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The aftershocks of the FTX disaster continue to roll on. The latest tremor for the industry came on November 22, as New York Attorney General (NYAG) Letitia James urged lawmakers to prohibit employer retirement plans and IRAs from investing in digital assets.
In a letter to Congress, James proposes legislation that would ban digital asset investment by retirement plans and, adding a cherry on top, also requests the scrapping of two Acts currently on the table, namely the Retirement Savings Modernization Act and the Financial Freedom Act of 2022. The former would allow 401(k) plan fiduciaries to make digital assets an investment option, while the latter would constrain the Secretary of Labor from prohibiting investments in digital assets.
This is not the first time James has attempted to curtail the ‘crypto Wild West,’ being the same NYAG who, back in 2019, went after Bitfiniex and Tether—calling the companies ‘perverse’ in their attempt to avoid the investigation of a reported $850 million loss suffered by Bitfinex, that Tether alleged to have helped cover-up. This case was eventually settled in February of last year in a deal that involved the payment of an $18.5 million penalty and no admission of wrongdoing.
This latest move by the NYAG against the asset class she describes as having “no intrinsic value on which their prices are based” comes uncoincidentally in the wake of the FTX collapse.
In the letter, James states that with the recent bankruptcy of FTX, “the value of many cryptocurrencies fell to new all-time lows”—in her view, this is an all too frequent occurrence that demonstrates “the extreme volatility and risks that many of these assets present.” As further evidence, she points to the TerraUSD crash in May, which also saw many digital assets drop to “record lows and investors lost hundreds of billions of dollars.”
When discussing FTX’s downfall, James suggests how it’s telling that former CEO Sam Bankman-Fried has described parts of the digital asset industry “in much the same way one would describe an ordinary Ponzi scheme.” Specifically, she quotes Bankman-Fried’s own description of it as a box that “does literally nothing…This box is worth zero obviously.”
In terms of the practicalities of her proposal, James cites precedence in the form of various laws passed to help workers save for retirement (e.g., the introduction of 401ks in 1978), as well as legislation to “safeguard retirement accounts from the massive losses that have now become synonymous with digital assets”—a key example being 403(b) plans, which already limit investment to annuities and mutual funds.
The letter to Congress expands on the risks of digital assets and the reasons why retirement plans must be protected, but the key arguments James makes are:
- Most digital assets have no intrinsic value and are, therefore, too unstable to be suitable assets for retirement savings.
- Digital asset companies are a breeding ground for fraud, crime, and theft and will render retirement accounts vulnerable to the same.
- Digital asset companies do not operate with sufficient guardrails to protect retirement savings.
The NYAG rounds off her case by suggesting that the easiest way to put safeguards into law would be to add subparagraphs into existing legislation—the 26 U.S. Code § 408 (individual retirement accounts) and 29 U.S. Code § 1104 (fiduciary duties)—prohibiting investment in digital assets.
The changes James proposes would not stop individual investors or companies from buying into digital assets. However, prohibiting the multi-billion-dollar retirement and pension fund market from interacting with the digital asset space would be a huge loss of potential investors at a time when the industry is still licking its wounds.
Watch: Head of Unit, Digital Innovation and Blockchain at DG Connect, European Commission Pēteris Zilgalvis on Bitcoin Association’s Blockchain Policy Matters
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