cftc

US Senate committee hearing on FTX fail brings gaps in regulatory authority to light

CFTC Chairman Rostin Behnam appeared before the Senate Agriculture Committee to talk about how FTX’s collapse occurred and how it could have been prevented.

United States Commodity Futures Trading Commission Chairman Rostin Behnam told a Senate Agriculture, Nutrition and Forestry Committee meeting Dec. 1 that his agency’s regulations contain “core elements that have served the markets for decades.” But as the fallout from the FTX collapse gets sorted out, notable gaps in current legislation have come to light, Behnam and the senators agreed.

Senator Tina Smith called FTX’s collapse “shocking, not surprising,” and said that future crises will continue to occur as long as regulatory gaps remain. Behnam pointed out that the Securities and Exchange Commission has the authority to mandate basic safeguards, such as separation of house and customer money and best execution of investment trades.

We know how to do this,” Behnam said, trying to explain how the collapse occurred nonetheless:

“Invariably, the questions we are all obligated to answer as regulators are: ‘How did you let this happen?’ and ‘How will you prevent this from happening again?’ […] Without new authority for the CFTC, there will remain gaps in a federal regulatory framework, even if other regulators act within their existing authority.”

Behnam has lobbied for greater authority for his agency for months. He alluded to alleged conflicts between the CFTC and SEC when he dismissed talk of a “power grab.” Interagency cooperation is not new and will continue, Behnam said. Extending CFTC authority is “about filling a gap.”

“I think the responsibilities would be the same,” between the SEC and CFTC with comprehensive regulation, and CFTC regulation works well when it is applicable.

Behnam pointed to crypto derivatives and clearing platform and FTX subsidiary LedgerX as an example of successful CFTC regulation. But, “We at the CFTC do not have the legal authority to ask about an unregulated entity,” without a whistleblower, Behnam told Senator Tommy Tuberville, adding:

“We simply do not have the authority to register cash market exchanges […] This is the gap.”

Tuberville also pointed out that FTX had high governance marks from ratings agencies and asked if they can be sued. Oversight of ratings agencies is another “potential gap,” Behnam replied.

CFTC Chairman Behnam says DCCPA wouldve prevented the FTX collapse.

DCCPA would apply to a Bahamian exchange? https://t.co/5RTpBZravM

— Miller (@millercwl) December 1, 2022

Senator Kristen Gillibrand, co-author of the Responsible Financial Innovation Act with Senator Cynthia Lummis, told Behnam that there were “a couple of areas where I still see risks that are coming ahead.” Mergers and acquisitions were one such area. The CFTC paperwork for FTX to acquire LedgerX amounted to “a notice filing” at best, Behnam conceded.

There is also a question of how much influence overseas companies have over the United States and U.S. companies trading offshore, Gillibrand added.

CFTC Chairman Rostin Behnam cites LedgerX as success story amid FTX collapse

”The customer property at LedgerX — the CFTC-regulated entity — has remained exactly where it should be, segregated and secure,” Rostin Behnam said at a hearing on FTX’s failures.

Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam has cited FTX Group’s LedgerX as an example of how regulating crypto firms could benefit United States consumers. The U.S.-based crypto derivatives and clearing platform was not part of its parent company’s recent bankruptcy filing.

At a Dec. 1 hearing of the Senate Agriculture Committee exploring the collapse of FTX, Behnam said LedgerX had essentially been “walled off” from the other companies within FTX Group, including those that filed for bankruptcy. The CFTC chairman said that LedgerX was “healthy,” “solvent,” and “operational” compared to other FTX entities.

“The limitations of our authority stopped at [LedgerX],” said Behnam. “For those same reasons that we were walled off from going past the regulated entity, the other FTX entities were not able to pierce through LedgerX and potentially take customer money, which obviously, as a regulator, is the priority.”

In his written testimony for the hearing, the CFTC chairman said:

“Many public reports indicate that segregation and customer security failures at the bankrupt FTX entities resulted in huge amounts of FTX customer funds being misappropriated by Alameda for its proprietary trading. But the customer property at LedgerX – the CFTC regulated entity – has remained exactly where it should be, segregated and secure. This is regulation working.”

CFTC Chairman Rostin Behnam addressing Senate Agriculture Committee on Dec. 1

Behnan added that FTX had reported in its bankruptcy filings that LedgerX held “more cash than all the other FTX debtor entities combined.” The CFTC chairman, committee chairwoman Michigan Senator Debbie Stabenow and Arkansas Senator John Boozman pointed to the Digital Commodities Consumer Protection Act as a potential solution to the events leading up to FTX’s insolvency, which left many U.S. consumers in the lurch.

“The crypto industry lacks the customer protections that Americans expect and deserve,” said Stabenow. “When trading in U.S. markets, when exchanges accept customer funds for trading they must not be allowed to gamble with those funds. […] FTX did all of those things, emboldened by a lack of federal oversight.”

Since filing for bankruptcy under Chapter 11 in the District of Delaware, FTX has been the target of global regulators and lawmakers investigating the exchange, including Turkey’s Financial Crimes Investigation Agency, authorities in the Bahamas and U.S. state and federal authorities. The U.S. House Financial Services Committee is holding a hearing on Dec. 13 to investigate the events around the collapse of the crypto exchange, with the next court hearing in the bankruptcy case set for Dec. 16.

CFTC chief says Bitcoin is the only commodity in the wake of FTX collapse

CFTC has faced a lot of scrutiny in the wake of FTX collapse due to its ties with the crypto exchange and SBF’s efforts to put the committee as the key oversight body for crypto.

The chief of the United States Commodity Futures Trading Commission (CFTC), Rostin Behnam, claimed Bitcoin is the only crypto asset that can be viewed as a commodity during an invite-only crypto event at Princeton University, reported Fortune.

Behnam’s comments are quite a contrast to his early statements in October, where he claimed Ether (ETH) could also be viewed as a commodity. The CFTC chief was answering a question on which crypto assets should be seen as commodities and which ones qualify as securities.

The CFTC chief’s backtracking of his comments on ETH comes in the wake of heavy scrutiny of U.S regulators and accusations of corruption, with Republican lawmakers accusing the SEC chair of coordinating with FTX “to obtain regulatory monopoly.”

The debate over which cryptocurrencies qualify as commodities under the law has been a long-drawn one. Bitcoin is unanimously seen as non-security because of its true decentralized nature, whereas the status of Ether and several other cryptocurrencies have been a controversial topic. Ripple is currently facing a security lawsuit from the SEC as well.

The American financial regulator has found itself in hot waters in the wake of the FTX crypto exchange collapse primarily because of its association with the exchange.

CFTC was poised to receive oversight capacity through proposed Senate legislation called the Digital Commodities Consumer Protection Act (DCCPA), while the CFTC chief faced a lot of criticism for the same but defended the commission’s actions, claiming they don’t have the luxury to wait.

Behnam said the committee has limited oversight powers and blamed the “matrix of regulators” as an imperfect system. However, he called for better collaboration among the long list of regulatory bodies to come up with formidable regulations.

The CFTC chief is slated for a congressional hearing on Dec. 1, discussing the collapse of the now-bankrupt crypto exchange FTX and the lessons learned from the debacle.

Breaking: 8 Congress Members tried to stop the SEC from inquiring into FTX by questioning the SEC’s authority to inquire about Crypto

5 of those 8 members also received campaign donations from FTX, ranging from $2,900 to $11,600

— Nancy Pelosi Stock Tracker ♟ (@PelosiTracker_) November 25, 2022

The close ties of former CEO Sam Bankman-Fried with US policymakers and his lobbying efforts to make CFTC the primary crypto regulatory body has been questioned by many in the crypto community. A recent report also alleged that 8 U.S. congresspeople tried to stop the SEC from inquiring into FTX.

US CFTC commissioner calls for new category to protect small investors from crypto

Speaking the FIA meeting in Singapore, Christy Goldsmith Romero compared the typical crypto investor, who may be of modest means, with the investors the CFTC is used to.

United States Commodity Futures Trading Commission (CFTC) commissioner Christy Goldsmith Romero spoke at the Futures Industry Association Asia Derivatives Conference in Singapore on Nov. 30. She talked about “how to harness the best that technology offers, while protecting against emerging threats,” with particular emphasis on cybersecurity and crypto.

Goldsmith Romero had two proposals for protecting consumers and markets from the risks presented by cryptocurrency. The first was rather novel: “Protecting household retail investors starts with redefining who is a retail investor,” Goldsmith Romero said. Crypto investors are different, she said:

“Most are young-born after 1980, diverse, and make less than $50k a year. That is not the typical customer that the CFTC is used to seeing.”

Thus, they should not be treated the same, Goldsmith Romero reasons. “We also should not let them be crushed, which will happen without meaningful and targeted customer protections,” she said, while acknowledging the need to maintain financial inclusivity.

Goldsmith Romero suggested creating two categories of retail investors “separating household retail from professional and high net worth individuals.” After that, the CFTC would provide consumer protections across that division and for each categories individually.

In traditional finance, a broker plays a role in determining the appropriateness of an investment for a consumer. In disintermediated transactions, “it is important for regulators to assess risk to customers,” she said. Moreover:

“Today, I am calling publicly for the first time for the CFTC to invoke heightened supervision of crypto exchanges. […] It is well within our existing authority for derivatives exchanges.”

The CFTC has not heeded her calls “for months” to implement that supervision, however. Goldsmith endorsed CFTC Commissioner Caroline Pham’s call for an office of retail investor advocate.

Goldsmith Romero digressed in her speech to discuss blockchain use cases unrelated to cryptocurrency. “Distributed ledger technology has the potential to prevent disease, keep food safe, limit waste, and save our agricultural industry time and money,” she said.

Goldsmith Romero was nominated for a CFTC chair by U.S. President Joe Biden in September 2021 and sworn in on March 30. She has voiced her concerns about retail investors before and received some industry support for her proposed household retail investor category.

US Senate committee schedules FTX hearing for Dec. 1, CFTC head to testify

The hearing, titled ‘Why Congress Needs to Act: Lessons Learned from the FTX Collapse’, will be one of the first in which U.S. lawmakers explore what happened with the exchange.

The United States Senate Agriculture Committee has announced that Commodity Futures Trading Commission, or CFTC, chair Rostin Behnam will be one of the witnesses in a hearing exploring the collapse of crypto exchange FTX.

According to the Senate Agriculture Committee website, on Dec. 1 the full committee will listen to testimony from Behnam and presumably other individuals with information about the liquidity issues and subsequent downfall of FTX. The hearing, titled ‘Why Congress Needs to Act: Lessons Learned from the FTX Collapse’ will be one of the first in which U.S. lawmakers explore what happened with the major crypto exchange and former CEO Sam Bankman-Fried.

News: On December 1 @SenateAgDems + @SenateAgGOP will hold a hearing about the FTX collapse and the need for congressional action.

— Senate Ag, Nutrition, & Forestry Committee Dems (@SenateAgDems) November 21, 2022

The U.S. House Financial Services Committee said on Nov. 16 it will be holding a similar hearing “into the collapse of FTX and the broader consequences for the digital asset ecosystem” in December, but the event did not appear in the committee’s calendar at the time of publication. The committee said it expected to hear from Bankman-Fried, Alameda Research, and Binance, but did not specifically mention testimony from federal regulators like those at the Securities and Exchange Commission or CFTC.

Lawmakers on both sides of the aisle in both chambers of Congress as well as the White House have hinted at the need for regulatory clarity or additional regulations in the wake of FTX’s collapse. On Nov. 10, White House Press Secretary Karine Jean-Pierre suggested that “prudent regulation of cryptocurrencies is indeed needed” in response to crypto firms without proper oversight.

Since filing for bankruptcy and resigning as FTX’s CEO on Nov. 11, Bankman-Fried has become the target of global regulators investigating the exchange, including Turkey’s Financial Crimes Investigation Agency, authorities in the Bahamas, and U.S. state and federal agencies. Reportedly still based in the Bahamas, Bankman-Fried may be extradited to the U.S. for questioning — it’s unclear whether he will be available to speak before either the House or Senate committee hearings.

CFTC Commissioner Mersinger says the time has come for action on crypto regulation

The commissioner said Congress may have to intervene in relations between the regulating agencies, but both have a role to work out; until then the burden is on the states.

United States Commodity Futures Trading Commission (CFTC) commissioner Summer Mersinger suggested that the time to act on cryptocurrency regulation may have arrived. Speaking at the Texas Blockchain Summit on Nov. 18, Mersinger considered what it may take for effective crypto regulation in the United States.

“Lately it’s probably been 70-80% of what we talk about,” Mersinger said of crypto. “We are clearly in a situation where we need to stop, we need to gather the facts, we need to understand what’s happening […] to move policy ahead.”

Mersinger saw forward movement in the process. “We are getting to the point that maybe we are past the education stage and now it’s the action [stage],” she said. “But it’s an interesting political question because it isn’t partisan issue.”

CFTC Commissioner Summer Mersinger at @txblockchain1 Summit.

Cc @lee_bratcher @blockcoalition @cascadiacounci1 @wtia pic.twitter.com/sLtlHp4MfS

— Arry (@ArryinSeattle) November 18, 2022

The CTFC and Securities and Exchange Commission will work out jurisdictional issues eventually, Mersinger continued. “There’s a role for both, we just have to figure out to make it work,” she said. They may need some help:

“Congress may have to say, ‘No, no, no, you really have to work together. […] And here’s when you’re going to meet and here’s what you’re going to talk about.’”

Real-time proof of reserves may be part of digital asset regulation in the future. “We expect that from our regulated entities. We don’t ask for it every day, but we can. And I think that’s fair,” Mersinger said. “Maybe the control is decentralized, but you take customer funds and you put them in this central location that the regulators know about and see and can check.”

In the meantime, “Until there’s some decision at the federal level, the states are the first line of defense,” Mersinger said. “Sometimes in Washington we forget that the states were the first actors and the first regulators here and that they play an important role. I think a lot of times states get left out of the conversation, and that’s unfortunate.”

Mersinger, a Republican, was nominated to the CTFC by President Joe Biden in December. She dissented from the commission’s treatment of Ooki DAO, calling it regulation by enforcement.

US regulator touts ‘aggressively’ policing crypto in new report

The Commodity Futures Trading Commission says 20% of its enforcement actions were aimed at the digital assets market in the 2022 fiscal year.

The United States commodities regulator certainly doesn’t want to look like it’s going easy on crypto, revealing it was behind 18 separate enforcement actions targeting digital assets in the 2022 fiscal year.

In an Oct. 20 report from the Commodity Futures Trading Commission (CFTC), a total of 82 enforcement actions were filed in 2022’s fiscal year, imposing $2.5 billion in “restitution, disgorgement and civil monetary penalties either through settlement or litigation.”

The CFTC said that 20% of the enforcements were aimed at digital asset businesses, with hairman Rostin Behnam stating:

“This FY 2022 enforcement report shows the CFTC continues to aggressively police new digital commodity asset markets with all of its available tools.”

One of the more recent CFTC enforcement actions that gained notoriety in the crypto world was a $250,000 penalty against bZeroX, its successor Ooki DAO, and its founders in September.

The action sparked fierce criticism from the community for going after the members of a decentralized autonomous organization (DAO), with CFTC Commissioner Summer Mersinger labeling the move “blatant ‘regulation by enforcement.’”

The CFTC also highlighted actions taken during the year against the operators of the Digitex Futures exchange for illegal futures offerings, manipulation of its native token, DGTX, and failure to provide a customer identification and Anti-Money Laundering program.

It also took action against Bitfinex for engaging in “illegal, off-exchange retail commodity transactions in digital assets with U.S. persons,” and operating without registering as a futures commission merchant.

Meanwhile, the report pointed to action against Tether Holdings for making “untrue or misleading statements” and “omissions of material” in connection with its Tether (USDT) stablecoin was ordered to pay a civil monetary penalty of $41 million.

It also targeted South African pool operator and CEO Cornelius Johannes Steynberg with fraud charges for accepting around 29,400 Bitcoin (BTC), worth over $1.7 billion, from approximately 23,000 non-eligible contract participants from the United States in late June.

The crypto industry had previously favored the CFTC for being easier on digital asset regulation. However, Chairman Rostin Behnam has vowed to come down hard on the asset class, saying “‘Don’t expect a free pass” earlier this month.

Both the CFTC and Securities and Exchange Commission are currently wrangling for control of crypto-asset regulation.

A bill submitted by Senators Cynthia Lummis and Kirsten Gillibrand in June proposes that the CFTC oversee crypto regulation, which would be much better for the industry, as the assets would be considered commodities rather than securities, which have much more stringent rules.

However, Congress is unlikely to turn its attention to digital asset regulation until sometime next year, as confirmed by Representative Jim Himes this week.

‘Secretly circulating’ draft crypto bill could be a ‘boon’ to DeFi

A crypto bill that industry advocates previously said would “kill DeFi” has seen an updated draft released online, with one commentator saying the U.S. is “finally getting their act together.”

A new draft of the Digital Commodities Consumer Protection Act (DCCPA) bill has started to circulate online, with some commentary suggesting it could be positive for decentralized finance (DeFi) and crypto.

A prior draft version of the bill drew heavy criticism from industry representative bodies for containing too broad a definition for a “digital commodity platform,” which “could be interpreted as a ban on decentralized finance (DeFi).”

In a newly posted 31-page draft bill shared by Delphi Labs’ general counsel Gabriel Shapiro, the lawyer said he made the draft bill publicly available as he believes in “transparency and open discussion.”

Shapiro remarked on a section amending the meaning of a “digital commodity trading facility” which excluded persons who develop or publish software, commenting that it “could be a boon” to DeFi and crypto.

Notably, this version contains a limited exception to the term “digital commodity trading facility” which would exclude persons who solely develop or publish software–this could be a boon to DeFi/crypto. pic.twitter.com/0pa843RJ9h

— _gabrielShapir0 (@lex_node) October 19, 2022

Martin Hiesboeck, head of research at crypto exchange UpHold, tweeted that the newly released draft seems to follow similar regulations in the European Union and the United Kingdom, suggesting that the United States is “finally getting their act together.”

First impression: leaked #CFTC Bill seems to follow UK/EU reg in broad strokes even though it uses similar somewhat different terminology. Will prepare a detailed report by tomorrow. US finally getting their act together. All good.

— Dr Martin Hiesboeck (@MHiesboeck) October 19, 2022

The comments are a change of tone from the previous version of the bill, which was described by Web3 incubator and advocacy group Alliance DAO as one that “kills DeFi.”

The decentralized autonomous organization (DAO) wrote that the bill “creates a compliance architecture that precludes the concept of a system of smart contracts operating decentralized infrastructure with little or no reliance on human activity,” as it required people to enforce compliance with the regulations.

There have long been calls for regulatory clarity regarding digital assets in the United States, with some calling on the U.S. Congress to pass legislation defining commodities and giving jurisdiction to the CFTC.

First introduced in August the DCCPA extends the regulatory power of the Commodities Future Trading Commission (CFTC) on the cryptocurrency industry and attempts to define certain cryptos, such as Bitcoin (BTC) and Ether (ETH) as commodities rather than securities.

Bankman-Fried ‘100%’ supports knowledge tests for retail derivatives traders

The FTX founder said a knowledge test for derivative retail customers “could make sense,” but it doesn’t need to be specific to crypto.

The founder and CEO of cryptocurrency exchange FTX, Sam Bankman-Fried, has backed the idea of knowledge tests and disclosures to protect retail investors but said it shouldn’t just be crypto-specific.

Bankman-Fried tweeted his thoughts in response to an idea floated by the United States Commodities Future Trading Commission (CFTC) commissioner Christy Goldsmith Romero on Oct. 15, saying the establishment of a “household retail investor” category for derivatives trading could give greater consumer protections.

Romero said due to crypto, more retail investors are entering the derivatives markets and called for the CFTC to separate these investors from professional and high-net-worth individuals and have “disclosures written in a way that regular people understand or could be used when weighing rules on the use of leverage.”

Derivatives trading is when traders speculate on the future price of an asset, such as stock, commodities, fiat currency, or cryptocurrency through the buying and selling of derivative contracts, which can involve leverage.

The FTX founder said he “100%” agrees with mandating disclosures and knowledge tests for all Future Commissions Merchants (FCMs) and Designated Contract Markets (DCMs) who face retail traders, adding it “could make sense.”

He added, however, that it doesn’t “necessarily make sense” for the disclosures and tests to be specific to cryptocurrencies, suggesting these should apply to all derivative products.

DCMs are CFTC-regulated derivate exchanges on which products such as options or futures are offered which can only be accessed through an FCM, which accepts or solicits buy and sell orders on futures or futures options contracts from customers.

Bankman-Fried’s comments come as FTX.US, FTX’s United States-based entity, looks to launch cryptocurrency derivatives trading, and the exchange has already created a knowledge test that could be used for its platform, according to Bankman-Fried.

The CFTC is ramping up its efforts to become the regulator of choice for the U.S. crypto market as calls for regulatory clarity become more persistent.

On Sept. 27 CFTC Commissioner Caroline Pham said the regulator should create a crypto retail investor-focused office to expand its consumer protections. The proposed office would be modeled off a similar office at the Security and Exchange Commission (SEC).

Bankman-Fried ‘100%’ supports knowledge tests for retail derivatives traders

The FTX founder said a knowledge test for derivative retail customers “could make sense” but it doesn’t need to be specific to crypto.

The founder and CEO of cryptocurrency exchange FTX, Sam Bankman-Fried has backed the idea of knowledge tests and disclosures to protect retail investors but said it shouldn’t just be crypto-specific.

Bankman-Fried tweeted his thoughts in response to an idea floated by the Commodities Future Trading Commission (CFTC) commissioner Christy Goldsmith Romero on Oct. 15, saying the establishment of a “household retail investor” category for derivatives trading could give greater consumer protections.

He added however that it doesn’t “necessarily make sense” for the disclosures and tests to be specific to cryptocurrencies, suggesting these should apply to all derivative products.

Bankman-Fried’s comments come as FTX.US, FTX’s United States-based entity, looks to launch cryptocurrency derivatives trading and the exchange has already created a knowledge test that could be used for its platform according to Bankman-Fried.

The CFTC is ramping up its efforts to become the regulator of choice for the U.S. crypto market as calls for regulatory clarity become more persistent.

On Sept. 27 CFTC Commissioner Caroline Pham said the regulator should create a crypto retail investor-focused office to expand its consumer protections, the proposed office would be modeled off a similar office at the Security and Exchange Commission (SEC).