FTX’s decline shouldn’t invalidate blockchain.

The House Financial Services Committee held a hearing last week to investigate the collapse of FTX, displaying Congress’s dissatisfaction with the cryptocurrency business. Lawmakers on both sides of the aisle are fed up with cryptocurrency company fraud and misbehavior, making it almost guaranteed that Congress will take steps to regulate the industry next year.

But in the eagerness to call FTX founder Sam Bankman-Fried to account, Congress should take care to design legislation that distinguishes bad actors and frauds from the promise of continued innovation in blockchain technologies.

Bankman-Fried, once a darling of the business, is now accused of scamming millions of investors out of billions of dollars. Last month, it was revealed that FTX and Alameda Capital—another venture capital firm created by Bankman-Fried—were commingling customer cash, resulting in a run on the exchange and ultimate insolvency. Following the collapse, court documents and other watchdogs claim that he misused customer deposits to make ventures such as real estate purchases and options trading. Only a small portion of FTX’s assets have been secured, and millions of creditors are expected to suffer a catastrophic loss.

Lawmakers are rightly outraged and want answers concerning Sam Bankman-Fried, who has become the poster child for crypto sector hubris and fraud. Rep. Maxine Waters (D-Calif.) was among the first to respond, requesting that Bankman-Fried appears before the House Financial Services Committee, which she leads. Bankman-Fried agreed to testify until he was arrested by Bahamian officials at the request of federal law enforcement.

Fortunately, Bankman-Fried is not the only person who can provide Congress with information about the crash. The committee did hear from FTX’s new CEO, John J. Ray III, and his testimony was both eye-opening and scathing.

Ray has seen his fair share of corporate misconduct in his almost 40 years of expertise in corporate reorganization, including management of the Enron bankruptcy. “However, I have never seen such a complete breakdown of corporate controls at every level of an organization in my experience,” he told the committee.

Many committee members took advantage of the opportunity to condemn the crypto business and blockchain technologies in general. Rep. Jesús Garcia (D-Ill.) opined: “FTX isn’t an exception; its failure isn’t the situation of one crooked individual stealing money. It is about an entire sector that refuses to follow existing regulations and believes it is beyond the law.” Rep. Juan Vargas (D-Calif.) went further: “I just don’t grasp the value of blockchain and cryptocurrencies … other than if you’re a terrorist or someone who wants to hide money.”

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Reports that the Department of Justice is considering charging Binance, another large cryptocurrency exchange, and its CEO, Changpeng Zhao, with money laundering and criminal sanctions violations only aggravate the industry’s image on Capitol Hill.

With multiple pieces of legislation currently circulating in Congress, the FTX collapse and possible fall of Binance increases the likelihood that lawmakers will take action to regulate cryptocurrencies and other blockchain-based technology next year. Unfortunately, Congress’ justifiable fury over FTX raises the risk that it will miss the forest for the trees.

The failure of FTX was plainly driven by corporate wrongdoing, which is hardly a crypto-specific crime. It seems appropriate that Ray is directing the reorganization of FTX given its collapse has been compared to that of Enron. The distinction here is that the Enron scam was “highly coordinated financial maneuvers by highly smart people, “whereas the FTX theft was “old-fashioned embezzlement and not sophisticated at all,” in Ray’s words.

This form of corporate misconduct can and should be addressed by targeted regulation. Setting new transparency standards for centralized exchanges and defining enforcement authority over cryptocurrencies and stablecoins would go a long way toward averting the next FTX. However, Congress must also identify bad actors and scams inside the crypto business from the fundamental technology.

The White House and Congress have both acknowledged that blockchain technologies offer immense potential for beneficial innovation. Ironically, the transparency of public ledgers makes it easier for Ray and his team to trace many of Bankman-activities. Fried’s Several members lauded blockchain-based technologies throughout the hearing for their ability to improve transaction efficiency, facilitate genuine cross-border payments, and develop unique organizational governance structures, among other things.

There have already been incidents of poorly crafted laws producing more confusion than clarity for the many players who construct, run, and enable the usage of blockchain technologies. Any new legislation should explicitly clarify which segments of the crypto economy are being controlled and avoid sweeping generalizations. Now, as politicians move toward regulating crypto, they should avoid unduly blocking the innovation that so many of them appear to recognize.

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