CFTC chairman calls on Congress to enact crypto regulation after FTX collapse

Following the collapse of cryptocurrency exchange FTX, Congress must act to regulate the cryptocurrency industry to prevent a similar incident, Commodity Futures Trading Commission Chairman Rostin Behnam told lawmakers Thursday.

"At the CFTC, we lacked the authority to comprehensively regulate the digital commodity market, and to prevent this from happening again. We must be provided appropriate authority by Congress," Mr. Behnam said in testimony before the Senate Agriculture Committee. "Without new authority for the CFTC, there will remain gaps in a federal regulatory framework, even if other regulators act within their existing authority."

Mr. Behnam noted that more than 130 FTX-affiliated entities have filed for bankruptcy in recent weeks, but one of the few to remain solvent is a derivatives exchange and clearinghouse called LedgerX that has been registered with the CFTC since 2017.

"The lesson here is clear: Thoughtful, comprehensive regulation works to protect customers and prevent the type of events that have befallen the other FTX entities," Mr. Behnam said.

Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., said the risks of trading crypto have come into sharp focus in the past few weeks, but they're not new.

"One thing is already apparent: The crypto industry lacks the customer protections that Americans expect and deserve when trading in U.S. markets," Ms. Stabenow said. "When exchanges accept customer funds for trading, they must not be allowed to gamble with those funds. They must not be allowed to invent products that have little or no intrinsic value and accept them as collateral for loans. And they must not be allowed to self-deal. FTX did all of those things, emboldened by a lack of federal oversight."

Ms. Stabenow and Sen. John Boozman, R-Ark., the committee's ranking member, said Congress should pass their bill — the Digital Commodities Consumer Protection Act of 2022, introduced in August — that would give the CFTC the authority to regulate the trading of digital assets that act as commodities, such as cryptocurrencies bitcoin and ether.

"The bill is a good-faith effort to establish a constructive regulatory framework that provides the CFTC with the resources and the authority necessary to protect consumers and retail investors while promoting industry innovation in digital commodity spot or cash markets," Mr. Boozman said. "I'm confident the CFTC is the right agency for an expanded regulatory role in the digital commodities spot market."

Currently, the CFTC can regulate only derivatives, such as futures, options and swaps.

Mr. Behnam said if the DCCPA were already law, the FTX collapse could have been largely avoided, though he said stakeholders should take a "fresh look" at the bill in light of the FTX news.

He noted that FTX had significant conflicts of interest, allegations of commingling customers' money, a lack of books and records, and a lack of corporate governance and risk controls that the DCCPA would have given the CFTC the power to address.

Securities and Exchange Commission Chairman Gary Gensler has said he's in favor of the Congress granting the CFTC broader authority to regulate non-security crypto tokens, but that of the nearly 10,000 tokens in the crypto market, the vast majority are securities.

Congress is unlikely to pass any crypto-related bill in the next few weeks before the congressional session concludes, but the conversation will likely continue when the next session begins in January.

The House Financial Services Committee will also hold a hearing on the FTX collapse on Dec. 13.