Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam hinted that had a regulatory framework been put in place, the collapse of FTX might not have been prevented. However, he highlighted reasons why it would be less likely. He also justified the “many meetings” he had with the FTX team about their request for changes to the CFTC rules for trading crypto derivatives.

At the Financial Times Cryptocurrency and Digital Assets Summit, Behnam was asked if recent events in the cryptocurrency sector have strengthened the need to regulate the cryptocurrency market, over which the CFTC has no oversight or oversight. You only have enforcement authority when someone complains.

“Obviously we have to talk about the FTX thing,” Behnam said. “I can’t suggest that if we had a regulatory framework around FTX, specifically non-US entities, it wouldn’t have happened.”

However, he outlined the standard tools that he expects to be enacted in future regulation to give the CFTC the authority to regulate the cash market for commodity cryptos. These include steps to:

• prohibit mixing of house money and client money
• use registered custodians to segregate client money
• Require books and records for auditing at least once a year.
• require reports for subsequent trade
• provided equal access and a fair and transparent order book.

Reports from FTX’s new CEO show that the company failed to meet every one of those points, though surprisingly, FTX was audited.

Behnam also noted that one of the few FTX subsidiaries that did not file for Chapter 11 bankruptcy was Ledger X, the CFTC-regulated derivatives firm. Before FTX’s new CEO commented on the lack of records, we noted that only Ledger X and the regulated Japanese subsidiary seemed to have adequate finance staff.

Would the CFTC be a touch lighter than the SEC?

Two issues arose over the division of crypto regulation between the CFTC and the SEC. The first is the dividing line between which cryptocurrencies are considered commodities versus securities.

“The vast majority of tokens are probable values,” Behnam said. “But at least there are a few – I have said publicly that I believe Bitcoin and Ether are commodities. But at the very least we know, at least in the US, that Bitcoin is a commodity.”

Behnam sees that the division between a value and a commodity is less important compared to what some claim.

“We will have to figure it out over time. At this point, the only certainty we have is a decision by a judge in some districts here in the US that has clearly determined that Bitcoin is a commodity. Other than that, we don’t have a clear determination. We’re going to have to get a set of rules and precedents and build from that over time.”

Behnam rejected the idea that the CFTC would be a lighter touch regulator than the SEC. He said the problem is that it has no enforcement authority over the commodity cash market. Most of the CFTC’s work relates to wholesale markets where derivatives are used for risk management. By contrast, cryptocurrency mainly involves retail investors and speculation.

The CFTC Chairman envisions the CFTC regulating part of the market and the SEC handling the rest, with no loopholes where tokens could go unregulated.

Many meetings with FTX

Last year, FTX requested regulatory changes to allow end-users to trade crypto derivatives directly from its platform without a broker acting as an intermediary. That request was recently withdrawn following the collapse of FTX.

In July, then-CEO of FTX, Sam Bankman-Fried, told the Wall Street Journal: “We’re going to have a more comprehensive set of client protections, disclosures, and suitability checks than currently exists in the security industry.” futures”. He added: “If anything, we’ll go a little overboard on that.” Those comments did not age well.

Chairman Behnam acknowledged that he had personally had many meetings with FTX. He said, “they very aggressively advocated all over Washington for the amendment.” The CFTC Chairman stressed their legal obligation to respond to the request.

“FTX and their management team came by quite often and wanted to meet and advocate. Look, if I’m in Washington and someone is willing to come to Washington and I have time, I’ll attend that meeting. I’m going to stay accessible and I want to learn and I want to be fair. This was such an important issue not only in relation to FTX.” As he pointed out, it could have a potential impact on the structure of derivatives markets and beyond.

“As the president of the agency, I wanted to be directly involved to make sure that I saw what was happening in terms of the process and that all parties were involved and felt that they had a fair opportunity to share their opinion.” His conclusion was that it was a fair, open and transparent process.