Commodity Futures Trading Commission Chairman Rostin Behnam urged senators to strengthen conflict of interest and financial disclosure provisions for cryptocurrency entities in a key piece of legislation in light of the collapse of the FTX exchange.
The circumstances around the FTX implosion merit a closer look at a bill introduced by Senate Agriculture Chairwoman Debbie Stabenow, D-Michigan, and co-sponsored by ranking member John Boozman, R-Arkansas, Behnam said at a committee hearing Thursday. He added that Congress would have to balance getting legislation right and moving quickly to prevent future harm.
“It’s important that we tighten the conflicts of interest provisions because of the egregious nature of what we learned with FTX,” Behnam said. “Disclosures to customers about financial resources also will be an important issue to address.”
FTX collapsed and filed for bankruptcy in early November after a run on customer accounts prompted by reports that Alameda Research, its affiliated trading arm, stood on shaky financial ground. FTX reportedly lent Alameda billions of dollars.
The legislation would prevent similar collapses from happening in the future by handing jurisdiction of digital commodity spot markets to the CFTC, Behnam said. The commission currently lacks the authority to police cryptocurrency spot markets unless tipped off to potential fraud or manipulation in those markets, he said.
“Every enforcement action we bring in the digital asset space is because someone comes to us, and that is not healthy,” Behnam said. “There is a whole area in the shadows. We need registration of exchanges. We need surveillance of market activity. We need direct relationships with custodians, who are holding customer money so that we can prohibit and prevent money moving around that isn’t house money. There are so many tools in a comprehensive regulatory framework that will put us as boots on the ground.”
Those basic market regulations aren’t possible without legislation that grants the CFTC authority over digital commodity spot markets, Behnam said.
The Stabenow-Boozman bill as drafted would address many of the most egregious issues learned so far about FTX’s actions and collapse, including the custody of funds, regulator access to company records and adequate resources on-hand, he said.
Stabenow said after the hearing the committee would plan to mark up the legislation in the new year.
‘Not a power grab’
Behnam and members of the committee defended the Stabenow-Boozman bill against criticism from both consumer advocates and some corners of the cryptocurrency ecosystem.
Consumer advocates characterized the bill and its designation of the CFTC as the primary regulator of digital assets and trading platforms as too industry friendly. The bill would define bitcoin and ether, the two biggest cryptocurrencies, as digital commodities. The Securities and Exchange Commission would retain jurisdiction over digital assets that are deemed securities.
“The DCCPA (Stabenow-Boozman bill) and other similar bills are not a power grab. It is filling a gap in the commodity cash market,” Behnam said. “If we don’t fill the gap, there will be fraud and there will be customer losses in the future. I am confident the CFTC and the SEC, I’m committing to you, that we will work together. We will figure out a path forward to have a reasonable, productive and effective means to figure out what is a security token and what is a commodity token, and who should regulate.”
Sen. Richard J. Durbin, D-Illinois, said he worried political spending by the cryptocurrency industry would undermine the CFTC’s efforts if it were designated as the primary regulator, given its reliance on annual appropriations. The SEC, by contrast, is funded by fees charged to the entities it oversees, though its funding level is still set by Congress through the appropriations process.
“The cryptocurrency people are active politically and they are trying to achieve a political end here,” Durbin said. Former FTX CEO Sam Bankman-Fried gave $2,900 to Durbin’s campaign and $5,000 to his leadership PAC in March, a fact that Durbin said he was unaware of until asked about it by a reporter outside the hearing room.
“Mr. Bankman-Fried, my contributor, and people just like him are going to be spending a lot of money to make sure there’s as little regulation as possible,” Durbin said. “And unfortunately, you are a captive of a process that is driven by politicians, like myself. So what assurance do we have that you’re going to have adequate resources, the staff, the technology, the people, over and above the authority to execute any kind of meaningful regulation of an industry, which is almost impossible to describe, let alone regulate?”
Sen. Cory Booker, D-New Jersey, raised the criticism from both consumer and cryptocurrency groups that the bill was too closely associated with Bankman-Fried, FTX and their priorities.
“It’s been widely discussed in the media that the Stabenow-Boozman bill, which I’m proud to co-sponsor, is an SBF bill or an FTX bill. This doesn’t match any experience I’ve had with the legislative process,” Booker said, referring to Bankman-Fried by his initials. “Sam Bankman-Fried did give a lot of feedback, as did many others from industry, from academia, from the policy community, from your shop and beyond. And everyone’s feedback was considered.”
