Why it’s time to usher in decentralised finance to fight corruption

Consumer protection should be a priority for regulators after the collapse of a number of crypto platforms in 2022

Last week marked the arrest and indictment of US Republican congressman George Santos following a saga in which he admitted to embellishing his CV, among other lies.

The Congressman has pleaded not guilty to 13 offences – including embezzling funds for his 2022 campaign, fraudulently gaining unemployment benefits and lying to Congress regarding the source of his assets.

In the process, a connection also emerged between Mr Santos and Sam Bankman-Fried, the disgraced chief executive of the collapsed FTX crypto exchange.

Sam Bankman-Fried - in photos

Allegedly, Mr Bankman-Fried maxed out his donations to the Santos campaign and funnelled millions of dollars into both Republican and Democratic elections through FTX and its subsidiaries.

Investigative journalists have uncovered a web of intrigue surrounding Mr Bankman-Fried’s connections to the US government machine, including “swap” and “straw donor” schemes that allowed him to circumvent campaign funding laws.

For example, the “swap” option allows partner candidates to exchange donors in case the upper limit for a donation from a particular individual has been reached.

This is a legal loophole that allowed Mr Bankman-Fried to throw millions into the campaign of a Republican candidate connected to FTX.

Indeed, several senior FTX executives allegedly contributed some $24 million to Republican candidates and committees during the 2022 midterm elections.

Playing with the big boys

By throwing money at both Republicans and Democrats, Mr Bankman-Fried earned himself a seat at the table with the Securities and Exchange Commission as a leading voice on crypto regulation.

He allegedly used this perk extensively to further his own cause, to the detriment of the wider crypto ecosystem.

Much of his posturing seems to have been aimed at advancing a piece of legislation that would have stifled the growth of the decentralised finance (DeFi) industry in the US, while channelling assets into centralised exchanges like FTX.

If passed, the Digital Commodities Consumer Protection Act could have potentially allowed the founder of FTX to continue his alleged Ponzi scheme indefinitely.

FTX is the biggest building block in this sprawling pyramid of lies. Many other perpetrators of the 2022 crypto collapse were also prominent and respected US businesses.

And while 2022 exposed some of the corruption that plagues the crypto industry, we are yet to see an adequate response from regulatory watchdogs.

Web of corruption

It appears that despite the regulator’s protestations to the contrary, consumer protection seems to be a low priority.

Rather, US political candidates appear comfortable accepting millions of dollars in donations from corrupt crypto fraudsters and the system legitimised this.

The 2022 midterm elections saw a significant jump in political spending from the crypto sector to $73 million from $13 million in 2020, with another $15 million poured into lobbying efforts, according to The Wall Street Journal.

When this web of corruption is exposed, like it was in 2022, the regulator chooses to crack down on crypto businesses that have followed the letter of the law, rather than punishing those that have undermined financial stability.

The recent Wells notice sent to Coinbase by the SEC is a testament to this.

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In response, Coinbase revealed the lack of clarity it has received from the SEC with regard to its own legal obligations and is pursuing the regulator legally.

A regulated and listed crypto exchange that has repeatedly attempted to support the creation of a comprehensive legislative framework for cryptocurrencies in the US, Coinbase is now being punished for being in the same industry as Mr Bankman-Fried and Alex Mashinsky, the founder of collapsed US cryptocurrency lending platform Celsius Network.

A decentralised future

Equally, now that the rot within FTX has been revealed, the US Internal Revenue Service has no scruples about claiming $44 billion in taxes from the embattled exchange, rather than prioritising the safe return of these assets to retail clients affected by its collapse.

These are not the actions of a government that places consumer protection over and above everything else.

Everything that has transpired since the 2022 crypto crisis reminds us yet again that the US government is not on our side.

Its laws and regulations are not being developed to protect our wealth.

The FTX saga and the corruption it exposed is the most compelling argument for true decentralisation of finance.

In a decentralised system, we will no longer be at the mercy of corruption and money-hungry executives. Our hard-earned assets won’t suddenly disappear in a puff of smoke.

It’s time to usher in the era of DeFi to finally take control of our own financial freedom.

Stefan Rust is chief executive of independent inflation data aggregator Truflation and former chief executive of bitcoin.com

Updated: May 24, 2023, 4:00 AM