The committee made the inquiry to four federal agencies—the Department of the Treasury, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the Federal Trade Commission. Meanwhile, the five cryptocurrency exchanges that received the letter were Kraken, FTX, Coinbase, Binance.US, and Kucoin.
Rep. Raja Khrisnamoorthi from the Subcommittee on Economic and Consumer Policy said that narratives of “skyrocketing prices” and “overnight riches” had drawn investors and scammers alike. He referred to FTC data that $1 billion had been lost in crypto fraud since the beginning of 2021.
"The lack of a central authority to flag suspicious transactions in many situations, the irreversibility of transactions, and the limited understanding many consumers and investors have of the underlying technology make cryptocurrency a preferred transaction method for scammers,” Khrisnamoorthi said.
Congress demanded that the agencies and exchanges respond to the letter by September 12. According to the committee, they will use the responses to draft legislative solutions for crypto fraud issues.
Crypto exchanges were requested to release company documents dating back from January 1, 2009, which showed their attempts to "identify, investigate, and remove or flag potentially fraudulent digital assets or accounts.” Congress also requested them to highlight plans for “more stringent” security policies.
Cause of concerns
Congress’ letters to these institutions came from concerns over the safety of crypto investment, as shown by recent data. Chainalysis data showed that 37 percent of crypto scam revenue in 2021 was caused by “rug pulls." In the scheme, a developer lists a token on a crypto exchange, rallies for investments, and disappears after taking away the money.
There were also cases when crypto companies announced bankruptcies. Two high-profile cases in recent months were Voyager and Celsius, both were crypto lending firms. In the bankruptcy proceedings for both firms, their customers were considered “unsecured creditors” and thus might not get their investments back.
Coinbase’s financial files also showed that if the company went bankrupt, users would be considered "general unsecured creditors." These cases gave rise to the question of which parties get the crypto assets when a crypto firm announces bankruptcy.
Another cause of concern for Congress was whether a crypto exchange reviewed a currency before listing it on the platform. Some exchanges implement this review policy, while others do not. Congress proposed this question specifically to FTX founder Sam Bankman-Fried. FTX reportedly allowed crypto assets to be listed on its platform with “little or no vetting."
False advertising is another issue in consumer protection brought up by Congress. Binance.US allegedly misled consumers about the safety of investing in UST, U.S. dollar-pegged stablecoin, and luna. Both tokens had a combined capital value of nearly $60 billion when they reached an all-time high. However, as the prices of crypto continued to dwindle, the two tokens had seen significant price reductions.
Krishnamoorthi also pointed out that government agencies often provided inconsistent guidance to actors in the private sector. These inconsistencies caused private agencies to be unable to effectively implement measures that protect crypto consumers and platforms.