While the SEC is outputting crazily, what is the attitude of the CFTC?

Speech: Rostin Behnam, Chairman of the U.S. CFTC

Compiled by: Azuma, Odaily Planet Daily

In two consecutive days, the U.S. Securities and Exchange Commission (SEC) has filed lawsuits against two major exchanges, Binance and Coinbase, shocking the crypto and even the entire financial industry.

While the SEC and its head Gary Gensler are in a frenzy, another major regulatory agency, the Commodity Futures Trading Commission (CFTC), chaired by Rostin Behnam, will attend a hearing today held by the House Agriculture Committee on the topic of "Providing Clarity for the Digital Asset Spot Market." Earlier, Rostin had published the full text of his testimony on his personal social media, from which we may glimpse the agency's current attitude towards crypto.

Below is the full content of Rostin's testimony, compiled by Odaily Planet Daily.

Chairman Thompson, Commissioner Scott, and other committee members, thank you for the opportunity.

On the Necessity of Legislative Action

Since attending a hearing in the Senate two years ago, I have been emphasizing the necessity of "legislative action to address the lack of regulation in the digital commodity market." I have clearly stated in my testimony before Congress and other public statements that bringing this volatile market under regulatory oversight can protect customers, ensure market resilience and stability, and prevent risks from spilling over into the traditional financial system.

I am not alone in this view. Last year, the Financial Stability Oversight Council unanimously issued a report on "Financial Stability Risks in the Digital Asset Market." One of the core recommendations in the report is to urge Congress to enact legislation to fill the obvious regulatory gaps in the non-securities digital asset spot market.

The events of the past year have heightened the urgency of these recommendations. The bankruptcies of several large digital asset platforms wiped out billions of dollars in customer funds; multiple major market participants were suspected of engaging in backdoor manipulation with affiliated trading platforms; cybersecurity vulnerabilities were continuously exploited by hackers, leading to billions of dollars in losses…

Leaving billions of dollars in customer funds and investments in essentially unregulated entities is bound to lead to disaster. However, recent history has provided us with many viable experiences. After the 2008 financial crisis, this committee reformed the previously unregulated swap market on a bipartisan basis, based on core principles of sound market regulation, designing measures such as transparency requirements, reporting, and registration requirements.

To prevent potential crises in the future, these measures are necessary, and they have now become effective regulatory rules in the derivatives market. In fact, during the bankruptcy of the FTX group, a CFTC-regulated related entity avoided a similar fate (referring to the derivatives exchange LedgerX, which was previously under FTX), precisely because CFTC regulations require any registered entity to ensure customer fund segregation, sufficient financial resources, and appropriate governance. In other words, the entity was able to protect customer funds and continue operations from a business perspective.

I believe that similar, time-tested regulatory measures should be applied to the digital commodity market, focusing on protecting customer assets, overseeing trading activities, prohibiting conflicts of interest, and implementing strict cybersecurity standards.

Focus Areas for Regulation

I encourage Congress and the administration to continue addressing the regulatory gaps in digital commodities and fully support the committee in developing legislative measures to grant the CFTC more authority. However, any new laws considered by Congress must not undermine existing laws. If the securities laws apply, the SEC should use its strong powers to protect customers and address the information gap between securities issuers and investors in the market.

I want to emphasize that in any legislation regarding this issue, Congress should focus on the following aspects:

1. Stronger Customer Protection

In the novel and technologically complex market of digital assets, strong customer protection is crucial. Congress should ensure that the CFTC has full authority to require registered entities to make necessary disclosures on various matters (such as investment risks, cybersecurity risks, mining, settlement practices, and other related activities) to ensure customers receive the best prices, and require registered entities to properly segregate and protect customer funds to prevent platform failures.

We also know that these markets are often touted as a form of "inclusive finance," but their users are most susceptible to the inherent risks of these assets and predatory financial schemes. Any legislation in this area should recognize this dynamic and require further work and research to better understand how these populations interact with the market and ensure they are adequately protected.

2. More Comprehensive Regulatory Authority

In the absence of federal market regulation, the digital asset market has been plagued by fraud and manipulation. The CFTC has been proactive in regulating these markets, bringing a total of 85 cases with fines and restitution exceeding $4 billion.

However, our legal authority in the digital commodity token spot market is somewhat limited, allowing us to act only after fraud has occurred. A more robust regulatory framework should empower the CFTC to proactively establish rules to minimize fraud. This should include setting strict standards to prevent conflicts of interest, establishing rules to maintain a fair, open, and transparent market, and actively monitoring the trading activities of market participants.

3. New Authority Requires More Funding

Currently, the CFTC is the only financial market regulator that relies on congressional appropriations. Other financial regulatory agencies have self-funding mechanisms, which provide greater assurance for their budget requests. For regulatory agencies taking on new responsibilities, Congress must provide the resources necessary to fulfill those new duties. Regulating the digital commodity market will impose new responsibilities on the CFTC, and fulfilling these responsibilities cannot rely solely on our existing resources.

I want to thank the committee again for the opportunity to testify today. I am pleased that the committee is addressing the challenging policy issues in the digital asset space, particularly the existing regulatory gaps. Of course, there is much work to be done, and I am ready to discuss this legislative proposal with this committee and members of Congress to ensure it addresses all key considerations for this emerging market.