Highlights of the CFTC-Senate hearing on FTX

A day after Sam Bankman-Fried, ex-CEO of collapsed crypto exchange FTX, was live at the DealBook summit, the Senate Committee on Agriculture, Nutrition, and Forestry held a hearing titled “Why Congress Needs to Act: Lessons Learned from the FTX Collapse.” Rostin Behnam, chairman of the Commodity Futures Trade Commission (CFTC) testified at the three-hour-long hearing.

U.S. Senator Debbie Stabenow, Chairwoman of the Senate Committee on Agriculture, Nutrition, and Forestry, in her opening remark, said: “To be clear: there currently is no Federal market regulation of spot crypto assets that are not securities. These include Bitcoin and Ether, the two most heavily traded crypto assets. The White House and the Financial Stability Oversight Council have urged Congress to close this gap.”

CFTC Chairman Grilled, Senators Air Their Views

Rostin Behnam was in a hot seat as he answered questions from Senators at the hearing. Senator John Boozman, who is a ranking member of the Senate Committee on Agriculture, Nutrition, and Forestry, took the floor following the Chairwoman’s opening remarks. The Senator started by praising the CFTC’s regulation of the futures market, calling it one of the most resilient markets. Senator Boozman urged the hearing to explore how the CFTC would have used the Digital Commodities Consumer Protection Act (DCCPA), also widely called the Stabenow-Boozman bill, in the FTX situation and how to prevent such occurrences from happening again. His address pointed to the expanded regulatory role that the CFTC could play in the digital commodity spot market when given the necessary authorities.

Chairman of the Commodity Futures Trade Commission (CFTC) Rostin Behnam in his opening speech reiterated that “regulators need to move quickly on a thoughtful regulatory approach to establish guard rails in these fast-growing markets of evolving risks.” He pointed to the CFTC's lack of the necessary and direct authority, unlike other federal financial regulators, to write rules and oversee the digital assets marketplace.

Senator Amy Klobuchar at the hearing expressed concern for the social-media-centric   marketing strategy of crypto companies; she cited the use of celebrity and influencer accounts to create hype for digital asset products, saying the Federal Trade Commission (FTC) has called the blend of social media and crypto “a combustible combination for fraud.” She questioned the Chairman of the CFTC on how the CFTC plans to work with other financial regulatory agencies “to combat the growing nexus of fraud between digital commodities and social media.” Senators Amy Klobuchar and Cynthia Lummis in February introduced a bipartisan social media bill which sought to address the negative influence of social media.

Senator Roger Marshall was of the view that 90% of the dark web drug trades are done with cryptocurrency, calling cryptocurrencies “a threat to national security.” He made assumptions about other vices perpetrated using crypto, including money laundering and human trafficking. However, several reports have indicated that some of the biggest money laundering schemes are carried out by corporate banks, via fiat channels, sometimes leading to regulators slapping a huge fine on them, when these lapses are discovered.

Senator Tommy Tuberville grilled Rostin Behnam over his alleged meetings and exchange of emails with Sam Bankman-Fried (SBF). Behnam affirmed that he had several meetings with SBF, and there were exchanges of emails. The meetings were mainly about the review and approval of an FTX application, and the emails were mostly about updates on the status of the application, according to Behnam’s response.

Senator Sherrod Brown who had earlier called for the regulation of cryptocurrencies in the wake of the FTX collapse and on Wednesday made a plea to the US Secretary of the Treasury Janet Yellen to develop legislation to regulate the crypto industry, said the failure of FTX was shocking not only in the misconduct that took place but also in the speed of its collapse. He mentioned the misuse of users’ funds and the other firms that have been affected due to their exposure to FTX. Senator Brown mentioned that he had written to Secretary Yellen, regarding the regulation of crypto, and looks forward to working with all the financial regulators.

About Behnam’s many meetings with the representatives of FTX Senator Ernest Grassley asked Behnam if he had made his calendar public, and if not, when he planned on making it public. Behnam once again made clear that the meetings, phone calls, and emails were related to FTX’s derivatives platform LedgerX, and not to the activities at FTX.

Senator Cory Booker talked about his optimism in the underlying technology that powers digital assets, calling it a technology that could create opportunities for the underprivileged who are often abused by the banking system. Booker focused on the DCCPA and Sam Bankman-Fried’s alleged influence on the bill. Before the FTX collapse, SBF was a supporter of the bill and it is reported that he often met with regulators to give insights on what the bill should entail. For this reason, the DCCPA (Stabenow-Boozman bill) has often been referred to as ‘the SBF bill’ or ‘the FTX bill.’

Bottom Line of the Hearing

The discussion, questions, and answers given during the hearing all point to the need for regulation in the digital assets space. More hearings are expected in the future, some of which SBF is expected to attend. As events unfold, there is a lot the crypto industry, and legislators alike could learn from the collapse of FTX.