FTX Collapse Draws Senate Scrutiny as Lawmakers Push for Crypto Oversight

WASHINGTON—Lawmakers should pass legislation that would impose strict rules on cryptocurrency exchanges, including rules to limit or prohibit the conflicts of interest that contributed to FTX’s collapse, Commodity Futures Trading Commission Chairman

Rostin Behnam

said Thursday. 

Speaking to members of the Senate Agriculture Committee, Mr. Behnam said he still supported a bill that would give his small agency authority to police trading in bitcoin, ether and other digital assets classified as commodities. FTX and its founder

Sam Bankman-Fried

also lobbied in support of the legislation before the firm’s collapse last month.

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The immediate future of the legislation is unknown. FTX’s support of the bill raises questions about its influence over it. FTX’s goal was to steer oversight of crypto into the hands of what was perceived to be a friendlier regulator than the Securities and Exchange Commission, which has authority to write stricter rules that most crypto companies oppose.

Mr. Bankman-Fried’s empire blew up last month amid reports that his exchange, FTX, misused customer funds by sending them to an affiliated trading firm, Alameda Research, that had made risky venture investments. Mr. Bankman-Fried has said in recent interviews that he neglected risk-management at FTX, but denied knowing that customer money was wrongly used. 

Senate Agriculture Committee Chairwoman

Debbie Stabenow

(D., Mich.) said her committee’s legislation addresses the risks posed by practices that took down FTX. 

The collapse of FTX has set off the largest crypto-related bankruptcy ever. Here are three things to know about the company’s bankruptcy process. Photo: Lam Yik/Bloomberg News

“When exchanges accept customer funds for trading, they must not be allowed to gamble with those funds,” Ms. Stabenow said. “They must not be allowed to invent products that have little to no intrinsic value and accept them as collateral for loans. And they must not be allowed to self-deal.”

The bill written by Ms. Stabenow and the committee’s ranking member, Sen.

John Boozman

(R., Ark.), would regulate trading in bitcoin, ether and some other cryptocurrencies through the commission. Giving the CFTC, a relatively small agency, authority to police trading in the most valuable crypto assets would mark a substantial expansion of its authority.

Before FTX’s bankruptcy, the CFTC also met with FTX about the company’s proposal to allow its U.S. derivatives exchange, LedgerX, to manage the risk of leveraged customer trades without the involvement of brokers. FTX acquired LedgerX last year. That derivatives exchange is solvent and its customer funds are safe, Mr. Behnam said, because it was subject to CFTC rules that impose risk-management and customer-protection standards.  

Mr. Bankman-Fried met with Mr. Behnam and other top CFTC officials 10 times over the past 14 months, Mr. Behnam said Thursday. The chairman said FTX was “dogged” in its pursuit of the proposal, which would have marked a radical change in the structure of derivatives markets. LedgerX has withdrawn the proposal. 

As the crypto industry struggles in the wake of FTX’s collapse, the question of how the SEC will react is unanswered. Here’s what past investigations tell us about how the SEC sees cryptocurrency and may regulate it moving forward. Illustration: Ali Larkin

The CFTC had previously declined to disclose how many times Mr. Behnam met with Mr. Bankman-Fried and his deputies.

Mr. Bankman-Fried personally contributed the individual maximum campaign contributions of $5,800 to Sens. Stabenow and Boozman as part of more than $40 million he gave to politicians and political-action committees ahead of the 2022 midterm elections.

Mr. Behnam, the lone witness at Thursday’s hearing, told lawmakers that his agency didn’t have authority to look into FTX’s business beyond how LedgerX operated. The CFTC never received any tips from whistleblowers or others about problems at FTX, he said. 

Rules written for Wall Street should largely apply to the crypto market, Mr. Behnam said. The market is now mostly unregulated in the U.S. Crypto exchanges, including FTX, often vertically integrate many functions that are provided by separate entities in regulated financial markets, including trade execution, lending, custody, and clearing trades.  

“We should essentially model any regulation for crypto around what has worked in the past,” Mr. Behnam said.

Mr. Behnam called for making sure that exchanges don’t have affiliated entities that trade with customers on the platforms.

Sen. Michael Bennet (D., Colo.) questioned why FTX would have “lobbied so hard for a bill that it could never comply with.” Mr. Behnam said he didn’t know. The structure that FTX operated under “would have been so far out of compliance it would have been impossible” to meet the bill’s demands, Mr. Behnam said.

For the CFTC, the legislation would expand its regulatory domain, while the Senate Agriculture Committee would also get a chance to carve out an expanded role, because it oversees the CFTC and its budget. Mr. Behnam was asked several times Thursday whether FTX and other crypto firms favor his agency as a regulator because its oversight model is softer than the SEC’s. “I patently reject that suggestion,” Mr. Behnam said. 

The legislation would provide a pathway to U.S. regulatory compliance for crypto exchanges, potentially expanding their customer base beyond hedge funds, individual traders and a handful of large asset managers that have tested the waters. FTX had hired several former CFTC officials who helped the company chart a path through Congress and regulatory agencies.

A spokeswoman for Ms. Stabenow has said no single industry participant had “significant input in the content of this bill—including FTX.” Mr. Behnam said the bill is “not a power grab,” and would leave room for the SEC to police digital assets that qualify as securities. 

FTX filed for bankruptcy in November in the midst of a “complete failure of corporate controls,” and an “absence of trustworthy financial information,” according to John J. Ray, the new chief executive hired to steer it through the process of paying as much as possible to creditors.

The Wall Street Journal has reported that billions of dollars in customer assets were misused to prop up Mr. Bankman-Fried’s affiliated trading firm, Alameda Research. Mr. Bankman-Fried has blamed the misuse of customer funds on sloppy record-keeping and a flood of unexpected customer withdrawals.

SEC Chair

Gary Gensler

is among those who have raised issues with the bill. One concern is whether it would hand authority to the CFTC that should be given to the SEC, a larger federal agency.

The SEC has staked a claim to overseeing many crypto assets and firms since 2017. Mr. Gensler has continued that approach, maintaining that most crypto assets are securities that failed to comply with investor-protection laws. He said, in early November, that the legislation’s approach to trading platforms “would unambiguously undermine investor protection.”

A CFTC commissioner, Christy Goldsmith Romero, said this week in a speech that her agency should impose “heightened supervision” on exchanges such as LedgerX that already list cryptocurrency derivatives.

Write to Dave Michaels at [email protected]

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