FTX Inquiry Sets Stage for Regulatory Turf War

Sam Bankman-Fried (SBF) isn’t the only one going in front of an audience this week.

Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam appeared before the Senate Agriculture Committee in Washington on Thursday (Dec. 1) to answer questions about the FTX collapse, just one day after SBF’s appearance on The New York Times’ DealBook Summit stage.

“The events of the past few weeks embody — in the most regrettable way — the perilous state of the digital asset market,” the CFTC chairman stated.

The hearing, “Why Congress Needs to Act: Lessons Learned From the FTX Collapse,” is one of many scheduled to unpack the details surrounding the industry-rattling failure of the SBF-led cryptocurrency exchange FTX. As reported by PYMNTS, the House Financial Services Committee is also launching a series of meetings that are slated to begin in just under two weeks on Dec. 13.

What’s at stake, outside of future consumer protections and a driving sense of urgency to get something on the books, is an underlying regulatory turf war over which agency should be responsible for overseeing crypto exchanges — and who deserves the subsequent increase in budget and staffing.

Behnam was adamant, as he told members of the Senate Agriculture Committee, about the need for legislation that brings more of the responsibility for policing the emergent crypto industry onto his agency’s plate.

CFTC vs SEC

The CFTC and Behnam are currently responsible for overseeing certain regulatory aspects of U.S. crypto markets, but not all. The agency’s present abilities are limited mostly to regulating crypto derivatives, but in that capacity the CFTC met regularly with SBF and other delegates from FTX affiliates.

Both SBF and the Behnam pointedly drew attention the solvency of U.S.-based FTX entities during their respective moments in the spotlight.

SBF declared that FTX US was completely solvent, and could make “all American customers whole again.”

Whereas Behnam pointed to the FTX-associated derivatives exchange his agency had been working with since 2017. “Most of the coverage about FTX in the past weeks has focused on the over 130 different entities that filed for bankruptcy. … Of significantly less focus is the entity registered with and overseen by the CFTC — a derivatives exchange and clearinghouse called LedgerX LLC (“LedgerX”),” Behnam stated during the hearing, citing the company as an example of how the CFTC has worked with crypto actors to keep American consumers safe in the past, and how the agency should be further empowered to do so in the future.

“The customer property at LedgerX — the CFTC-regulated entity — has remained exactly where it should be, segregated and secure,” said Behnam, elaborating that the derivatives exchange had been in daily communication with the agency to ensure its adherence to regulations.

Behnam, along with Agriculture Committee chair, Sen. Debbie Stabenow, D-Mich., who is sponsoring the bill, and ranking member Sen. John Boozman, R-Ark., have all been trying to push through the Digital Commodities Consumer Protection Act (DCCPA) as a solution for crypto regulation, which would put the power to regulate the spot digital commodity market under the CFTC’s jurisdiction.

But SBF’s vocal and repeated support for legislation bolstering the CFTC’s role as a crypto regulator has cast a pall over expanding its future place in the governance landscape, as critics are hesitant to sign into law new powers for an agency that many view as an industry favorite.

The CFTC has far fewer resources than the Securities and Exchange Commission (SEC), which has requested more than $2.1 billion for its 2023 operations. The CFTC has requested $365 million for the same fiscal year.

Both numbers pale in comparison to the billions in evaporated deposits of just FTX’s 50 largest creditors.

Something Needs to Happen

The scale and impact of FTX’s collapse means the Biden administration will likely tip its hand toward what legislation it believes is needed, and which agency is best suited to protect the American public.

On Wednesday (Nov. 30), the head of the Senate Banking Committee publicly urged Janet Yellen, the Treasury secretary, to help craft regulatory legislation policing the crypto industry.

The FTX situation is shot through with oversight failures. The unfortunate reality of the company’s demise provides lawmakers with a bittersweet opportunity to understand the distinctions between centralized crypto exchanges like FTX, and decentralized finance (DeFi) exchanges which operate on-chain across transparent and immutable ledgers that aren’t under the control of any single party.

During the hearing, Stabenow highlighted that her bill is meant only as a short-term solution to fill regulatory gaps with the authority it gives to the CFTC, and still leaves room for other regulators like Gary Gensler’s SEC to serve as the main federal regulatory body for the industry.

The urgency is there, and hopefully U.S. lawmakers can make a bipartisan, non-politically motivated effort to sign into law a bill that ensures adequate protection for the American public.

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