CFTC Chair Responds to FTX Collapse, Acknowledges Multiple Meetings – Ledger Insights

Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam suggested that if a regulatory framework had been in place, the FTX collapse might not have been avoided. However, he highlighted the reasons why that would be less likely. He also cited the “numerous meetings” he had with the FTX team over their application for CFTC rule changes for crypto derivatives trading.

At the Financial Times Crypto and Digital Assets Summit, Behnam was asked whether recent events in the cryptocurrency sector have reinforced the need to regulate the cryptocurrency market, over which the CFTC has no regulatory or supervisory oversight. It only has enforcement authority when someone complains.

“Obviously, we need to talk about the FTX case,” Behnam said. “I cannot suggest that if we had a regulatory framework over FTX, specifically the non-US entities, it would not have happened.”

However, he outlined the standard tools he hopes will be adopted in future regulation to empower the CFTC to regulate the commodity crypto cash market. These include steps to:

• prohibit the mixing of house money and customer money
• use registered custodians to separate customer money
• require books and records for audit at least annually
• requires reporting for after-sales
• given equal access and a fair and transparent order book.

Reports from the new FTX boss show that the company failed to live up to all these points, although shockingly FTX was 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 financial staff.

Would the CFTC be a lighter touch than the SEC?

Two questions arose about dividing crypto regulation between the CFTC and the SEC. The first is the dividing line between which cryptocurrencies are considered commodities versus securities.

“A large majority of tokens are probably securities,” Behnam said. “But at least there are a few — I’ve said publicly that I think Bitcoin and Ether are commodities. But at least we know, at least in the United States, that Bitcoin is a commodity.”

Behnam sees the distinction between a security and a commodity as less of a big deal compared to what some make of it.

“We will have to find out over time. At this point, the only certainty we have is a decision by a judge in a few districts here in the US that has clearly ruled that Bitcoin is a commodity. Beyond that, we have no clear decision. We have to get a set of rules and precedent and build on that over time.”

Behnam pushed back on the idea that the CFTC would be a lighter-touch regulator than the SEC. He said the problem is that it has no enforcement authority over the cash 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 loopholes where tokens could become unregulated.

Many meetings with FTX

Last year, FTX applied for regulatory changes to allow end users to trade crypto derivatives directly from its platform without a broker acting as an intermediary. This 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 due diligence checks in place than currently exist in the futures industry.” He added: “If anything, we’ll go a little overboard on that.” These comments did not age.

Chairman Behnam acknowledged that he had personally had many meetings with FTX. He said, “they advocated very aggressively all over Washington for the change.” The CFTC chairman highlighted his legal obligation to respond to the application.

“FTX and its leadership team came by quite often and wanted to meet and advocate. Look, if I’m in Washington and somebody is willing to come to Washington and I have the time, I’ll take that meeting. I’m going to stay available and wanting to learn and wanting to be fair. This was such an important issue, not just in relation to FTX.” As he pointed out, that would potentially affect the structure of derivatives markets and beyond.

“As chair of the agency, I wanted to be directly involved to make sure I saw what was happening in terms of the process and that all parties were involved and felt they had a fair opportunity to share their input.” His conclusion was that it was a fair, open and transparent process.