Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam pushed lawmakers Thursday to create a regulatory framework for digital assets following a rocky year in the cryptocurrency industry, including the recent astonishing collapse of the FTX exchange.
Members of the Senate Agriculture Committee pressed Behnam over whether FTX’s failure could have been prevented with better oversight.
It was the first of several hearings planned to put the failure, which has spread through the industry to cause the bankruptcy of BlockFi and financial challenges at firms like Genesis and Gemini, under a microscope.
The CFTC is limited in its ability to register cash market exchanges, Behnam said, and “that’s what concerns” him.
“This is the gap that exists," he said. "If we don't do something, customers will continue to lose money and we're going to be right back here in a couple months."
Despite its eventual spectacular collapse, FTX founder and former CEO Sam Bankman-Fried met with Behnam 10 times and had numerous follow-up calls to discuss FTX subsidiary LedgerX’s derivatives clearing organization (DCO) application, which would have allowed the firm to directly clear customer trades.
LedgerX has since pulled its DCO application. It’s the only subsidiary not included in FTX’s bankruptcy filing, which occurred on Nov. 11 following a rollercoaster week of $6 billion withdrawals from the platform and an unsuccessful rescue attempt by rival exchange Binance.
Bankman-Fried, long known as crypto’s white knight and whiz kid, had made a name for himself as a welcome of regulation. Following the company’s downfall, he made anti-regulator comments to a Vox reporter but did an about-face on Twitter by saying, “It’s *really* hard to be a regulator.”
The CFTC, which oversees derivatives markets, does not have the power to regulate spot markets or markets where commodities are traded for instantaneous delivery.
Behnam, in the past, has asked lawmakers to give the CFTC more authority to regulate digital assets and used the hearing to continue such requests.
"The CFTC has many tools at its disposal to try to make defrauded customers whole, but the process is long and arduous, and sometimes there is no way to return all of what was lost," Behnam said.
The hearing also included a discussion of what regulator should have primary oversight of the crypto market. Behnam expressed that the CFTC should be in charge of that oversight, but U.S. Securities and Exchange Commission Chairman Gary Gensler has previously expressed that he expects the SEC to be the crypto market’s primary regulator because he views most tokens as securities.
Comparing cryptocurrency today to nuclear physics in the 1940s, Senator Roger Marshall, R-KS, said, “Two weeks ago, a nuclear bomb went off in the financial world. We know as with nuclear physics, there can be good, there can be bad from it — just like as we try to understand and think about the uses of digital currency, we all understand there's an upside to it. But there's definitely a downside to it. … Do you think that crypto should be held to the same standards as banking?” Marshall asked.
“I think our banking and market regulations are sound, they've worked well and they've proven to be efficient and effective,” Behnam said. “And as the [Digital Commodities Consumer Protection Act] does, we should essentially model any regulation around crypto off of what has worked in the past.”
Behnam also suggested that lawmakers "take a pause" and reexamine a previously introduced bill that would guide digital commodities’ regulatory framework following the FTX bankruptcy to increase provisions around disclosures of financial information and conflicts of interest.
The House Financial Services Committee will hold a series of hearings addressing the collapse of FTX starting Dec. 13.
On Friday, U.S. Representative Maxine Waters, D-CA, and chair of the House Financial Services Committee tweeted to Bankman-Fried, “[Sam], we appreciate that you've been candid in your discussions about what happened at #FTX. Your willingness to talk to the public will help the company's customers, investors, and others. To that end, we would welcome your participation in our hearing on the 13th.”