining these digital assets once and for all and providing regulators with stronger supervisory tools. But nothing is close to approval. The ongoing SEC enforcement cases could change the landscape, and getting legislation through the hot mess in the GOP-controlled House will be a challenge, at least until the next election.

Any serious discussion about the future of crypto will be overshadowed by the spectacle of the SBF process, which is already underway and expected to last about six weeks. On Tuesday, Caroline Ellison, Bankman-Fried’s sometime lover, close business associate and now a prominent co-witness for the prosecution, is expected to take the witness stand, drawing outsized press coverage.

On Capitol Hill, the crypto industry has sought to portray 31-year-old Bankman-Fried (who has pleaded not guilty) as a renegade outlier. That’s a laugh, considering how he served as a public figurehead while distributing tens of millions of dollars in political donations to Democrats and Republicans. You can count on skeptics like Democratic Senator Elizabeth Warren of Massachusetts to use the SBF trial’s daily drumbeat of salacious scandals to remind everyone of the dirty underside of unregulated cryptocurrencies.

The dirt is real. The collapse of FTX cost customers a fortune and significantly tarnished the exciting new marketplace. In his opening statement, federal prosecutor Thane Rehn said Bankman-Fried “lied to the world” about the security of the client funds under his care and knowingly “stole billions of dollars from thousands of people.”

Bankman-Fried’s lawyer, Mark Cohen, told the jury that his “math nerd” client acted in “good faith”: “Sam didn’t defraud anyone.” Sam had no intention of defrauding anyone.” That is difficult to sell with billions of dollars missing. And even if Bankman-Fried were to get away, the crypto industry would still have to prove that it is not a haven for fraud where customer funds can easily disappear.

We hope our dysfunctional Congress can get its act together and pass legislation that will help clean up cryptocurrencies that are much bigger and more important than the man currently on trial.

The US urgently needs some meaningful new guardrails so that the crypto market can develop responsibly – including in Chicago, which has a proud history of taking market innovations like this to the next level.

—Chicago Tribune