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…
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- 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.
Fried’s involvement in the creation of Senate Ag’s DCCPA as well as his campaign donations targeting elections this Fall have sullied legislative efforts to-date but may ironically help expedite legislation – potentially even less industry-friendly than before given the loss of trust by Congress in the crypto world.
No one is blaming Behnam for FTX specifically – at least not yet. Up until 2017, Behnam worked directly for Chairwoman Senator Debbie Stabenow of Michigan as her Senior Counsel.
Hearing proceedings
Senator Stabenow began the meeting by reinvigorating the need for DCCPA saying crypto spot markets require regulation.
She stated two goals for the day’s hearing with Chair Behnam:
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- Elucidating what went wrong at FTX
- Make sure DCCPA addresses the risks represented by FTX
She also noted that LedgerX, a part of FTX and registered with the SEC, remains solvent today with responsible management.
Senate Ag Ranking Member and Sen. John Boozman (R, AR) spoke next and emphasized why the CFTC is the right agency for the complex markets of digital commodities. He believed that a bill such as DCCPA would help prevent an implosion such as FTX’s. Sen. Boozman reasoning follows that the on-shoring effects of DCCPA would compel companies to do business in the robust U.S. markets under its strict but safe regulatory guidelines.
Sen. Boozman added some color on his meeting calendar in his own opening statement that “long before FTX’s collapse, the Chairwoman (Sen. Stabenow) and I began work drafting legislation to address the need for regulation in digital commodity spot markets. Speaking for myself, I can tell you that between my staff and I, we have had a transparent process taking at least 240 meetings this year with a wide variety of stakeholders that informed the legislation that was introduced in August and continues to inform my thinking as Chairwoman Stabenow and I refine the DCCPA.”
Or put another way, we weren’t just meeting with SBF.
Behnam’s statement
Chair Behnam offered his opening statement (read) on the importance of pushing through DCCPA in order to address an unregulated industry because he said, “many Americans invested in a novel product and will likely lose money because digital asset markets lacked the basic protections that we have all come to expect and it made American financial markets the envy of the world.”
Q&A
Sen. Stabenow began the Q&A portion of the hearing which allowed Behnam to again address an “elephant in the room” – undue influence by FTX on the CFTC.
Behnam specifically identified 10 meetings over 14 months in which the CFTC was involved with FTX and LedgerX’s DCO application. He emphasized that the number of meetings was a function of his agency responding to any application – there was no special treatment in other words. Ultimately, FTX and its subsidiary withdrew the application on November 11, 2022.
In his Q&A exchange with Sen. Boozman, Behnam said that DCCPA would address offshore exchanges such as FTX in the future by the simple fact that U.S. regulatory clarity would bring companies and exchanges such as FTX “on shore” – where they presumably couldn’t get away with what happened in the Bahamas, for example.
Next in the hearing, Sen. Roger Marshall (R, KS) compared the FTX collapse to a nuclear explosion in the financial world and questioned whether Behnam and the CFTC can get its arms around the problems in crypto regulation. Furthermore, Marshall wondered if DCCPA would be enough. Behnam essentially said that it would be an important start.
Marshall blamed the threat to the U.S. with drug trafficking on the Dark Web and its enablement via cryptocurrency. Behnam agreed crypto, in this regard, could be a “potential” threat to the United States. But, he added that he didn’t see “ringfencing” the country from cryptocurrency as a solution.
Senator Tina Smith (D, NM) said that, coming out of FTX, she remains concerned about the potential for cryptocurrency to be included in retirement plan investments. Sen. Smith said that FTX taught everyone that an unregulated market can and will cause more disasters. The banking system has been largely unaffected by crypto said Behnam because the system has been protected.. put another way, the U.S. banking system can’t get involved in something unregulated.
Senator Tommy Tuberville (R, AL) said that Chair Gary Gensler of the SEC has “repeatedly cut off crypto firms with registering at the SEC” and wanted to hear what Behnam was doing to help onboard crypto firms. Beyond derivatives, Behnam reiterated that his agency does not have authority on crypto cash markets – this purview would give the CFTC the ability to register crypto companies according to the Chair.
Sen. Sherrod Brown (D, OH) questioned cryptos function within illicit financing. Behnam emphasized the importance of coordination with FinCEN and OFAC and then addressed the narrative around a “power grab” between the SEC and CFTC. He said it’s simply about “filling a gap.” Chair Gensler would no doubt disagree and point to the Howey Test as the “gap filler” as he’s done many times before.
In an exchange with Senator Charles Grassley (R, IA), Behnam said the CFTC did not have authority to go beyond its engagement and regulation of FTX’s subsidiary and LedgerX. Disclosures and conflicts of interests are two areas which Behnam said he believed could be strengthened in future regulation and may possibly ferret out issues with a company like FTX which was based offshore.
Next up, Senator Kirsten Gillibrand (D, NY) brought up mergers and acquisitions as it related to FTX and the purchase of LedgerX in 2021. Was more oversight needed by the CFTC for understanding purchases such as LedgerX by an offshore entity, FTX? Behnam agreed this was worthy of more oversight and spoke to understanding conflicts of interest.
Gillibrand also brought up that 2% of FTX International’s customers were from the United States – these customers should have been under the FTX.us umbrella. Behnam said from a retail perspective, virtual private networks (VPNs) were likely enabling U.S. retail signups. For U.S. corporate entities that might have been signed up with FTX International, Behnam said they would likely have an offshore office that would make them compliant.
Layer 1 blockchain Solana (SOL) was brought up by Sen. Deb Fischer (R, NE) and the question about who has authority on cryptocurrencies other than Bitcoin and Ether. Behnam admitted agency oversight for SOL is to be determined, but also suggested a dual registration between the SEC and CFTC may be required down the road.
On the involvement of U.S. states in the formulation of regulation, Behnam believed effective consumer protection started at the local level.
Senator Ben Ray Lujan (D, NM), who is a co-sponsor of DCCPA, sought to clarify the complexities of M&A that could bring a company like FTX into the financial system by virtue of purchasing a regulated entity. Behnam believes that a discussion of the current hands-off-ish policy is warranted. He added that LedgerX remains under surveillance from a regulatory standpoint as FTX enters bankruptcy.
Final thought
As each Senator took their turn during the two-hour hearing, one thing was clear: everyone wanted to be arms length from FTX and Sam Bankman-Fried.
Time will tell if DCCPA gets mothballed considering the FTX toxicity. The Responsible Financial Innovation Act (RFIA) from Senators Cynthia Lummis (R, WY) and Gillibrand or Rep. GT Thompson’s (R, PA) Digital Commodities Exchange Act (DCEA) in the U.S. House may end up being the crypto regulation Trojan horse.