What did SBF Want?

His plan to turn crypto legit

The blast ratio around SBF’s political schemes keeps expanding. 

David Freedlander has a great piece in NY Mag last week in which he describes the rise and fall of Sean McElwee and his involvement with SBF. The piece is well reported and helps to advance the story of SBF’s political involvement in a number of ways. It now appears McElwee and others who helped SBF with a potential straw-donor scheme could be in real legal trouble. 

But, in all of the reporting on SBF’s beliefs and the ramifications of his downfall on crypto and his erstwhile allies in both parties, I think two questions have not been sufficiently explained: 

1. What did SBF want out of his political activities? What was he hoping to accomplish? 

2. What strategies was he pursuing to achieve his political goals? In particular, what was SBF trying to do within the Democratic Party?

During my time at More Perfect Union, I did a little bit of reporting on these questions. I want to lay out what I found (and what we have subsequently learned) because there are still a lot of important unanswered questions about what SBF was up to that I hope journalists will keep digging into. I want more people to know how dangerous crypto still could be and how far SBF and his VC allies got in their lobbying efforts. 

SBF’s plan was to take crypto legit. He wanted favorable regulations that could exponentially grow the industry by bringing in new investors. He wanted laws that would grant stablecoin issuers access to the federal reserve’s master window -- which could make crypto Too Big to Fail. 

Right now, crypto isn’t within the “regulatory perimeter” of the US; it’s not entrenched in the “real” financial system. It can safely collapse without broader ramifications for the economy. But, if SBF’s plan had succeeded, crypto would have eventually become the next iteration of sub-prime finance. The inevitable collapse of the crypto market would have destroyed millions of working people’s lives, and potentially threatened the entire financial system. 

I’ll write another post after this about SBF’s political strategy, and in particular, what he was up to within the Democratic Party. But, for now, let’s talk about what SBF hoped to accomplish in his political giving. 

The Goal: Make Crypto Too Big to Fail

For all the talk about effective altruism and big philosophical ideas, SBF’s goal was basically the same as every other industry with lobbyists in DC: write laws and regulations that maximize profit.

Unlike many in crypto who were ideologically opposed to any regulations, SBF’s goal was to get DC to write regulations favorable to the long-term growth of FTX and crypto as a whole. SBF lays his play out very clearly in an appearance on Mad Money a year ago: 

Cramer: “Well [believing in regulations] does make you a bit of an outlier. I think there's some people in the industry who basically enjoy the fact that it's not regulated which therefore makes it far more difficult for us old mainstream folks to want to go with it. Your proposal would make it so that billions of people around the world would want to be involved with crypto. How do you get yours to be the prevalent view?”

SBF: “Yeah I mean and that's a lot of the goal: how do we get from where we are today to a truly mainstream global industry that has the consumer protection and the trust that people are used to.”

As Cramer explains, if SBF succeeded at passing pro-crypto regulations, more investors - especially institutional investors like pension funds, mutual funds, and sovereign wealth funds - would be convinced to invest in crypto. SBF’s company FTX was a crypto exchange, but their largest source of revenue was from derivatives trades.

Most normal traders don’t engage in derivatives trades, but institutional investors have lots of experience in derivatives trades -- and hundreds of billions of dollars to play with. If more institutional investors got more involved in crypto, FTX stood to benefit handsomely. But, institutional investors are less likely to engage in a market that has zero legal guidelines or protections, which is why SBF spent so much money on lobbying and elections around the country. 

So, what did SBF want? What laws and regulations was he trying to buy with all that money?

The World SBF Wanted: A Bespoke Regulatory Framework

We have a pretty good sense of what SBF and his venture capital allies wanted from a regulatory regime because there were three bills written in this session of Congress that dealt with crypto regulations, and each of them was so industry friendly they could have been written by crypto lobbyists (and in fact, likely were). 

Incredibly, all three major crypto bills before Congress would have granted stablecoin issuers access to the Federal Reserve’s master window. The discount window is the mechanism the Fed uses to ensure banks that hold consumer deposits have enough money to survive a bank run. Giving Crypto access to the Fed’s discount window would ensure they wouldn’t be allowed to fail in the event of an industry wide downturn. 

Each of these bills would have created a “bespoke” regulatory framework for crypto. Instead of simply using the existing laws on securities, exchanges and banking to enforce consumer protections and diagnose systemic risk, these bills would have created an entirely new system designed specifically for crypto assets. In addition to giving crypto-billionaires like SBF exactly the rules they wanted, a bespoke framework would have legitimated the industry by showing they deserve their own rules.

According to experts on crypto’s lobbying efforts, SBF had three top objectives:

1. Make CFTC the primary regulator for the crypto industry. The American Prospect has done a great job of following this story. The short version is that CFTC is a much friendlier regulator than the SEC. The CFTC doesn’t have experience regulating a consumer facing asset, it has a much lower enforcement budget, and the CFTC regulators were much more captured. The now infamous letter from 8 members of Congress - including Ritchie Torres - to SEC Commissioner Gary Gensler was an effort to discourage the SEC from regulating the industry. 

2. Get the Fed to treat stablecoins like a normal bank. Stablecoins are the poker chips that allow you to enter the crypto casino. Without stablecoins, the entire crypto industry would fail to function. Right now, they don’t have any government backing.  For the industry to go mainstream, they need to make stablecoins, well, actually stable. If SBF and the VC backed lobbying groups had succeeded, they would have made the Federal Reserve treat stablecoin issuers like banks, which would mean the risks were socialized, but the gains were privatized. 

3. Tax exemptions for crypto assets. Two of the bills introduced included a form of tax exemption from capital gains taxes on small crypto transactions. In the same way hedge fund managers focus on the carried interest loop-hole, crypto interests were focused on carving out as many tax loopholes as possible for their assets. 

How Far They Got

No one reasonably expected these bills to pass in a Democratic-led Congress. But, crypto lobbyists spent more last year than the Defense industry or Big Pharma on political contributions. There was a 5,200% increase from 2020 to 2021. 

I’ll get more into this in the next post, but SBF and his VC allies had a simple strategy: use money to give support for crypto a bipartisan patina, and wait until Republicans held Congress to pass crypto-friendly legislation. 

This is why all the talk about SBF’s support for Democrats is missing the bigger picture. He was buying off chunks of the Democratic Party - including some progressives like Sean - as a defensive play. The real goal was to get Republicans to give them what they wanted. 

It’s shameful and unfortunate some Democrats went along with the plan. But, more on that soon.