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U.S. CFTC head urges Congress to act fast on crypto regulation

Published 12/01/2022, 01:10 AM
Updated 12/01/2022, 12:37 PM
© Reuters. FILE PHOTO: Rostin Behnam testifies before a Senate Agriculture, Nutrition, and Forestry Committee hearing on his nomination to be chairman of the Commodity Futures Trading Commission (CFTC) on Capitol Hill in Washington, U.S., October 27, 2021. REUTERS/E

By Hannah Lang and Chris Prentice

(Reuters) -A leading U.S. financial regulator on Thursday urged lawmakers to act quickly to install a regulatory framework for digital assets following the spectacular collapse of cryptocurrency exchange FTX.

In the first of several congressional hearings to examine FTX's failure, members of the Senate Agriculture Committee pressed Rostin Behnam, chairman of the Commodity Futures Trading Commission, over whether the turmoil could have been avoided with better oversight.

The CFTC is hamstrung by its inability to register cash market exchanges, Behnam said.

"That's what concerns me. This is the gap that exists," he told lawmakers. "If we don't do something, customers will continue to lose money and we're going to be right back here in a couple months."

The regulator also told lawmakers he had met with former FTX chief executive officer Sam Bankman-Fried 10 times and exchanged follow-up calls and messages to discuss the company's application to directly clear its customers trades.

FTX filed for bankruptcy and Bankman-Fried stepped down as chief executive on Nov. 11, days after traders pulled $6 billion from the platform and rival exchange Binance abandoned a rescue deal.

LedgerX, a CFTC-regulated FTX subsidiary that was omitted from the bankruptcy proceedings, has since pulled the plug on its clearing house application.

CFTC's Behnam said LedgerX customer property remains secure and that the company has the financial resources to "continue operating for the forseeable future."

He added that the CFTC did not have any legal authority to examine any of FTX's other entities, and had no visibility into the operations of other subsidiaries.

Behnam has previously asked for more authority from lawmakers to regulate digital assets at the agency, and continued to urge congressional action during Thursday's hearing.

The CFTC, which typically oversees derivatives markets dominated by large players like money managers, has the authority to crack down on fraud and misconduct, but does not have the power to regulate spot markets.

"The CFTC has many tools at its disposal to try to make defrauded customers whole, but the process is long and arduous, and sometimes there is no way to return all of what was lost," Behnam said.

Regulators are also squabbling over who should take primary responsibility for overseeing the crypto market. Many Senate Agriculture Committee members have previously agreed with Behnam that the CFTC should take on a larger role.

But the U.S. Securities and Exchange Commission has more expertise overseeing markets in which individual investors are involved. SEC Chair Gary Gensler has said he expects his agency to be the primary regulator because he considers most crypto tokens to be securities.

Sen. Debbie Stabenow, the Democratic chair of the Senate Agriculture Committee and Sen. John Boozman, the committee's top Republican, introduced legislation in August that would create a regulatory framework for digital commodities.

Behnam suggested that lawmakers "take a pause" and reexamine the bill in light of the FTX bankruptcy, and possibly consider bolstering provisions around disclosures of financial information and conflicts of interest.

© Reuters. FILE PHOTO: Rostin Behnam testifies before a Senate Agriculture, Nutrition, and Forestry Committee hearing on his nomination to be chairman of the Commodity Futures Trading Commission (CFTC) on Capitol Hill in Washington, U.S., October 27, 2021. REUTERS/Elizabeth Frantz/File Photo

FTX's downfall will be examined in several more congressional hearings this month, with the House Financial Services Committee launching a series of hearings on Dec. 13.

The committee has said it expects to hear from Bankman-Fried, FTX and its affiliated trading firm Alameda Research, as well as Binance.

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