In the aftermath of the collapse of crypto exchange FTX, lawmakers at a committee hearing on Thursday doubled down on legislation that would give the Commodity Futures Trading Commission new authority to directly regulate crypto firms, and some appeared to want to push that authority still further.
Senators at an agriculture committee hearing delved into a wide-ranging discussion about FTX, its disgraced former chairman, Sam Bankman-Fried, and the efforts by both to influence crypto legislation being considered by the committee. Lawmakers asked CFTC Chairman Rostin Behnam — the hearing's only witness — to explain how FTX failed and whether existing legislation would have prevented FTX's bankruptcy, or at least have saved consumers billions in expected losses.
Sens. Debbie Stabenow, D-Mich., chair the Senate Agriculture Committee, and John Boozman of Arkansas, the panel's ranking Republican, asked Behnam whether the existing bill they co-sponsored, the Digital Commodities Consumer Protection Act of 2022, would have prohibited the significant conflicts of interest at FTX. Behnam, a former senior counsel to Stabenow, supports several changes that he said would have prevented the Bahamian-based crypto exchange's failure. During the two-and-a-half-hour committee hearing, Behnam also described the CFTC interactions with Bankman-Fried that have come under scrutiny.
"At the CFTC, we lacked the authority to comprehensively regulate the digital commodity market and to prevent this from happening again," Behnam said. "If you are going to ensure that FTX and other firms … are appropriately regulated and held accountable, we need to act promptly to apply a comprehensive regulatory regime."
Last year, FTX filed an application with the CFTC for its U.S.-based subsidiary, LedgerX, to become a registered derivatives clearinghouse. The application was withdrawn on Nov. 11 after FTX filed for bankruptcy protection with no decision or recommendation from CFTC staff. Yet LedgerX appears to be one of the handful of entities among FTXs' 130 assorted subsidiaries that remain solvent — largely because of oversight by the CFTC, Behnam claimed.
"Of all the 130 entities in the FTX family, of the few that survived, one is the CFTC-regulated entity," Behnam said, adding that LedgerX is "solvent, operational and customer money [is] where it's supposed to be."
The CFTC currently has limited oversight and rulemaking authority over digital assets, and lawmakers are being urged to quickly pass legislation if it includes more consumer protections and addresses significant conflicts of interest. Currently, the CFTC can only launch an investigation if it receives a whistleblower tip or a referral. It also can only use its subpoena authority after passing a commission vote. Behnam sought to make the case to lawmakers that the CFTC is up to the task of regulating the crypto derivatives market despite having a mere $320 million budget, as issue legislation also would address.
If Congress passes legislation, the CFTC could implement rules within the next 12 to 18 months, Behnam said. The CFTC has implemented roughly 60 rules over the past three years governing the swaps market.
FTX was "dogged" in its pursuit of the CFTC's derivatives application, Behnam said. In the past 14 months, Behnam and CFTC officials met 10 times with Bankman-Fried and FTX executives. The meetings were almost all held at the CFTC's offices at FTX's request, he said. In addition, Behnam said he received two phone calls and numerous text messages from Bankman-Fried, all to set up meetings or provide further information in support of FTX's derivatives application. Currently, the CFTC is in daily communication with LedgerX and its custodians, who are required to maintain segregated funds and demonstrate that assets are being held in accounts on behalf of customers, he said.
"Given what we've learned about what's happened with FTX, we could have certainly prohibited many of the actions that we're hearing about," Behnam told lawmakers. "A more comprehensive regime and regulatory oversight over all of these markets, I think, would be a huge step in the right direction."
Several lawmakers questioned the difference in oversight between the CFTC and the Securities and Exchange Commission, and the differences in definitions between security tokens and commodity tokens. Sen. Kirsten Gillibrand, D-N.Y., asked whether the CFTC can investigate overseas exchanges that have heavily marketed crypto products to American consumers. Sen. Roger Marshall, R-Kan., asked whether crypto firms should be held to the same standards as banks, prompting a discussion of whether regulation itself would have the effect of validating digital currencies that are not tied to any underlying asset.
To that end, Behnam told lawmakers that FTX suffered from "a classic liquidity crunch that forced a run on the institution."
Sen. John Thune, R-S.D., said the collapse of FTX made it increasingly clear that Congress needs to "act soon," to pass legislation. Thune said he was "deeply troubled" by the information coming out on FTX, and he invoked his father, who grew up during the Depression.
"He always said: 'If it's too good to be true, it probably is,' and I think it looks like this whole thing, there just wasn't any 'there' there," Thune said. "I don't know how they were able to pull this off for as long as they did. But it's just really pretty stunning … what appears to be at the very least some incredibly serious wrongdoing on the part of FTX. And I think that whole collapse, again, underscores the need for greater oversight and transparency of the digital asset marketplace."
Sen. Dick Durbin, D-Ill., dropped a bombshell on the hearing by stating that many lawmakers, including himself,
"I've heard so many of my colleagues say 'We gotta move on this, we've got to be a leader in the world when it comes to cryptocurrency.' I don't know if they're saying that now," Durbin said. "There's a hell of a lot more credibility when the United States says, 'This is properly regulated.' We have to take the time to make sure we not only salve our consciences, but to make sure we provide the resources for regulation."
