Financial Regulatory Bodies Vie for Power Over Crypto Industry

Commodity Futures Trading Commission Chairman Rostin Behnam testifies about the collapse of the cryptocurrency exchange company FTX before the Senate Agriculture, Nutrition, and Forestry Committee in the Dirksen Senate Office Building on Capitol Hill in Washington, on Dec. 1, 2022. Chip Somodevilla/Getty Images

The collapse of the cryptocurrency exchange FTX has reignited a power struggle between two federal agencies—the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC)—for domain over digital assets. Many in the crypto business complain that the struggle between those agencies is one of the reasons for delays in rules to govern that industry.

The first congressional hearing related to the failed exchange since it declared bankruptcy in early November occurred last week. CFTC Chair Rostin Behnam, as the sole witness of the hearing, fielded questions from a bipartisan panel of U.S. senators, including Chuck Grassley (R-Iowa), Amy Klobuchar (D-Minn.), and Cory Booker (D-N.J.).

Behnam’s opening remarks at the hearing called for more clarity in digital asset regulation.

“For years, many have recognized that a patchwork of federal and state-based regulation is an unsuitable substitute for a comprehensive approach,” he stated.

The CFTC is an independent federal agency responsible for overseeing the derivatives markets in the United States, including futures contracts, options, and swaps.

The hearing was hosted by the Senate Committee on Agriculture, Nutrition, and Forestry. The chair of the committee, Sen. Debbie Stabenow (D-Mich.), sponsored legislation earlier this year that would have enhanced the CFTC’s regulatory power over the crypto industry.

Stabenow, who received campaign donations from Sam Bankman-Fried, distanced herself from the FTX founder and former CEO during the hearing.

“At best, these events uncovered an alarming lack of internal controls and egregious governance failures. At worst, Sam Bankman-Fried and his inner circle lied to and stole from over 1 million customers, some of whom have lost their life savings,” Stabenow said in her opening remarks.

Stabenow’s bill, called the Digital Commodities Consumer Protection Act (DCCPA), was heavily backed by Bankman-Fried. That led many, including SEC Chair Gary Gensler, to call into question the motivation behind the initiative.

At the hearing, Behnam, a proponent of DCCAP, expressed uncertainty as to why Bankman-Fried supported the proposed legislation. The CFTC chair also claimed to have met with FTX leadership 10 times over the previous 14 months, but emphasized he didn’t possess the authority to investigate the company thoroughly.

Benham assured that FTX would have failed to meet DCCAP’s guidelines.

To strengthen his case for unified regulation, Benham emphasized that FTX-affiliate LedgerX, which is registered with the CFTC, hasn’t filed for bankruptcy.

Sen. John Boozman (R-Ark.), the ranking Republican member of the committee and the other sponsor of DCCPA, asked the CFTC chair to respond to allegations that Bankman-Fried backed the legislation to ensure his companies were governed by a “soft touch regulator.” Behnam disagreed with the premise that the CFTC would be more lenient than other agencies.

“I patently reject that suggestion,” he said.

Behnam voiced his support for the Stabenow–Boozman bill several times over the course of the hearing.

Defining Tokens

Gensler has made his opposition to the bill clear, stating in early November that the proposal “would unambiguously undermine investor protection.” For years, he has advocated that many cryptocurrencies qualify as securities and therefore are under the purview of his agency.

On the subject of Stablecoins—crypto tokens whose values are pegged to the U.S. dollar—Gensler has conceded that this particular digital asset falls more appropriately within the CFTC’s specialty. Behnam echoed a similar sentiment last week, asking for congressional clarity in defining which tokens are commodities and which are securities.

“Senator, it goes to the core of the issue,” Benham said in response to Sen. Deb Fischer (R-Neb.), who raised the issue of unclear token classifications. “It is the gap that exists that provides and presents customer protection risks.”

Washington outsiders have criticized the slow-to-change and confusing state of U.S. digital asset regulations as well.

David Sacco, a finance instructor at the Pompea College of Business at the University of New Haven, for example, says the current approach is all wrong.

“We need some of the smartest people in these industries involved in regulating them, and we do not currently get that,” he told The Epoch Times.

Sacco stressed the importance of “better” regulation, as opposed to simply piling more on. He also acknowledged that participants in the crypto markets bear some level of personal responsibility.

“I think the answer is to make it explicitly understood that new technologies and investment classes inherently contain risk.”