CFTC Chair Rostin Behnam Says Stablecoins Are Commodities At Senate Agriculture Hearing

Rostin Behnam, CFTC

Today’s Commodity Futures Trading Commission (CFTC) oversight hearing by the Senate Agriculture Committee was broad in its remit as CFTC Chair Rostin Behnam provided an overview of the latest and greatest at his agency.

Video is here.

Chairwoman Sen. Debbie Stabenow’s (D, MI) opening remarks made clear digital assets were on the agenda with an allusion to recent events in digital assets such as the FTX implosion saying, “The massive customer losses caused by this misconduct highlight exactly why we need federal oversight of the crypto industry, and I remain committed to working with my colleagues to hold crypto companies to the same rules as traditional financial firms.”

In spite of the beginning of the hearing, the Digital Commodity Consumer Protection Act (DCCPA) was barely discussed thereafter as was any new specific new digital assets legislation that could come out of Senate Ag.

Ranking Member Sen. Boozman (R, AR) followed with his opening remarks which were complimentary of the CFTC and Behnam. The remarks briefly touched on digital assets: “I am confident the CFTC is suitable for an expanded role in regulating the digital commodity spot market. I am committed to working with Chairwoman Stabenow and our colleagues to create the safeguards the market needs.” Also, Sen. Boozman said that he appreciated the CFTC’s use of “No Action” letters in managing commodity and futures markets perhaps reflecting a more “light touch” approach to regulation by Republicans.

CFTC Chair Behnam built on Stabenow’s and Boozman’s themes and expressed the continued need for comprehensive regulation in digital assets in his opening remarks. He repeated what he has said many times before: “In the absence of direct regulatory and surveillance authority for digital commodities in an underlying cash market, our enforcement authority is by definition reactionary; we can only act after fraud or manipulation has occurred or been uncovered.”

Opening statements:

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Partisan Divide On Display In Senate Banking Crypto Crash Hearing

Crypto Crash

This morning’s 90-minute Senate Banking hearing, “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets,” offered a snapshot of the partisan divide existing on the committee as it relates to crypto. See the hearing’s video.

    • Democrats focused on fraud, illicit financing and consumer protections with some exceptions.
    • Republicans focused on innovation with consumer protections and blamed the Securities Exchange Commission (SEC) and its Chair, Gary Gensler, for part of crypto’s problems.
    • SBF: The damage done to digital asset legislation prospects by former FTX CEO Sam Bankman Fried cannot be overstated.

Senate Banking Chair Senator Sherrod Brown (D, OH), who controls the agenda on the Committee on behalf of the Democratic majority, expressed skepticism about the efficacy of cryptocurrency from the start which helped set the tone for the day.

The three witnesses present for the hearing were from academia:

    • Mr. Lee Reiners, Duke Financial Economics Center (testimony)
    • Professor Linda Jeng, Georgetown Institute of International Economic Law (testimony)
    • Professor Yesha Yadav, Vanderbilt University Law School (testimony)

Within the prepared testimony, Mr. Reiners, a critic of the crypto industry, suggests that bipartisan stablecoin legislation should be possible.

Mr. Yadav argues for an SRO (self-regulatory organization) “Opting into an SRO model gives industry a chance to take advantage of this crisis, to engage in reform, mature, and to innovate…”

Ms. Jeng, who is also Chief Regulatory Officer & General Counsel at industry trade organization Crypto Council for Innovation, has previously served in financial regulation roles in the U.S. government including Treasury. She showed her industry tilt by concluding her testimony with a request for Committee members on creating effective legislation, “… moving the dial, whether it be on consumer and investor protection, or financial inclusion, requires understanding the technology, its limitations, and opportunities – and having a builder’s mentality.” In other words, legislation should not be about consumer protections exclusively.

the hearing – Chair and Ranking Member

Chair and Senator Brown started off the hearing with listing all the lowlights for crypto in the past year mentioning “high fees, outright theft” associated with crypto in addition to the multiple implosions including FTX – making note of the Senate’s December hearing on FTX.

Everything… everything about crypto was bad in the Senator’s estimation, “When it comes to crypto, it doesn’t favor the brave, it favors wealthy insiders. (…) It was an industry created to skirt the rules.” He advocated for legislation and reminded that “access to financial markets is a privilege and not a right.” See the press release for Brown’s opening statement.

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Senate’s FTX Hearing Highlights Fraud Vs Crypto Skeptic Debate

Senate Banking

The Senate Banking Committee convened another Congressional hearing today about the FTX implosion titled, “Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers”.

See the video of the hearing.

Yesterday’s House Financial Services Committee hearing on FTX was hard to top with the current CEO of FTX delivering an indictment of the past CEO Sam Bankman-Fried (SBF), his company’s past performance and even the Bahamian government.

Chair and Sen. Sherrod Brown’s (D, OH) opening statement did not hesitate to address his extreme skepticism of crypto with nothing redeeming to say about the digital currency industry and blockchain technology. He added, “Crypto doesn’t get a free pass because it’s shiny and bright.”

National security, Facebook’s Libra, terrorist financing and more were examples of crypto’s effects that had metastasized for Sen. Brown into a global blight.

Conversely, Ranking Member Sen. Toomey (R, PA) sought to differentiate between the alleged fraud of FTX and the software, code and innovation activating cryptocurrency today.

Sen. Toomey chided those who wanted to stop crypto saying that it cannot be and, in fact, represents a fundamental misunderstanding of the technology. He suggested that those who call for not addressing crypto with legislation at all are misguided. He promoted his own Stablecoin Transparency Act as an important step in providing guardrails for crypto’s growth, let alone the use of blockchain technology.

Continue reading “Senate’s FTX Hearing Highlights Fraud Vs Crypto Skeptic Debate”

FTX Had No Controls Says CEO John Ray At House Financial Services Hearing

House Financial Services Committee

With the arrest yesterday of FTX CEO Sam Bankman-Fried now in the rear-view mirror, House Financial Service Committee members undertook a review of the cryptocurrency exchange’s implosion with its current CEO John J. Ray who is overseeing the company’s bankruptcy proceedings.

The hearing titled, “Investigating the Collapse of FTX, Part I,” was led by Chairwoman Rep. Maxine Waters (D, CA) and Ranking Member Rep. Patrick McHenry (R, NC).  With Bankman-Fried’s appearance no longer possible due to his incarceration, there was  some measure of disappointment identified by both Waters and McHenry in the hearing’s opening statements. See the hearing video below.

McHenry made clear that he expects to hear from SEC Chair Gary Gensler “early and often” as the Ranking Member becomes Chair of the Committee in the next Congress. McHenry’s criticism of Gensler’s regulation by enforcement policy toward crypto is well-known.

Read all of McHenry’s opening statement.

Enter the new CEO

John J. Ray jumped right in with his criticism of the poor management, corporate malfeasance and inadequate security controls typical of his predecessors at FTX and its trading group, Alameda Research.

Read his complete opening testimony here.

As he concluded, Ray said:

“I would like to especially say to regulators – in the U.S. and abroad – that I completely understand the depth of outrage and frustration with what happened. I have instructed my team to cooperate as comprehensively and completely as possible, and much of our time so far has been spent on the truly herculean task of gathering and organizing information responsive to the many requests we have received.”

The Q&A

Reiterating themes from his testimony in the Q&A with Chairwoman Waters, Ray stated, “The operations of the FTX Group were not separated” – this is one reason U.S. regulators are even more interested.

FTX.us was not carved out of the international company. They were operated as one unit which violated the regulatory requirements for a U.S.-based cryptocurrency exchange. Mr Ray added, “There were no internal controls. There was no separateness.”

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Centralization Villain Gets More Hearings While Decentralization Watches

Hearings on FTX

With FTX continuing to burn like a sun that never sets, Congress is undertaking its review of the cryptocurrency exchange’s implosion with two hearings this week – one quotable,  the other that checks a box.

Hearing #1 – likely very quotable

On Tuesday, December 13 at 10:00a, Chairwoman Maxine Waters (D, CA), Ranking Member Patrick McHenry (R, NC) and the House Financial Services Committee convene a hearing titled  “Investigating the Collapse of FTX, Part I.” (Live stream)

The scheduled witness list for the House Financial Services hearing is exactly who you’d want, at a minimum, for a one-day hearing: the current CEO and the former one:

      • John J. Ray III, current Chief Executive Officer, FTX Group
      • Sam Bankman-Fried (SBF), Founder and Former CEO, FTX Group

Read the HFS Committee’s hearing memorandum here.

Mr. Ray is well-known for his work in corporate disasters such as Enron and Nortel where Mr. Ray led teams of lawyers to find the best way out possible for shareholders, creditors and customers alike. Read this profile from Ray’s hometown paper for more.

The ignominious FTX founder, SBF, created still more drama around “will he” or “won’t he” appear for the Committee in recent Twitter banter (1, 2, 3, 4) with Chairwoman Waters. As of this writing, he says he’ll appear -likely by video. Rumors had swirled whether Chairwoman Waters would use her subpoena powers to compel SBF to testify. Complicating matters was SBF’s Bahamian location.

It was only one year ago – almost to the day – that  SBF was throwing bouquets to House Financial Services after a Committee appearance and tweeting, “A huge thanks to @MaxineWaters, @PatrickMcHenry, and the whole House Financial Services Committee for having us today to talk about the future of digital assets. The meeting was productive and I’m really grateful for the engagement and thoughts from policymakers.”

With Chairwoman Waters and Ranking Member Rep. Patrick McHenry’s work on stablecoin legislation waiting in the wings, it would seem tough questions will be prepared for Mr. Bankman-Fried.

Top 10 questioners to watch on HFS:
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Senate Ag Committee Attempts To Resuscitate DCCPA, Distance From FTX

Senate Ag hearing

With the collapse of cryptocurrency exchange FTX not even a month old, the first FTX hearing commenced on Capitol Hill with the Senate Agriculture Committee questioning Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam yesterday in Washington D.C.

Overall, the hearing seemed to be a theater of positioning by Senate Ag intended to address…

    • Urgency – Senate Ag and the CFTC appeared to believe the Digital Commodity Consumer Protection Act (DCCPA) has more urgency than ever in light of the FTX collapse.
    • Overcoming the conflict of interest – Senate Ag and the CFTC endeavored to distance themselves from FTX and its founder Sam Bankman-Fried (SBF). The unspoken message is that FTX did not influence the creation of the DCCPA. On that note – and grasping for transparency, for example – CFTC Chair Behnam’s calendar in the past year was under the microscope which included 10 FTX meetings largely related to its subsidiary LedgerX and its DCO application – not DCCPA.
    • Refinement– Chair Rostin Behnam and Committee members urged that learnings from FTX’s implosion be incorporated into the new bill. In some ways, the refinement appears to be finding a way to bring companies like FTX onshore, which would have required the company to adhere to regulations that would have prevented the implosion in the first place.
    • Pause – In spite of the urgency, the need for refinement requires pause. DCCPA won’t be heading for a vote on the Committee or Senate floor until next year at the earliest. Chair Behnam advocated as much.

Hearing context

On its face, D.C. appears to be in soul-searching mode as it gropes for answers on how the FTX collapse occurred even though the company was based in the Bahamas. The krux of the concern, though, stems from the humiliation endured by unsuspecting lawmakers who had been courted and cajoled by FTX founder and CEO Sam Bankman-Fried.

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Senator Lummis Asks For Disclosure Requirements From SEC’s Gensler Before Next Congress

Senator Lummis

It was a relatively brief interaction, but in engaging with SEC Chair Gary Gensler at his Senate Banking Committee hearing last week, Sen. Cynthia Lummis (R, WY) provided an update on her bipartisan Responsible Financial Innovation Act (RFIA) co-sponsored with Sen. Kirsten Gillibrand (D, NY).

Senator Lummis also generated news about the SEC’s crypto disclosure requirements.

View at 1 hour 36 minutes of the video for Thursday’s hearing on oversight of the SEC.

Lummis told SEC Chair Gensler that she and Sen. Gillibrand expect to re-introduce the bill early in the new Congress next year.

In order to meet that deadline, she asked that Chair Gensler and SEC staff work with her and Gillibrand on Section 301 of the bill to understand the necessary disclosures required by digital asset companies.

Throughout the brief interaction, Sen. Lummis made multiple mentions of her Democratic colleague’s involvement appearing to signal to the Democrat Gensler, who was appointed by a Democratic administration, that this isn’t just a Republican initiative.

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Preview: SEC Budget for 2023 and House Appropriations Committee Meeting

House Appropriations

On Capitol Hill this Wednesday, Securities and Exchange Commission (SEC) Chair Gary Gensler will appear before the House Appropriations Committee to review the SEC’s 2023 budget proposal as it looks to continue to fulfill its mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

In late March, the SEC submitted its budget “justification” to Congress (PDF) as a precursor to the meeting and revealed several areas in which it expects to continue to engage crypto markets in 2023.

Side note: there are no members of the Congressional Blockchain Caucus on the House Appropriations Committee.

Enforcement

Following up on the SEC’s recent announcement of doubling positions related to crypto enforcement this year, the 2023 budget justification outlines a request for 125 additional positions in the Department of Enforcement (ENF) to help enforce regulations across financial assets – including crypto:

“ENF requests 125 additional positions to enhance the division’s ability to timely pursue the wide variety of misconduct within the SEC’s remit. They will also strengthen ENF’s capabilities to investigate new and emerging issues, including crypto-asset markets, cyber-related risks, and the environmental, social, and governance space. Finally, it is expected that the number of litigated cases will continue to rise as ENF increasingly holds wrongdoers accountable for their misconduct with more meaningful and, in some instances, escalating sanctions. ENF requires additional resources to ensure that it has an adequate number of attorneys to staff the increasing number of litigated cases.”

The ENF only accounts for an increase of 63 full-time employees in the justification’s line item – from 1302 in 2022 to 1365 in 2023 .

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