Kristin Smith, executive director of the Blockchain Association, one of the largest cryptocurrency lobbying groups, knows it won’t be easy to rebuild the industry’s reputation.
Lawmakers are outraged by the fall of FTX, one of the largest crypto exchanges, and whose founder, Sam Bankman-Fried, was formerly a trusted voice on Capitol Hill. More than 1 million FTX users may lose their funds after an affiliated trading firm blew through their deposits on risky gambles, and Bankman-Fried was arrested Monday in the Bahamas after charges were filed against him in the U.S.
The high-profile failure — which follows several other crypto collapses this year — has cast a shadow over an industry that had been making inroads with lawmakers and will only spur more scrutiny from crypto’s most vocal skeptics.
“I’m outraged too,” Smith said in a recent interview with us that came before Bankman-Fried’s arrest. “This is just a pattern of really egregious behavior, and if you look at some of the reporting that’s been out there, there’s a very good case that this could be fraud.”
“It’s going to be incumbent upon the crypto industry to explain that this is incredibly abnormal behavior,” she added.
Her association, which doesn’t represent FTX but does list bankrupt crypto lenders Voyager Digital and BlockFi among its members, is gearing up for a flurry of meetings with leery lawmakers early in the new Congress next year.
Its primary goals are to demonstrate the benefits of crypto and explain why Congress must create regulatory clarity to ensure crypto firms set up shop in the U.S. FTX is based in the Bahamas, and thus did not fall under the scope of U.S. regulators.
Seeking distance from disaster
Distancing FTX from the broader crypto community could be crucial for the industry’s political survival.
Smith and other crypto figures say they were always wary of Bankman-Fried, particularly over his efforts to dominate the conversation in the halls of Congress — and the tens of millions of dollars in political donations he made to cosy up with lawmakers.
They refer to the Digital Commodities Consumer Protection Act — the first piece of comprehensive crypto legislation — as “the FTX bill” because Bankman-Fried was effectively its lead author.
The Blockchain Association lobbied for major changes to the bill and pushed back on Bankman-Fried’s controversial proposal before the Commodity Futures Trading Commission that would allow FTX users to make trades using borrowed money without going through a clearing house.
Smith said she had an uneasy feeling as a speaker at Bankman-Fried’s extravagant “Crypto Bahamas” conference in April, which featured a host of celebrities including Tom Brady, Katy Perry and even former President Clinton. Just how was he pulling this off, she wondered.
“This guy got the entire world thinking he was a genius, and it looks like he may end up being nothing more than a common criminal,” Smith said.
Bankman-Fried is the most high-profile crypto kingmaker to face criminal probes and congressional scrutiny, but he’s not the first. Bankrupt crypto lender Celsius Network faces federal and state-level investigations into its operations, while Terraform Labs co-founder Do Kwon is on the run after the collapse of his TerraUSD coin wiped out $40 billion in investor funds.
Smith said that as the industry fights to rebuild its reputation, it must also look inward and call out its problematic figures. She acknowledges that identifying the bad actors is a difficult task — and something crypto trade groups, lawmakers and financial services giants alike have failed at.
“I think we need to step back and stop hero-worshiping the ‘founders’ and really take a more objective look at what it is they’re building and ask the tough questions,” she said. “Until there’s a better regulatory framework in place, the industry itself is going to be on the front lines for weeding out these bad actors.”
‘The advantage of being one of the first people to show up’
A Los Angeles native, Smith came to the nation’s capital to study biology at George Washington University.
She first dipped into politics as an intern for the late Sen. Conrad Burns (R-Mont.). Smith worked her way up to a legislative role where she focused on internet and telecom policy.
After four years as deputy chief of staff to then-Rep. Denny Rehberg (R-Mont.) and multiple stints at lobbying firms, Smith joined the Blockchain Association in 2018, seeking to return to tech and internet policy.
She wasn’t satisfied with the direction of the current state of the internet due to its focus on social media and unchecked personal data collection.
“For me, getting into this space was a return to trying to be a specialist in something,” Smith said. “And given that there were very few people in Washington doing this, I had the advantage of being one of the first people to show up.”
The conversation has evolved from when Smith first started. In most cases, she no longer has to explain to lawmakers the basics of how crypto and blockchain technology works.
That’s a relief, but she remains frustrated that Congress still hasn’t passed any legislation to regulate the crypto industry, something she hopes will get done next year.
The easiest issue to tackle is regulating so-called stablecoins, digital assets that match the value of the dollar and other traditional currencies, which Congress has been examining for several years. Legislation could prevent a repeat of stablecoin crashes earlier this year that rattled the crypto market.
Smith added that Congress should decide which agency will regulate crypto spot markets, something that Treasury Secretary Janet Yellen is also pushing for.
Getting a comprehensive crypto regulation and consumer protection bill through will be a bigger lift. While crypto supporters and skeptics agree on the need for regulation, they disagree on how strict the rules should be. The FTX collapse will only embolden doubters such as Sen. Elizabeth Warren (D-Mass.) to double down.
“I think the bigger question is going to be: How far apart are the approaches for how to regulate this space?” Smith said. “And is it something where there can be a deal that people can coalesce around?”
Smith, like many crypto diehards, doesn’t see the latest setbacks as the end of the road, but rather a natural, if painful, process of weeding out crypto’s bad actors.
She still believes that crypto’s underlying blockchain technology will transform the internet by handing power over to users and taking it away from tech giants and other power players. For Smith, it’s a matter of when, not if.
“I think that the fundamental underlying technology is good and powerful and something that ultimately will prove out as time goes on,” she said. “So yeah, I’m more excited than ever.”