Crypto exchange FTX.US’ effort to win government approval to directly clear its customers’ derivatives trades needs an answer because it won’t be the last proposal of its kind, the chief of the Commodity Futures Trading Commission (CFTC) told U.S. lawmakers on Thursday.
“There will be more in the future,” CFTC Chairman Rostin Behnam said during a hearing of the House Agriculture Committee, which oversees his agency. He said the proposal from FTX.US Derivatives – though novel – is a logical outcome of the new technology to “break down some of these silos and have more direct access,” though he said he hasn’t decided whether to support it.
“This proposal could end up leading to more efficient trading execution, less risk in the system,” Behnam said, adding that he’s required to cultivate “responsible innovation,” and the idea isn’t necessarily prohibited or in violation of commodities laws. Still, he considered the question worth a significant ongoing public-comment period. “As we are considering and contemplating the FTX proposal, we're doing it cautiously,” he said.
FTX had applied to allow its trading platform to directly clear derivatives that are backed by margin, and FTX.US President Brett Harrison argued earlier this month that “large amounts of time between margining periods causes risk to build up in the system, resulting in market swings,” and this change would address that problem.
Harrison, whose company hired former CFTC commissioner and acting chair Mark Wetjen to shepherd its regulatory goals, said an approval from the CFTC would set up FTX as “the first crypto-native exchange that is able offer margined crypto derivatives in an integrated platform with a cryptocurrency spot exchange.”
However, the committee’s Democratic chairman was suspicious of the plan.
“This needs far more review,” said Rep. David Scott, calling the FTX idea “unproven and untested.” He said he’s “very concerned about this.”
After the CFTC’s 60-day comment period that ends May 11, Behnam said his staff will plan for a roundtable on non-intermediated market structure later that month. The agency will also then have a full slate of commissioners, after the Senate this week confirmed four nominees to fill gaps in the shorthanded agency.
The CFTC could eventually decide to make tweaks to the FTX idea based on the agency’s internal review and outside input, and then it would be up to the company to decide whether it can live with those changes. Behnam said he doubted an FTX approval would require changes to existing commodities rules.
Meanwhile, the agency chief argued that it’s increasingly important for this “largely unregulated market” to put a definition to what makes a digital commodity. He said that definition should come from the CFTC.
Behnam, installed as chairman by President Joe Biden, also seized a chance during questioning to warn lawmakers that the agency needs more money to deal with its rapidly increasing responsibilities – including over crypto assets.
“I do think we will need an increased budget to deal with all of these issues in the digital assets space,” Behnam said.
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