A top financial regulator told lawmakers Thursday his agency lacked the proper legal authority to oversee collapsed cryptocurrency firm FTX and step in before the company imploded, setting off a crisis within the digital asset industry.
Commodity Futures Trading Commission (CFTC) Chairman Rostin Benham told a Senate panel Thursday that his agency had insight only into a small segment of the FTX empire—one of the company’s few financially solvent affiliates—and did not have the ability to spot broader issues with the Bahamas-based crypto firm.
Benham also called for new rules that would give the CFTC and other regulators clear authority and more power to oversee crypto firms, which do not fit neatly into the domain of any one federal financial market watchdog.
“I need to do my job and I need to fulfill the mandate that you provide to me,” Benham, a Biden appointee, told the Senate Agriculture Committee.
“So if you provide me authority to oversee cash market commodity digital tokens, I will be very transparent with you about what I need to fulfill that responsibility,” he continued.
The CFTC and Securities and Exchange Commission (SEC) each have the power to penalize firms who break financial rules with cryptocurrency products. Each agency has filed dozens of enforcement actions and levied millions of dollars in fines on firms and individuals behind crypto investment offerings that either violated registration rules or defrauded customers.
But neither agency has the authority to supervise certain crypto companies—such as digital token exchanges and “wallets”—in the same way they monitor stock brokerages and futures traders in conventional financial markets.
Benham told lawmakers Wednesday that the CFTC only had direct oversight over LedgerX, a U.S.-based exchange operated by FTX where customers could buy futures contracts tied to cryptocurrency offerings. LedgerX was registered with the CFTC as a futures trading platform and was thus subject to agency supervision and regulations that did not pertain to the broader FTX empire.
While LedgerX has remained solvent, its parent company FTX, an affiliated investment firm Alameda Research, and others connected to the titanic crypto platform have collapsed into bankruptcy. But Benham insisted the CFTC did not have the legal authority to look beyond LedgerX and received no warnings or complaints about the missteps that led to FTX’s demise.
“Unfortunately, when we act it’s often after the fact because the information that allows us to bring an enforcement action to digital asset cash commodity markets… is coming to us from outsiders, from referrals, from tips,” Benham explained.
“This is in stark contrast to some of the surveillance tools and examination tools that we would have if we had a comprehensive regulatory framework over digital asset commodities.”
Bankman-Fried has admitted to sending money deposited on FTX by customers to fund Alameda’s investments—many of which backfired as cryptocurrency values plunged—even though FTX promised users it would not use customer money for such purposes.
He also said FTX lacked basic information about the amount of money it owed to customers and how much hard cash it had to back up its obligations—two absolute necessities for any business, let alone one responsible for other people’s money. FTX’s deep financial connections to other cryptocurrency firms have also brought other trading platforms and crypto lenders into bankruptcy or debilitating financial losses.
Lawmakers in both parties say the collapse of FTX illustrates the need to bolster oversight of cryptocurrency companies that do not fall squarely under the SEC or CFTC’s purview. While both Democrats and Republicans have agreed for years on the insufficiency of current crypto regulation, they’ve struggled to make basic steps toward filling in those gaps.
“Congress must act to pass legislation that will hold this industry to the same rules as traditional financial institutions and close gaping holes in our regulations. If we fail to meet this responsibility consumers will continue to be harmed and hardworking Americans will continue to lose billions of dollars at the hands of bad actors like FTX,” said Senate Agriculture Committee Chairwoman Debbie Stabenow (D-Mich.).
Stabenow and several Agriculture panel members from both parties introduced earlier this year the Digital Commodities Consumer Protection Act (DCCPA), a bill to give the CFTC greater authority over cryptocurrency exchanges.
“The bill is a good faith effort to establish a constructive regulatory framework that provides the CFTC with the resources and the authority necessary to protect consumers and retail investors while promoting industry innovation in digital commodity spot or cash markets,” said Sen. John Boozman (Ark.), the panel’s ranking Republican and a co-sponsor of the bill.
Benham has expressed support for the DCCPA and said the CFTC would implement the sprawling new rules it would require as soon as possible, insisting the agency was up to the task.
But the bill faces an uncertain future in the Senate after former FTX CEO Sam Bankman-Fried spent months urging lawmakers to quickly pass the bill, alienating other crypto advocates in Washington, D.C. along the way. Several cryptocurrency trade groups and firms have expressed concerns about the legislation and doubts about whether it would have prevented the collapse of FTX.