With FTX US Derivatives Still Standing, CFTC Chair Credits Its Oversight
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With FTX US Derivatives Still Standing, CFTC Chair Credits Its Oversight

Created 10mo ago, last updated 10mo ago

The one FTX company that remains solvent is the U.S. derivatives exchange formerly known as LedgerX, which came already regulated.

With FTX US Derivatives Still Standing, CFTC Chair Credits Its Oversight

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The one FTX company that remains solvent is the U.S. derivatives exchange formerly known as LedgerX, which came already regulated. Commodity Futures Trading Commission Chairman Rostin Behnam said that saved it.

As consensus comes that clear and firm regulation of cryptocurrencies are needed more than ever in the wake of the collapse of Sam Bankman-Fried’s FTX exchange empire, one piece of it remains standing.

That is FTX US Derivatives, formerly LedgerX, the U.S. derivatives exchange Bankman-Fried bought last October with registration with the Commodity Futures Trading Commission (CFTC) already in place. Unlike more than 130 companies under the FTX Group, FTX, FTX US and Alameda Research, it has not filed for bankruptcy protection.

“The reason is because — I believe pretty strongly — that they are very clearly regulated by the CFTC,” the regulatory agency’s chairman, Rostin Behnam said on Nov. 14 at a Futures Industry Association (FIA) event, CoinDesk reported. “It's a testament to CFTC regulations and CFTC staff and the benefit of having clear, transparent rules.”

His agency has been in daily contact with FTX US Derivatives and its custodial operations, in order “to ensure member property is where it’s supposed to be.” Benham said “We’re pleased with where we are. A lot remains to be seen over the next couple of days, weeks and months, but we’re being, certainly, vigilant.”

As for the rest of the FTX companies, Benham pointed out that CFTC oversight does extend to fraud and manipulation in crypto commodity trading  which would, at the very least, include Bitcoin.

“We will use that authority to the full extent of the law,” he said, adding that Congress doesn’t “have the luxury of time anymore” to lay out clearer regulation.

Middlemen Win One

One Bankman-Fried legacy that FTX US Derivatives has already walked away from is its proposal that the firm be allowed to directly clear customers’ swaps rather than go through the traditionally required intermediary.

Clearinghouses have a key role in the futures and derivatives industry, acting as a neutral third party whose functions include validating and finalizing transactions, settling trading accounts, delivering assets to new owners and collecting margin payments — ensuring both parties meet their obligations under the contract.

Which is to say, it is the trusted third party to financial transactions that Bitcoin creator Satoshi Nakamoto aimed to eliminate.

Bankman-Fried argued that point in May at a CFTC-hosted roundtable in Washington, D.C., where traditional derivatives firms called the proposal dangerous, CoinDesk said. One said the proposal’s use of smart contracts that automatically liquidate positions during periods of market volatility would “create a cycle of flash crashes” that human intermediaries can and do prevent.

A long shot at best, with Bankman-Fried’s credibility nonexistent, the proposal is now distinctly dead, and not just because the company withdrew it.

Congressional Criticism

More broadly, Congressional crypto-skeptic advocates of tougher regulation, focusing more heavily on consumer protection than the lighter-handed innovation-friendly, are in ascendance for the moment.

Strong crypto critic Rep. Brad Sherman (D-Calif.) said in a statement on Sunday:
“For years I have advocated for Congress and federal regulators to take an aggressive approach in confronting the many threats to our society posed by cryptocurrencies.”

Which isn’t really new. But, now he can (and did) point to “tens of billions of dollars in losses” to consumers — after factoring in the May collapse of the Terra/LUNA stablecoin ecosystem, at a cost of some $48 billion. This makes his argument politically harder to challenge at the moment.

That said, the two sides haven’t really changed their core positions. The crypto-friendly House Financial Services Committee’s ranking minority member, Rep. Patrick McHenry (R-N.C.), said:

Protection vs. Innovation

“The recent events show the necessity of Congressional action. It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S.”

McHenry and his counterpart on that Committee, Chairwoman Maxine Waters (D-Calif.), have been trying to forge a bipartisan bill regulating just stablecoins — which became a priority after the Terra/LUNA stablecoin collapse — for several months without success, although both have repeatedly said they thought a deal was near.

Rep. Waters said last week:
“The recent fall of FTX.com […] is just the latest example in a string of incidents involving the collapse of cryptocurrency companies and the impacts these failures have on consumers and investors […] Now more than ever, it is clear that there are major consequences when cryptocurrency entities operate without robust federal oversight and protections for customers.”
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