The crypto industry has eagerly watched for a decision from the U.S. Commodity Futures Trading Commission to allow FTX to directly clear its customers’ derivatives transactions, but that market-shaping application has entered murky territory.
The potential Binance deal to acquire FTX leaves the ownership of the applicant – FTX US Derivatives – in flux, raising questions about whether and how the effort will proceed. The company’s application, if approved by the regulator, could upend the way margin-backed derivatives trades are cleared, cutting out the long tradition of clearing houses in those markets.
FTX’s derivatives affiliate that applied with the CFTC is part of the U.S. arm of the global crypto exchange. Though the global FTX has struck a deal to be absorbed by rival Binance, FTX CEO Sam Bankman-Fried has indicated that the U.S. arm is “not currently impacted by this” because it’s a separate company.
For the CFTC’s part, Steven Adamske, an agency spokesman, said he “cannot comment until the applicant provides clarity on the application.”
A Washington, D.C.-based official for FTX couldn’t immediately be reached for comment.
“Its proposal with the CFTC to offer central clearing of margin products to retail customers will be seen in a different light,” said Ian Katz, a managing director at Capital Alpha Partners, in a Tuesday research note. Bankman-Fried has been on a Washington charm offensive in recent weeks, Katz wrote, but this development will mean the company’s “advocacy role in D.C. will, at the very least, be diminished.”
CFTC Chairman Rostin Behnam said last month that the application could potentially represent “another phase in the evolution of market structure, innovation and disruption.” And Zach Dexter, the CEO of FTX US Derivatives – a company previously known as LedgerX, which is already regulated by the CFTC – said recently that the application process has been going well, and the agency has been collecting a lot of highly detailed information.
Still, the idea has encountered plenty of enemies. Among them are the established derivatives industry, where major firms owe their livelihood to acting as go-betweens, and consumer-protection advocates who have criticized its potential risks from around-the-clock market manipulation and volatility as positions are automatically liquidated.
“Today’s reported fire sale by FTX of its non-U.S. operations to Binance so that it has the liquidity to meet its current obligations proves that FTX does not have the financial wherewithal represented in its application,” said Dennis Kelleher, the CEO of Washington-based Better Markets, in a statement. The company should pull the application, he argued, or the CFTC should immediately deny it.
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