Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam implied that if a regulatory framework had been in place, the FTX collapse might not have been avoided. However, he highlighted the reasons it would be less likely. He also justified the “many meetings” he had with the FTX team over their application for CFTC rule changes for crypto derivative trading.
At the Financial Times Crypto and Digital Assets Summit, Behnam was asked whether recent events in the cryptocurrency sector have strengthened the need to regulate the crypto cash market, over which the CFTC has no regulatory or supervisory oversight. It only has enforcement authority when someone complains.
“We have to talk about the FTX matter obviously,” said Behnam. “I can’t suggest that if we had a regulatory framework over FTX, specifically the non-US entities, it would have not happened.”
However, he outlined the standard tools he hopes will be enacted in future regulation to give the CFTC the authority to regulate the cash market for commodity cryptos. These include steps to:
- prohibit co-mingling of house money and customer money
- use registered custodians to separate customer money
- require books and records for audit at least annually
- require reporting for post trade
- provided equal access and a fair and transparent order book.
Reports from the new FTX CEO show the company failed to live up to every one of those points, although shockingly, FTX did get audited.
Behnam also highlighted that one of the few FTX subsidiaries that did not enter Chapter 11 bankruptcy was Ledger X, the CFTC-regulated derivatives firm. Before the new FTX CEO commented on the lack of records, we observed that only Ledger X and the regulated Japanese subsidiary seemed to have proper finance staff.
Would the CFTC be a lighter touch than the SEC?
Two issues came up about divvying up crypto regulation between the CFTC and SEC. The first is the dividing line between which cryptocurrencies are considered commodities versus securities.
“A vast majority of tokens are likely securities,” said Behnam. “But there are a few at least – I’ve said publicly that I believe Bitcoin and Ether are commodities. But at a minimum we know, at least in the U.S., that Bitcoin is a commodity.”
Behnam sees the divide between a security and commodity is less of a big deal compared to what some are making it out to be.
“We’ll have to figure it out over time. At this point, the only certainty we have is a decision by a judge in a few districts here in the U.S. that has clearly determined that Bitcoin is a commodity. Other than that, we have no clear determination. We’re going to have to get a set of rules and precedent and build off of that over time.”
Behnam pushed back on the idea that the CFTC would be a lighter touch regulator than the SEC. He said the issue is it doesn’t have enforcement authority over the cash commodity market. Most of the CFTC’s work relates to wholesale markets where derivatives are used for risk management. In contrast, cryptocurrency mainly involves retail investors and speculation.
The CFTC Chair envisions the CFTC regulating part of the market and the SEC handling the rest, with no gaps where tokens can go unregulated.
Many meetings with FTX
Last year FTX applied for changes to regulations to allow end users to trade crypto derivatives directly from its platform without a broker acting as an intermediary. That application has recently been withdrawn following the FTX collapse.
In July, then FTX CEO Sam Bankman-Fried told the Wall Street Journal, “We’re going to have a more complete set of customer protections, disclosures and suitability checks in place than currently exists in the futures industry.” He added, “If anything, we’ll be going a little bit overboard on that.” Those comments did not age well.
Chair Behnam acknowledged that he’d personally had many meetings with FTX. He said, “they very aggressively advocated across Washington for the amendment.” The CFTC Chair highlighted his legal obligation to respond to the application.
“FTX and its management team came in quite frequently and wanted to meet and advocate. Look, if I’m in Washington and someone’s willing to come to Washington and I have time, I’m going to take that meeting. I’m going to remain accessible and want to learn and want to be fair. This was such an important issue not only relative to FTX.” As he pointed out, it would potentially impact the structure of derivatives markets and beyond.
“As the Chairman of the agency, I wanted to be squarely involved to make sure I was seeing what was happening in terms of the process and all parties were involved and felt like they had a fair opportunity to share their input.” His conclusion was that it was a fair, open and transparent process.
