Why Congress Needs to Act: Lessons Learned from the FTX Collapse (U.S. Senate Committee on Agriculture, Nutrition, and Forestry)

Hearing	Why Congress Needs to Act: Lessons Learned from the FTX Collapse
Committee	U.S. Senate Committee on Agriculture, Nutrition, and Forestry
Date	December 1, 2022

 

Hearing Takeaways:

• The Recent Collapse of FTX: The hearing focused on how hedge fund Alameda Research’s financial troubles had caused cryptocurrency exchange FTX and most of its affiliated companies to declare bankruptcy within a matter of days. Committee Members and U.S. Commodity Futures Trading Commission (CFTC) Chairman Behnam expressed concerns that FTX’s lack of risk management practices, conflicts of interest, misuses of customer funds (including the co-mingling of customer and hedge fund monies), and excessive vertical integration could have caused this collapse. Chairman Behnam stated however that it would likely take months for the U.S. to fully understand the causes of FTX’s failure.
  • The Survival of LedgerX: Committee Members and Chairman Behnam emphasized that LedgerX (a derivatives exchange and clearinghouse) was one of the few FTX-affiliated entities that was not affected by FTX’s recent collapse. They attributed this survival to LedgerX’s registration with the CFTC as a derivatives exchange and clearinghouse. They stated that LedgerX’s CFTC registration had meant that LedgerX’s finances were entirely separate from FTX’s finances. Chairman Behnam testified that the CFTC has been in “near daily contact” with LedgerX, as well as the third-party custodians that LedgerX uses to hold both cash and digital assets. He stated that LedgerX customer property appeared to be secure and that LedgerX appeared to have the necessary financial resources to continue operating for the foreseeable future. 
  • The CFTC’s Interactions with FTX Prior to FTX’s Collapse: Chairman Behnam noted how FTX had held numerous meetings with the CFTC prior to the company’s collapse related to FTX’s pursuit of a clearinghouse application. He testified that his personal office had met with former FTX CEO Sam Bankman-Fried and his team ten times over the previous 14 months. He also testified that his office had held two phone calls and had exchanged several messages with FTX regarding this application. He emphasized that the CFTC was statutorily required to respond to FTX’s application. He stated that his office would conduct additional reviews of the CFTC’s meetings with FTX and would provide updates to the Committee on this subject if necessary.
• The Digital Commodities Consumer Protection Act of 2022: The hearing also focused on the Digital Commodities Consumer Protection Act of 2022, which is bipartisan legislation that would provide the CFTC with regulatory authority over the trading of digital commodity tokens. Committee Members and CFTC Chairman Behnam noted how the CFTC currently lacked jurisdiction over digital commodity spot markets and indicted that the CFTC only possessed anti-fraud and anti-manipulation authority. He stated that these authorities only enabled the CFTC to respond to problems after they arise (rather than proactively police the digital commodities space). Committee Members and Chairman Behnam also asserted that the legislation’s robust regulatory framework for digital frameworks could have helped to prevent many of the drivers of FTX’s collapse.
  • Imposition of a User Fee: A notable feature of the Digital Commodities Consumer Protection Act of 2022 is its imposition of a user fee on digital commodities market participants to fund the CFTC’s new responsibilities. Sen. Dick Durbin (D-IL) noted however that Congress could limit the total amount of user fees collected by the CFTC and expressed concerns that the digital assets industry might pressure Congress to keep this limit low. Chairman Behnam expressed confidence in the CFTC’s ability and willingness to use this new funding to police the digital assets space.
  • The Legislation’s Definition of the Term “Dealer”: Full Committee Ranking Member John Boozman (R-AR) expressed concerns over the definition of the term “dealer” under the Digital Commodities Consumer Protection Act of 2022. He indicated that this definition would require CFTC registration within the digital assets context for U.S. entities that do not trade with retail counterparties and do not offer trading with margin, leverage, and custody. He stated that this policy would establish a precedent for future Congresses to call for these same requirements in traditional commodity markets. He called these requirements “wholly inappropriate” for traditional commodity markets.
  • The Legislation’s Restrictions on Good Locations for Customer Money, Securities and Property: Sen. Roger Marshall (R-KS) noted how the Commodity Exchange Act and CFTC regulations deem any bank or trust company in the U.S. to be a good location for customer money, securities, or property. He expressed reservations that the Digital Commodities Consumer Protection Act of 2022 would restrict such good locations to insured depository institutions, insured credit institutions, and digital commodity platforms.
  • Potential Revisions Considering FTX’s Collapse: Chairman Behnam recommended that Congress take a “pause” and review the Digital Commodities Consumer Protection Act of 2022 considering recent events. He specifically suggested that Congress address financial information disclosure requirements for cryptocurrency entities and bolster the legislation’s conflicts of interest provisions.
  • The CFTC’s Ability to Swiftly Implement the Legislation: Sen. Deb Fisher (R-NE) noted how the Digital Commodities Consumer Protection Act of 2022 would instruct the CFTC to write rules and guidelines related to customer protection, margin trading of digital commodities, conflicts of interest, lending activities, reporting of trades and other information, and stablecoins. She expressed concerns that it might take the CFTC a long time to develop and issue these rules. Chairman Behnam expressed confidence in the CFTC’s ability to swiftly develop and implement these rules. He estimated that this could be accomplished within 12 to 18 months.
• Collaboration Between the CFTC and the U.S. Securities and Exchange Commission (SEC): A key area of discussion during the hearing was the CFTC’s ability to collaborate with the SEC on the regulation of digital assets. Committee Members and CFTC Chairman Behnam expressed agreement that the CFTC should oversee digital assets deemed to be commodities and the SEC should oversee digital assets deemed to be securities. Chairman Behnam noted how the CFTC already worked with the SEC to oversee some existing markets and expressed his confidence in the ability of the two agencies to collaborate on digital assets market oversight.
  • Classification of Digital Assets as Either Securities or Commodities: Several Committee Members raised concerns that determining whether a given digital asset constitutes a security or commodity was not always a straightforward exercise. Chairman Behnam stated that historical precedent should inform determinations as to what constitutes a commodity and what constitutes a security. He noted how the test established under the U.S. Supreme Court’s decision in SEC v. W. J. Howey Co. (known as the Howey test) defines a security as an investment of money in a common enterprise with the expectation of profit from the work of others. He stated that these same fundamental characteristics should be applied to digital securities. He acknowledged that while the SEC and the CFTC would likely need to develop additional considerations for determining whether digital assets constitute securities or commodities, he asserted that the Howey test framework was generally sufficient.
• Other Policy Topics: In addition to the aforementioned policy topics, the hearing addressed additional policy issues relating to digital assets and the CFTC more broadly.
  • Deceptive Cryptocurrency Advertisements: Sen. Amy Klobuchar (D-MN) expressed concerns over the sheer quantity of cryptocurrency advertisements currently targeting retail investors. She stated that cryptocurrency companies were not subject to the same types of advertising restrictions as were present in the broker space. She warned that this situation could leave consumers vulnerable. She also expressed concerns over how cryptocurrency companies have made use of social media platforms and influencers to promote their products. CFTC Chairman Behnam called for more robust disclosure recommendations for cryptocurrency companies. He also testified that the CFTC currently worked closely with the SEC and the U.S. Federal Trade Commission (FTC) on enforcement matters and on publishing customer protection advisories.
  • Cryptocurrency Threats to the U.S. Dollar and National Security: Several Committee Members expressed concerns that cryptocurrencies could threaten the global supremacy of the U.S. dollar and expressed specific concerns over China’s recent issuance of a digital currency. They also raised concerns over the use of cryptocurrencies in various illicit activities (including ransomware, drug trafficking, and human trafficking).
  • Foreign Acquisitions of U.S. Financial Infrastructure: Sen. Kirsten Gillibrand (D-NY) expressed interest in identifying who owned and controlled the U.S.’s critical infrastructure and stated that platforms engaging in financial exchange and custodial services constitute critical infrastructure. She noted how a CFTC registrant had to notify the CFTC when ownership of a CFTC-licensed exchange changes at the holding company level under current CFTC rules. She stated however that the CFTC’s current rules do not require detailed information about the purchasing entity of a CFTC-licensed exchange or the beneficial owners of the purchasing entity. She also stated that the CFTC’s current rules did not allow for the CFTC to impose conditions on the transaction to manage risk or to block the sale of an exchange under exceptional circumstances. She remarked that the CFTC should be permitted to inquire about exchange transactions involving suspicious parties. Chairman Behnam expressed interest in expanding the CFTC’s authority to review transactions involving CFTC-regulated entities.
  • U.S. Customers Engaging in Overseas Cryptocurrency Activity: Sen. Gillibrand also expressed concerns over the number of U.S. customers that were illegally accessing foreign cryptocurrency exchanges. Chairman Behnam called this situation problematic as it could expose the U.S. to international financial risks. He also discussed how many savvy U.S. retail investors were able to use virtual private networks (VPNs) to access offshore exchanges. He commented that while the CFTC probably lacked the technological expertise to address this practice on its own, he suggested that the CFTC could work with other federal agencies on efforts to prevent U.S. customers from bypassing prohibitions on using foreign exchanges.
  • Use of Cryptocurrencies in Retirement Accounts: Sen. Tina Smith (D-MN) mentioned how she had joined Sen. Dick Durbin (D-IL) and Sen. Elizabeth Warren (D-MA) in calling for investment firms (such as Fidelity Investments) to keep cryptocurrencies out of their retirement plans because cryptocurrencies lacked sufficient regulations.
  • Involvement of Environmental, Social, and Governance (ESG) Ratings Companies within the Cryptocurrency Space: Sen. Tommy Tuberville (R-AL) raised concerns that improper recommendations from ESG ratings companies could have led some people to invest in FTX and stated that Congress must address ESG rating systems. Chairman Behnam remarked that Congress should consider ways to address cryptocurrency firms that receive ESG ratings.
  • The CFTC’s Whistleblower Program: Sen. Charles Grassley (R-IA) expressed interest in the functioning of the CFTC’s Whistleblower Program, which provides monetary incentives to people that report violations of U.S. commodity laws. Chairman Behnam remarked that the CFTC was currently in a “good place” regarding its ability to pay whistleblowers. He stated however that the CFTC must continue to work ensuring the effectiveness of its Whistleblower Program. He attributed the CFTC Whistleblower Program’s challenges to the significant rewards streaming from whistleblower cases (which he called a good thing). He expressed his interest in having the CFTC continue to make significant payments to whistleblowers. He further testified that the CFTC had not received any alerts through the program regarding FTX.
  • Role of State Regulators in Overseeing the Digital Assets Space: Sen. Deb Fischer (R-NE) expressed concerns that there was insufficient communication between federal and state financial regulators, especially regarding digital assets. Chairman Behnam testified that he was currently in communication with state securities regulators and remarked that state securities regulators played key roles in ensuring that investors were adequately informed.

Hearing Witnesses:

1. The Hon. Rostin Behnam, Chairman, U.S. Commodity Futures Trading Commission

 Member Opening Statements:

Full Committee Chairman Debbie Stabenow (D-MI):

• She discussed how the cryptocurrency market had recently experienced significant turmoil stemming from news reports of hedge fund Alameda Research’s financial troubles.
  • She explained how Alameda Research was closely affiliated with the cryptocurrency trading platform FTX and indicated that Alameda Research’s balance sheet was heavily dependent on a FTX-created crypto token.
• She noted how Alameda Research’s financial troubles had caused FTX and most of its affiliated companies to declare bankruptcy within a matter of days.
• She remarked that a generous view of these events would suggest that there had been an “alarming” lack of internal controls and “egregious” governance failures at FTX.
  • She stated that a less generous view of these events would suggest that FTX CEO Sam Bankman-Fried and his leadership team had lied to and stolen from FTX’s customers.
• She remarked that the effects of FTX’s recent collapse was still being felt throughout the broader cryptocurrency ecosystem.
• She discussed how the Committee had been examining how the U.S. government’s lack of oversight of the cryptocurrency industry posed various risks.
  • She recounted how CFTC Chairman Rostin Behnam had previously warned the Committee that the CFTC’s enforcement actions against cryptocurrency firms were “just the tip of the iceberg.”
• She mentioned how the Committee had worked on bipartisan legislation that would provide the CFTC with regulatory authority over the trading of cryptocurrency tokens that were not securities.
  • She emphasized that there was no current federal market regulation for spot crypto assets that were not securities.
  • She noted how non-security crypto assets include Bitcoin and Ethereum, which are the two most heavily traded crypto assets.
• She mentioned how the White House and the U.S. Financial Stability Oversight Council (FSOC) have urged Congress to address this lack of federal market regulation for spot crypto assets.
• She remarked that the Digital Commodities Consumer Protection Act of 2022 would provide federal market regulation for spot crypto assets that were not securities.
• She asserted that this legislation would not take authority away from other financial market regulators and would not make the CFTC the primary regulator for crypto assets.
  • She highlighted how crypto assets could be used in a variety of ways and contended that no single financial market regulator possessed the expertise or the authority to regulate the entire cryptocurrency industry.
• She stated that the Committee was working with the U.S. Senate Committee on Banking, Housing, and Urban Affairs, the SEC, and other financial regulators to bring greater protections to the cryptocurrency market.
• She asserted that this most recent FTX-created crisis further confirmed the need for a whole of government approach to regulating the cryptocurrency market.
  • She commented that the risks associated with cryptocurrency trading had long been well known.
• She stated that the lack of clear and consistent rules for cryptocurrencies had enabled these assets to flourish, despite harmful conflicts of interest and the absence of responsible governance and risk management practices amongst crypto firms.
  • She further alleged that these crypto firms had failed to safeguard customer assets.
• She remarked that the Digital Commodities Consumer Protection Act of 2022 was meant to address the aforementioned problems within the cryptocurrency space.
• She called on federal regulators (including the SEC) to make use of their existing authorities to register and oversee crypto firms.
  • She lamented how there were not enough cryptocurrency fraud prosecutions and how such prosecutions could only be brought after a customer’s money had been lost.
• She remarked that cryptocurrency exchanges should not be allowed to gamble with customer funds, invent products with little or no intrinsic value and accept said products as collateral for loans, and engage in self-dealing.
  • She commented that FTX had engaged in the aforementioned activities and had been emboldened by a lack of federal oversight.
• She lastly discussed how FTX had purchased LedgerX, a derivatives exchange and clearinghouse, and noted how LedgerX was registered with the CFTC.
  • She highlighted how LedgerX has a solvent balance sheet and responsible management and noted that LedgerX’s customer money had been safeguarded and was accounted for.
• She stated that the Digital Commodities Consumer Protection Act of 2022 would replicate LedgerX’s protections for digital commodity markets.
  • She asserted that this legislation would have made FTX’s conduct illegal and preventable.

Full Committee Ranking Member John Boozman (R-AR):

• He called the sudden bankruptcy of FTX “truly shocking” and mentioned how public reports have suggested that FTX lacked risk management practices, had conflicts of interest, and misused their customer funds.
  • He stated that FTX’s failure required Congress to assess what had happened, the failure’s impact on U.S. consumers and investors, whether this failure could have been prevented, and the systemic risks posed by this failure.
• He noted how the Committee held exclusive jurisdiction over the U.S.’s commodities markets and indicated that Bitcoin constitutes a commodity.
• He remarked that the U.S.’s failure to regulate commodity exchanges would leave consumers at the mercy of bad actors and would drive cryptocurrency entities offshore.
  • He commented that U.S. consumers would still be harmed when offshore cryptocurrency entities failed.
• He asserted that the CFTC constitutes the correct agency to regulate digital commodities and stated that the CFTC had consistently demonstrated its willingness to protect consumers via enforcement actions against bad actors.
• He further remarked that the CFTC had a pragmatic and principles-based approach that enhanced consumer protection through building and implementing constructive and workable regulatory structures for markets to function in.
  • He identified the CFTC’s work regulating the futures market as an example of the Agency’s success.
• He stated that the CFTC regulated markets through core principles that prevent conflicts of interest, prohibit abusive trade practices, protect customer funds, and inform investors about market risks.
• He mentioned how he had worked with Full Committee Chairman Debbie Stabenow (D-MI) to use the aforementioned principles and the CFTC’s expertise in regulating evolving and complex markets to develop a regulatory framework for digital commodities spot markets.
  • He expressed interest in learning about how the CFTC would have applied the Digital Commodities Consumer Protection Act of 2022 to FTX had the legislation been in effect during the previous year.
  • He also expressed interest in identifying regulatory gaps that Congress must still address.
• He noted how both he and his office had taken “at least” 240 meetings with a wide variety of stakeholders as part of the development process for the Digital Commodities Consumer Protection Act of 2022.
  • He stated that this legislation incorporates consumer advocacy, academic input, and regulatory technical assistance.
• He remarked that the Digital Commodities Consumer Protection Act of 2022 would establish a constructive regulatory framework that would provide the CFTC with the resources and authority necessary to protect consumers and retail investors while promoting industry innovation in the digital commodities spot market.
  • He expressed his confidence in the CFTC’s ability to play an expanded regulatory role in the digital commodities spot market.

Witness Opening Statements:

The Hon. Rosin Behnam (U.S. Commodity Futures Trading Commission):

• He remarked that the events of the previous few weeks have highlighted the “perilous” state of the digital assets market.
• He asserted that the current “patchwork” of federal and state-based regulations governing the digital assets market was an unsuitable substitute for a comprehensive approach.
  • He commented that many Americans will likely lose money because digital asset markets lack the basic protections found in more traditional financial markets.
• He remarked that the absence of stringent and uniform standards had led the digital assets market to expand “rapidly”.
  • He commented that the nominal barriers to entry for new products and new consumers had caused “massive” speculative interest to replace legitimate market forces, which had put the American public at risk.
• He stated that the U.S. would need to move quickly on a thoughtful regulatory approach to establish guardrails in fast growing digital asset markets that contained evolving risks.
  • He asserted that the U.S.’s failure to address these markets would leave digital commodities investors “largely unprotected.”
• He remarked that the CFTC currently lacked the necessary and direct authority to write rules and oversee the digital assets market.
  • He noted how the CFTC could only address the digital assets market using its limited anti-fraud and anti-manipulation authority and indicated that this authority could only be exercised following an incident of malfeasance.
  • He commented that this post-crime enforcement failed to protect victims of market fraud and manipulation.
• He explained how the CFTC’s current ability to oversee the digital assets market was largely dependent on referrals and tips from external sources.
• He testified however that the CFTC had brought more than 60 digital assets enforcement cases since 2014 with total penalties exceeding $820 million.
  • He mentioned how more than 20 percent of the CFTC’s enforcement actions in fiscal year (FY) 2022 had involved digital assets.
• He stated that the CFTC was likely only able to prosecute a fraction of total digital assets fraud due to its limited enforcement authority.
• He contended that limited enforcement authority was no substitute for comprehensive regulation in which trading platforms, dealers, custodians, and other critical infrastructure participants are required to be registered and subject to direct oversight from a regulator.
  • He mentioned how he had requested that Congress provide the CFTC with the authority to impose its traditional regulatory regime over the digital asset commodities market.
• He remarked that the CFTC and the SEC could have shared responsibility in overseeing the digital assets market.
  • He elaborated that the SEC could use its existing authorities and reporting regimes for security tokens while the CFTC could apply its market-based rules to commodity tokens.
• He mentioned how he had previously expressed the CFTC’s support for the Digital Commodities Consumer Protection Act of 2022 during a September 2022 Committee hearing.
  • He commented that this legislation’s regulatory framework was similar to the CFTC’s current regulatory framework for derivatives.
• He expressed his encouragement with the bipartisan and bicameral support for legislation to establish guardrails for the digital assets market and for the adoption of regulations to impart transparency, accountability, stability, customer protections, and oversight across digital assets.
• He then discussed how most of the recent coverage surrounding FTX had focused on the over 130 different entities that have filed for bankruptcy.
  • He noted that these entities include an offshore exchange-based exchange for trading digital assets and digital asset-based derivatives, a highly leveraged market making firm trading throughout the digital asset market, and a U.S.-based spot exchange.
• He highlighted however that LedgerX was one of the few FTX entities to not file for bankruptcy and noted that LedgerX was a CFTC-registered derivatives exchange and clearinghouse.
  • He elaborated that LedgerX is a registered designated contract market (DCM), swaps execution facility (SEF), and a derivatives clearing organization (DCO)
• He testified that the CFTC has been in “near daily contact” with LedgerX, as well as the third-party custodians that LedgerX uses to hold both cash and digital assets.
  • He stated that LedgerX customer property appeared to be secure and that LedgerX appeared to have the necessary financial resources to continue operating for the foreseeable future.
• He remarked that the initial evidence suggests that CFTC regulations were working to ensure that CFTC-registered entities were able to protect customers and continue market operations.
• He contended that comprehensive market regulation would be key to protecting against future cryptocurrency exchange failures.
  • He stated that the CFTC’s inability to regulate the digital commodity market had been largely responsible for FTX’s collapse.

Congressional Question Period:

Full Committee Chairman Debbie Stabenow (D-MI):

• Chairman Stabenow noted how the CFTC had possessed a “limited window” into FTX’s operations apart from LedgerX and highlighted how LedgerX is registered with the CFTC. She asked Chairman Behnam to provide insights into the cause of FTX’s collapse based on the CFTC’s visibility into LedgerX and the CFTC’s discussions with other regulators.
  • Chairman Behnam noted how LedgerX had been “walled off” from other affiliates and entities within the FTX family. He testified that LedgerX was healthy, solvent, and operational and stated that LedgerX’s customer funds were accounted for. He indicated that the CFTC had only been able to directly regulate LedgerX based on its authorities. He remarked that the CFTC’s direct regulation of LedgerX had prevented FTX’s other entities from accessing LedgerX’s funds. He then noted that while the CFTC was still receiving information about FTX’s collapse, he stated that the collapse appeared to result from liquidity problems that forced a run on FTX and its affiliates. He noted how this run had led FTX to freeze customer withdrawals and to ultimately file for bankruptcy. He also stated that there were indications that FTX had co-mingled customer funds and had failed to properly protect customer property. He further noted how FTX could have had conflicts of interest in their management of customer funds. He stated that the CFTC was continuing to monitor the situation.
• Chairman Stabenow then discussed how FTX had requested that the CFTC amend LedgerX’s clearinghouse license and indicated that CFTC was reviewing this proposal at the time of LedgerX’s bankruptcy. She asked Chairman Behnam to describe the CFTC’s interactions with FTX and its former CEO regarding this request. She also asked Chairman Behnam to indicate the status of this request before it had been withdrawn.
  • Chairman Behnam remarked that FTX had been “dogged” in its pursuit of an approval for its clearinghouse application. He indicated that while he did not know the exact number of meetings that FTX had with CFTC staff regarding the application, he stated that the FTX team had conducted numerous meetings with CFTC staff regarding the application. He noted however that he had conducted an initial review of his calendar and testified that his personal office had met with former FTX CEO Sam Bankman-Fried and his team ten times over the previous 14 months. He indicated that meetings were at the request of FTX and were all in relation to FTX’s clearinghouse application. He further indicated that nine of these meetings were held at the CFTC’s office in Washington, DC and that one of these meetings was held at a conference in Florida. He also testified that his office had held two phone calls and had exchanged several messages with FTX regarding this application. He emphasized that the CFTC was statutorily required to respond to FTX’s application. He noted how FTX’s application had received both strong support and strong opposition and stated that this public interest had led the CFTC to consider the application in a very transparent fashion. He mentioned how the CFTC had issued a request for information (RFI) regarding FTX’s application in March 2022 and testified that the CFTC had received 1,500 responses to this RFI. He also noted how the CFTC had held a public roundtable on non-intermediation issues. He emphasized that this roundtable did not specifically pertain to FTX’s application and predicted that future clearinghouse applications before the CFTC would seek permission for non-intermediated trading. He remarked that the granting of FTX’s application could have impacted market structures, derivatives markets, and broader financial markets. He stated that the potential impacts of FTX’s application had thus led him to personally get involved with the application process. He lastly noted how FTX’s application had been submitted in December 2021 and had been formally withdrawn on November 11, 2022. He testified that the CFTC had not yet rendered its decision on the application at the time of the application’s withdrawal. He stated that the CFTC was still carefully reviewing the application and stakeholder input on the application at the time of the application’s withdrawal.
• Chairman Stabenow lastly asked Chairman Behnam to indicate whether the Digital Commodities Consumer Protection Act of 2022 would have prevented the conduct that had led to FTX’s failure.
  • Chairman Behnam remarked that FTX’s failure appeared to be the result of various factors based on what was currently known. He stated that these factors include significant conflicts of interest, the co-mingling of customer money and institutional money, a lack of recordkeeping, a lack of corporate governance, and a lack of corporate risk controls. He remarked that the Digital Commodities Consumer Protection Act of 2022 would have addressed the factors that had contributed to FTX’s failure.

Full Committee Ranking Member John Boozman (R-AR):

• Ranking Member Boozman called it important for Congress to provide the CFTC and the SEC with regulatory authority so that the agencies could work to protect against cryptocurrency market problems. He asked Chairman Behnam to respond to the argument that the CFTC was a “soft touch” regulator. He commented that he did not believe this argument to be true.
  • Chairman Behnam dismissed the argument that the CFTC was a “soft touch” regulatory as unfounded. He remarked that the CFTC was one of the world’s strongest and most respected regulators, especially with regard to derivatives markets. He highlighted how LedgerX (which is a CFTC-regulated entity) is one of the few FTX-affiliated entities to survive the company’s recent demise. He commented that LedgerX’s survival demonstrates the effectiveness of CFTC regulation. He also testified that the CFTC had assessed over $2.5 billion in penalties in FY 2022 and indicated that the CFTC’s budget for this period had only been $320 million. He further mentioned how 20 percent of the CFTC’s enforcement cases for FY 2022 involved digital assets and asserted that these cases had been substantive in nature. He then discussed how cleared derivatives were the one area that had successfully weathered the 2008 Financial Crisis. He noted how the CFTC’s regulatory framework for cleared derivatives would later inform the Dodd–Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank) swaps reforms. He also mentioned how the CFTC’s framework for cleared derivatives was influencing current policy discussions around reforming the U.S. Treasury market.
• Ranking Member Boozman asked Chairman Behnam to address whether the CFTC could have mitigated FTX’s collapse if FTX had been a U.S.-registered exchange.
  • Chairman Behnam remarked that the CFTC needs the authority to directly oversee cryptocurrency exchanges. He stated that if FTX had been a U.S.-registered exchange, then the CFTC would have been able to identify FTX’s conflicts of interest, co-mingling of funds, and poor recordkeeping practices. He asserted that the CFTC could have thus prevented FTX’s collapse if it had possessed the necessary authorities. He highlighted how FTX had been able to provide robust oversight of LedgerX because it is a U.S.-registered exchange and noted how LedgerX had survived FTX’s collapse. He noted how the FTX was in direct communication with LedgerX and its custodians on a daily basis.
• Ranking Member Boozman then asked Chairman Behnam to address whether FTX’s collapse had demonstrated the importance of bringing cryptocurrency entities into the U.S. to enable regulatory oversight of the entities. He also asked Chairman Behnam to address whether FTX’s collapse had demonstrated the importance of establishing a regulatory framework for custodians and exchanges. He further asked Chairman Behnam to indicate whether FTX’s collapse demonstrated the need to scrutinize conflicts of interest related to common ownership and control of exchanges and on venue trading firms.
  • Chairman Behnam predicted that a U.S. regulatory framework for cryptocurrency entities would lead many cryptocurrency entities to migrate to the U.S. He commented that such a regulatory framework would provide “direly needed” transparency to cryptocurrency entities. He stated that the “core fundamentals” of CFTC regulation included prohibitions on conflicts of interest, prohibitions on the abilities of individual entities to offer different services to the same customer, prohibitions on the co-mingling of customer and institutional funds, assurances that exchanges would maintain robust recordkeeping practices, and the maintenance of robust customer disclosures. He remarked that the CFTC must apply the aforementioned fundamentals to the digital assets market considering the market’s growing popularity amongst retail investors.
• Ranking Member Boozman then expressed concerns that the definition of the term “dealer” under the Digital Commodities Consumer Protection Act of 2022 would require CFTC registration within the digital assets context for U.S. entities that do not trade with retail counterparties and that do not offer trading with margin, leverage, and custody. He stated that this policy would establish a precedent for future Congresses to call for these same requirements in traditional commodity markets. He called these requirements “wholly inappropriate” for traditional commodity markets. He also raised concerns over how the Digital Commodities Consumer Protection Act of 2022 might dilute the CFTC’s resources away from protecting retail market participants by unnecessarily requiring large numbers of entities to register with the CFTC. He asked Chairman Behnam to indicate whether CFTC’s priority should be to protect retail investors from fraudulent leveraged selling practices.
  • Chairman Behnam remarked that the CFTC’s priority should be to protect retail customers and investors. He stated that retail investors faced increased trading risks and a knowledge and education gap, which underscored the importance of protecting these investors.

Sen. Amy Klobuchar (D-MN):

• Sen. Klobuchar described FTX as a “shell game” and stated that the company had gambled with customer funds through an affiliated hedge fund. She remarked that the $8 billion gap in FTX’s balance sheet raised questions about regulatory oversight, transparency, broader market structures, and the interconnectedness of the digital assets market. She noted how retail investors that purchased traditional assets (such as equities) through cash markets typically had their transactions carried out through several different entities. She indicated that these entities include brokers, exchanges, and clearing and settlement companies. She noted however that FTX (and other digital asset companies) had consolidated several of these processes under a single entity. She asked Chairman Behnam to address the extent to which FTX’s centralization and vertical integration had contributed to FTX’s ability to conceal operational risk and fraud from regulators, auditors, and investors. She also asked Chairman Behnam to indicate whether rules about conflicts of interest and requirements relating to transparency and disclosure improve exchange risk management practices.
  • Chairman Behnam remarked that the CFTC must be mindful of centralized and vertically integrated structures within the digital assets space. He predicted that the CFTC would receive clearinghouse applications with these features moving forward. He noted how FSOC had mentioned vertical integration as a potential risk to the financial system. He stated that this vertical integration was a product of technology and its ability to enable direct execution of trades to clearinghouses and trading platforms. He acknowledged that while this vertical integration might have merits, he stated that this vertical integration also posed risks. He remarked that the CFTC’s inability to directly oversee FTX had made it difficult for him to determine whether FTX’s centralized and vertically integrated structure had contributed to FTX’s ability to conceal its activities.
• Sen. Klobuchar then mentioned how FTX had taken customer funds that they were supposed to safeguard and had lent these funds to Alameda Research. She stated that Alameda Research had made “reckless” gambles with these customer funds. She asked Chairman Behnam to discuss what the SEC’s role should be in overseeing the digital assets space and how the SEC should complement the CFTC’s actions within this space.
  • Chairman Behnam remarked that the CFTC and the SEC should have similar responsibilities for overseeing the digital assets market. He stated that the CFTC should be responsible for overseeing commodity tokens and the SEC should be responsible for overseeing security tokens. He remarked that the CFTC and the SEC currently address similar market structures in terms of their oversight of trading platforms, exchanges, clearinghouses, broker-dealers, intermediaries, investment advisors, and market makers. He stated that providing the CFTC with regulatory authority and regulatory insight into financial institutions would enable the CFTC to impose requirements to guard against conflicts of interest and the co-mingling of customer and institutional funds. He also stated that this authority would enable the CFTC to establish disclosure and recordkeeping requirements for digital asset exchanges. He concluded that Congress should extend the CFTC’s existing regulatory authorities to the digital assets market.
• Sen. Klobuchar then discussed how retail investors dominated the cash market for digital assets and noted how these retail investors might not understand the differences in protections offered by digital asset market platforms and traditional financial service companies. She mentioned how consumers had been “inundated” with advertisements for cryptocurrency companies and products and stated that these advertisements sought to evoke feelings of urgency among consumers. She noted how brokers must follow the SEC’s Regulation Best Interest (BI) and the Financial Industry Regulatory Authority’s (FINRA) suitability standard. She explained that these rules govern the types of instruments that brokers can recommend to clients. She asked Chairman Behnam to indicate whether there should exist parallel investor protections between digital commodity companies acting as brokers and prospective investors. She also asked Chairman Behnam to recommend additional requirements for digital commodity brokers.
  • Chairman Behnam remarked that there needed to exist disclosure rules like Regulation BI for digital assets to ensure that investors understood the risks of the underlying assets. He testified that the CFTC was using its existing authorities to provide as much information as possible to investors in digital commodity futures markets.
• Sen. Klobuchar then discussed how many cryptocurrency companies have made use of social media platforms and social media influencers to create hype for digital asset products. She mentioned how the SEC had recently fined Kim Kardashian $1.26 million for failing to disclose that she had been paid to promote a cryptocurrency token on her Instagram account. She noted how the FTC raised concerns over this trend and had found that more than 46,000 people have reported losing over $1 billion in cryptocurrencies to scammers since the beginning of 2021. She asked Chairman Behnam to discuss how the CFTC planned to work with the SEC, FTC, and other government agencies to combat the growing nexus of fraud between digital commodities and social media.
  • Chairman Behnam testified that the CFTC currently worked closely with the SEC and the FTC on enforcement matters and on publishing customer protection advisories. He stated that the CFTC, the SEC, and the FTC had significant experience policing fraud in the swaps and futures market and that the agencies had a shared interest in protecting customers.

Sen. Roger Marshall (R-KS):

• Sen. Marshall first remarked that there were both benefits and drawbacks associated with cryptocurrencies. He asked Chairman Behnam to indicate whether cryptocurrency entities should be held to the same standards as banking entities. He also stated that it would take the U.S. several months or years to fully implement any cryptocurrency legislation. He asked Chairman Behnam to indicate whether the U.S. should consider imposing a “pause” on digital assets while it worked to better understand them.
  • Chairman Behnam remarked that the CFTC did not have the luxury of not acting on cryptocurrencies. He stated that cryptocurrency markets would continue to exist either domestically or offshore and that retail and institutional investors would continue to participate in cryptocurrency markets.
• Sen. Marshall interjected to remark that the U.S. did not fully understand cryptocurrencies and that the Digital Commodities Consumer Protection Act of 2022 alone would not fully address this lack of understanding.
  • Chairman Behnam stated that while the Digital Commodities Consumer Protection Act of 2022 would not fully address the U.S.’s lack of understanding of cryptocurrencies, he asserted that this legislation would help the U.S. to make “significant” progress in understanding cryptocurrencies. He stated that this legislation would provide necessary disclosure requirements for cryptocurrency entities.
• Sen. Marshall interjected to ask Chairman Behnam to indicate whether cryptocurrency entities should be held to the same regulatory standards as banking entities.
  • Chairman Behnam remarked that the U.S.’s banking and market regulations were “sound” and have proven to be efficient and effective. He recommended that the U.S. should model its cryptocurrency regulations off of these banking and market regulations. He commented that the Digital Commodities Consumer Protection Act of 2022 would do this.
• Sen. Marshall then asked Chairman Behnam to project the global economic impact of having digital assets replace the U.S. dollar as the world’s currency.
  • Chairman Behnam remarked that U.S. policymakers must consider the implications associated with the rise of foreign digital currencies (including Chinese digital currencies). He stated that the U.S. Federal Reserve was taking this issue very seriously and was currently considering how technology could disrupt financial markets and systems (including the U.S. currency system). He called it important for the U.S. to examine this topic given its implications for the U.S. economy, labor market, and national security.
• Sen. Marshall then discussed how foreign national security officials had relayed concerns to him about the ways in which digital currencies were being used. He specifically highlighted how foreign national security officials had raised concerns over the use of digital currencies in ransomware payments and noted how there had been $600 million in known cryptocurrency ransomware payments in 2021. He mentioned how companies had developed ransomware insurance products to provide companies with financial protection against ransomware attacks. He also discussed how cryptocurrencies were often used in drug and human trafficking operations. He asked Chairman Behnam to address how the U.S. could respond to the use of cryptocurrencies in illicit activities.
  • Chairman Behnam stated that the U.S. Department of the Treasury worked to combat the use of cryptocurrencies in illicit activities through the U.S. Financial Crimes Enforcement Network (FinCEN) and the U.S. Office of Foreign Assets Control (OFAC). He stated however that a more comprehensive regulatory regime for cryptocurrency markets would constitute a “huge step in the right direction.” He stated that while the U.S. would never be able to comprehensively cover every element and fraud within the cryptocurrency space, he asserted that the U.S. could not be inactive within this space.
• Sen. Marshall interjected to state that he agreed with Chairman Behnam’s response. He remarked however that there did not currently appear to exist any plausible strategies for addressing the problems associated with cryptocurrencies. He reiterated his suggestion that the U.S. consider imposing a “pause” on digital assets while it worked to better understand them. He noted how cryptocurrencies were involved in 90 percent of dark net drug sales. He asked Chairman Behnam to indicate whether cryptocurrencies posed a threat to U.S. national security.
  • Chairman Behnam remarked that cryptocurrencies were “potentially” a threat to U.S. national security.
• Sen. Marshall emphasized how cryptocurrencies were involved in various illicit activities, including drug trafficking and human trafficking.
  • Chairman Behnam stated that while cryptocurrencies might pose a threat to U.S. national security in some instances, he questioned the feasibility of having the U.S. impose a “pause” on digital assets. He stated that U.S. attempts to ring fence itself from cryptocurrencies would not negate the fact that cryptocurrencies would continue to exist offshore. He mentioned how FTX’s acting CEO had recently indicated that 2 percent of customer exposures to FTX’s collapse were from U.S. customers, even though U.S. customers were not supposed to use FTX (note: U.S. customers had only been permitted to use FTX US). He remarked that Americans would find a way to get exposure to offshore cryptocurrency entities and activities, even if those entities and activities were prohibited in the U.S. He asserted that the CFTC would need to address this situation.
• Sen. Marshall then remarked that the Commodity Exchange Act and CFTC regulations deem any bank or trust company in the U.S. to be a good location for customer money, securities, or property. He stated that the Digital Commodities Consumer Protection Act of 2022 would restrict such good locations to insured depository institutions, insured credit institutions, and digital commodity platforms. He asked Chairman Behnam to address whether the Digital Commodities Consumer Protection Act of 2022 should expand its definition of good locations to include banks and trust companies.
  • Chairman Behnam remarked that U.S. policymakers should revisit provisions of the Digital Commodities Consumer Protection Act of 2022 considering FTX’s recent collapse. He stated that U.S. policymakers should focus on addressing regulatory gaps, protecting customer funds held in digital asset exchanges, and combating fraud and illicit activity.

Sen. Tina Smith (D-MN):

• Sen. Smith called FTX’s collapse shocking and stated that FTX and Alameda Research had failed to properly safeguard customer funds. She stated that crypto assets were highly volatile and risky and that a lack of basic consumer protections made these risks even worse. She mentioned how she had joined Sen. Dick Durbin (D-IL) and Sen. Elizabeth Warren (D-MA) in calling for investment firms (such as Fidelity Investments) to keep cryptocurrencies out of their retirement plans because cryptocurrencies lacked sufficient regulations. She then discussed how traditional equities and commodities exchanges and trading firms were required to keep their own money separate from their customer’s money. She asked Chairman Behnam to indicate whether cryptocurrency exchanges were currently subject to a similar requirement.
  • Chairman Behnam answered no.
• Sen. Smith asked Chairman Behnam to indicate whether any federal agency possessed enforcement authority to require that cryptocurrency exchanges not commingle customer and institutional funds.
  • Chairman Behnam stated that the SEC possessed the enforcement authority to require that cryptocurrency exchanges not commingle customer and institutional funds.
• Sen. Smith remarked that firms whose customers paid for investment advice were required to provide investment advice that was in the best interest of the customers. She asked Chairman Behnam to indicate whether a similar requirement currently existed for cryptocurrency exchanges.
  • Chairman Behnam answered no.
• Sen. Smith asked Chairman Behnam to indicate whether any federal agency possessed enforcement authority to require that cryptocurrency exchanges whose customers paid for investment advice receive investment advice that was in their best interest.
  • Chairman Behnam clarified his previous response and noted that the SEC possessed the enforcement authority over security tokens. He indicated however that the SEC did not possess this authority with respect to commodity tokens.
• Sen. Smith noted how companies that made investments using customer funds were required to obtain the best prices through searching across multiple markets. She explained that this requirement was commonly known as best execution. She asked Chairman Behnam to indicate whether such requirements were currently present within the cryptocurrency space.
  • Chairman Behnam answered no.
• Sen. Smith asked Chairman Behnam to indicate whether any federal agency possessed enforcement authority to require best execution within the cryptocurrency trading context.
  • Chairman Behnam stated that the SEC would have best execution authority over security tokens.
• Sen. Smith noted how banks and financial services firms have a duty to know who their customers are. She commented that this duty was key to combating the practice of money laundering. She asked Chairman Behnam to indicate whether a similar requirement exists for cryptocurrency-related enterprises.
  • Chairman Behnam noted how many cryptocurrency exchanges received state money transmitter licenses. He indicated that these state money transmitter licenses included requirements for the exchanges to register with FinCEN. He highlighted how FinCEN maintained anti-money laundering (AML) and know your customer (KYC) requirements. He remarked that cryptocurrency exchanges thus might have some requirements to know their customers. He stated however that these requirements might not be as comprehensive as for the federal regulatory requirements for traditional markets.
• Sen. Smith remarked that FTX’s recent collapse demonstrated the consequences associated with a lack of consumer protections. She stated that the U.S. had significant experience regulating markets. She called on the U.S. to enforce its existing laws to address problems within the cryptocurrency space and to develop new laws where necessary.
  • Chairman Behnam expressed agreement with Sen. Smith’s comments.
• Sen. Smith then noted how Chairman Behnam served on FSOC in his capacity CFTC Chairman. She asked Chairman Behnam to address how future cryptocurrency market volatility could impact the broader economy.
  • Chairman Behnam remarked that problems within the cryptocurrency ecosystem had thus far not spread to the broader economy. He stated that the broader economy’s ability to withstand problems from the cryptocurrency system was a testament to the strength of the U.S.’s existing banking regulations. He noted how the market capitalization of the cryptocurrency ecosystem had shrunk from $3 trillion to under $1 trillion over the previous year. He asserted that the cryptocurrency market therefore did not appear to pose a threat to broader financial stability. He stated however that the U.S. must proactively monitor this space as the cryptocurrency market might eventually pose threats to broader financial market stability.

Sen. Tommy Tuberville (R-AL):

• Sen. Tuberville lamented how the U.S. lacked rules governing the cryptocurrency space and stated that this absence of rules would imperil retail investors. He remarked that the U.S. must be a world leader in financial regulation to maintain its leadership in financial innovation. He mentioned how China had launched its own central bank digital currency (CBDC) that was gaining popularity. He stated that the U.S. would need to develop a policy framework for digital currencies to foster confidence in these assets. He then asked Chairman Behnam to indicate whether he had ever exchanged text messages and emails with former FTX CEO Sam Bankman-Fried.
  • Chairman Behnam remarked that FTX had been “dogged” in its efforts to obtain approval from the CFTC for its clearinghouse application. He testified that he was personally involved in reviewing this application. He stated that he had traded emails and messages with former FTX CEO Sam Bankman-Fried regarding the application. He indicated that these emails and messages had pertained to information related to FTX’s application, application status updates, and the scheduling of formal meetings.
• Sen. Tuberville then stated that SEC Chairman Gary Gensler was using FTX’s collapse to argue that the SEC should be the lead federal agency on cryptocurrency regulatory matters. He stated however that Chairman Gensler had repeatedly cut off opportunities for cryptocurrency firms to register with the SEC. He asked Chairman Behnam to discuss the actions that the CFTC had taken to encourage cryptocurrency firms to enter the regulated space.
  • Chairman Behnam noted how there had been an influx of cryptocurrency firms seeking to register with the CFTC so that they could list derivatives products. He indicated that these firms had sought to list these derivatives products on existing exchanges and had sought to acquire derivatives exchanges so that they could list cryptocurrency derivatives. He remarked however that the CFTC did not have the authority to register cryptocurrency exchanges, intermediaries, or broker-dealer entities within the spot market space. He expressed concerns that this situation had led to a gap in regulatory oversight that could endanger consumers.
• Sen. Tuberville then mentioned how ESG ratings companies had given FTX very high marks for corporate governance. He stated however that FTX had poor corporate governance standards based on recent findings. He asked Chairman Behnam to identify the federal agency that was responsible for auditing ESG rating reports and to provide recommendations for protecting investors from inaccurate reports from ESG rating companies. He further asked Chairman Behnam to indicate whether ESG rating companies could be sued for issuing inaccurate reports.
  • Chairman Behnam stated that the SEC would likely need to develop a system for evaluating the rating mechanisms for security products. He commented however that another federal agency might be responsible for overseeing rating mechanisms. He noted how rating agency oversight had been an issue during the 2008 Financial Crisis and highlighted how conflicts of interest at these rating agencies had undermined the objectivity of said agencies.
• Sen. Tuberville asked Chairman Behnam to indicate whether Congress should address ESG rating systems as part of broader cryptocurrency legislation.
  • Chairman Behnam remarked that Congress should consider ways to address cryptocurrency firms that receive ESG ratings. He stated that the Digital Commodities Consumer Protection Act of 2022 was focused on providing more information to investors so that investors could make more informed decisions.
• Sen. Tuberville raised concerns that improper recommendations from ESG ratings companies could have led some people to invest in FTX. He stated that Congress must address ESG rating systems.

Sen. Sherrod Brown (D-OH):

• Sen. Brown called FTX’s failure “shocking” given the extent of the misconduct involved and the speed of the company’s collapse. He also expressed concerns over how the effects of FTX’s collapse were being felt throughout the broader cryptocurrency ecosystem. He stated that Congress must establish a policy framework for cryptocurrencies that would safeguard the traditional financial system, protect consumers, and not prioritize cryptocurrency companies over consumers. He mentioned how he had recently written a letter to U.S. Secretary of the Treasury Janet Yellen on this issue and expressed interest in working with financial regulators to achieve the aforementioned goals. He then expressed concerns over how cryptocurrencies were heavily involved in illicit financial activities and stated that this involvement posed threats to national security. He mentioned how the U.S. Senate Committee on Banking, Housing, and Urban Affairs had held a March 2022 hearing about the role of cryptocurrencies in illicit activities. He noted how cryptocurrencies could provide hackers and scammers with anonymity and the ability to immediately transfer funds. He commented that these features facilitate various cybercrimes, including ransomware attacks. He mentioned how FinCEN had recently reported that Bank Secrecy Act (BSA) filings related to ransomware attacks had reached over $1 billion in 2021, which was over double the 2020 amount. He asked Chairman Behnam to indicate whether the U.S. should further prioritize efforts to combat the use of cryptocurrencies in illicit finance.
  • Chairman Behnam noted how cryptocurrencies and digital assets were often used in illicit activity. He stated that the U.S. Department of the Treasury was doing an excellent job in their efforts to combat this illicit activity using their existing tools. He acknowledged however that there currently existed a “technology curve” that was hampering efforts to identify illicit activities involving cryptocurrencies. He remarked that the CFTC would work with the U.S. Department of the Treasury, OFAC, and FinCEN on efforts to combat illicit activities involving cryptocurrencies. He stated that comprehensive regulation would constitute a critical tool for addressing this illegal activity.
• Sen. Brown then remarked that FTX’s collapse demonstrated the inherent conflicts of interest and self-dealing in some cryptocurrency business models. He noted how banks were subject to proprietary trading and affiliate transaction restrictions. He asked Chairman Behnam to indicate whether similar safeguards should be imposed on cryptocurrency firms.
  • Chairman Behnam answered affirmatively. He stated that the idea that a single exchange could act as a dealer, lender, and custodian was impractical.
• Sen. Brown asked Chairman Behnam to identify other conflicts of interest within the cryptocurrency space that should be addressed.
  • Chairman Behnam noted how many cryptocurrencies were offering exchange functions, market making functions, broker-dealer functions, lending functions, and custodian functions. He commented that a single traditional financial institution did not typically offer these various functions.
• Sen. Brown then asked Chairman Behnam to commit to having the CFTC continue to work with other regulatory agencies to minimize regulatory gaps and to ensure that consumers in the financial markets were fully protected.
  • Chairman Behnam remarked that CFTC’s top priority was to collaborate with other regulatory agencies on addressing regulatory gaps and protecting customers.

Sen. Charles Grassley (R-IA):

• Sen. Grassley mentioned how there were reports that people involved with FTX had concerns over the company’s business practices. He lamented however that none of these people had voiced these concerns. He asked Chairman Behnam to indicate whether the CFTC had received any reports of wrongdoing that involved FTX. He also asked Chairman Behnam to indicate whether FTX employees would have been more willing to report problems to the CFTC if the CFTC Whistleblower Program was better publicized.
  • Chairman Behnam testified that the CFTC had not received any tips or whistleblowing activity about FTX. He expressed his appreciation for Sen. Grassley’s support of the CFTC Whistleblower Program and stated that the program had been “extremely effective” in supporting the CFTC’s Division of Enforcement. He stated that the CFTC would continue to work to ensure that whistleblowers felt safe and protected and that they could report problems without fear of retribution.
• Sen. Grassley asked Chairman Behnam to indicate whether the CFTC had adequate funds to pay whistleblowers.
  • Chairman Behnam remarked that the CFTC was currently in a “good place” regarding its ability to pay whistleblowers. He stated however that the CFTC must work to ensure the effectiveness of its Whistleblower Program. He attributed the CFTC Whistleblower Program’s challenges to the significant rewards streaming from whistleblower cases (which he called a good thing). He expressed his interest in having the CFTC continue to make significant payments to whistleblowers.
• Sen. Grassley then asked Chairman Behnam to indicate whether he had made his calendar public. He also asked Chairman Behnam to indicate when he would make his calendar public if he had not already done so.
  • Chairman Behnam testified that he had held ten meetings with former FTX CEO Sam Bankman-Fried and his team over the previous 14 months. He also indicated that he had two phone calls and exchanged “a few” messages with Sam Bankman-Fried. He indicated that these messages pertained to the scheduling of meetings and information about FTX’s clearinghouse application. He emphasized that the CFTC’s relationship with FTX was focused on LedgerX, which was FTX’s regulated clearinghouse. He stated that the CFTC’s relationship with FTX had nothing to do with FTX’s offshore activities or spot exchanges. He remarked that FTX had been “dogged” in their efforts to obtain approval for their clearinghouse application, which had entailed FTX having numerous meetings with CFTC staff over the previous year. He stated that his office would conduct additional reviews of FTX’s meetings with the CFTC and would provide updates to the Committee on this subject if necessary.
• Sen. Grassley then asked Chairman Behnam to indicate whether the CFTC had requested any financial information or organizational charts as part of the review process for FTX’s clearinghouse application. He also asked Chairman Behnam to indicate whether he could provide the Committee with the items that FTX had submitted to the CFTC as part of its clearinghouse application.
  • Chairman Behnam remarked that CFTC is only able to ask questions about entities that it regulates. He stated that the CFTC could only ask questions about unregulated entities if it received a whistleblower tip, a referral, or information that could be used to obtain a subpoena in court. He remarked however that this legal limitation was responsible for the safety of customer funds held in the LedgerX entity. He expressed interest in exploring changes to the CFTC’s authority so that it could ask questions beyond regulated entities.
• Sen. Grassley then mentioned how the current CEO of FTX had stated that he had never seen as large of a failure of corporate controls as what had occurred with FTX. He asked Chairman Behnam to address how the CFTC had been unable to identify FTX’s absence of corporate controls.
  • Chairman Behnam stated that the current CEO of FTX was referring to the non-CFTC regulated part of FTX when he discussed FTX’s lack of corporate controls. He noted however that the current CEO of FTX had stated that LedgerX (which was CFTC-regulated) was healthy, capitalized, and operational. He reiterated that the CFTC lacked legal authority to investigate the non-regulated elements of an entity. He remarked that LedgerX was fully in compliance with CFTC rules, fully operational, and met all of the legal requirements of the CFTC. He stated that the CFTC therefore had no basis to investigate FTX-affiliated entities that were not registered with the CFTC.
• Sen. Grassley then asked Chairman Behnam to indicate whether any provisions of the Digital Commodities Consumer Protection Act of 2022 should be rewritten considering FTX’s recent collapse.
  • Chairman Behnam recommended that Congress take a “pause” and review the Digital Commodities Consumer Protection Act of 2022 in light of recent events. He stated that the U.S. would learn more information about FTX’s collapse in the coming weeks that might inform the U.S.’s approach to regulating digital commodities. He specifically suggested that Congress address financial information disclosure requirements for cryptocurrency entities and bolster the legislation’s conflicts of interest provisions.

Sen. Kirsten Gillibrand (D-NY):

• Sen. Gillibrand mentioned how she had introduced bipartisan legislation with Sen. Cynthia Lummis (R-WY) to provide a comprehensive regulatory framework for these assets. She noted how the United States Senate Committee on Agriculture, Nutrition, and Forestry had proposed the Digital Commodities Consumer Protection Act of 2022 that focused on digital commodities (which fell under the Committee’s jurisdiction). She expressed interest in receiving suggestions from the CFTC for ways to improve both of the aforementioned bills. She then expressed concerns over the potential for future problems within the cryptocurrency space. She stated that FTX’s lack of responsible governance had contributed to the company’s problems (especially with its foreign-registered entities). She also expressed interest in identifying who owned and controlled the U.S.’s critical infrastructure. She stated that platforms engaging in financial exchange and custodial services constitute critical infrastructure. She expressed particular concerns over areas where foreign interests may conflict with U.S. interests. She stated that FTX’s recent collapse had demonstrated how foreign and domestic bad actors could contribute to problems in the global digital assets market, which could ultimately harm U.S. consumers. She noted how a CFTC registrant had to notify the CFTC when ownership of a CFTC-licensed exchange changes at the holding company level. She indicated that this type of change of ownership situation had occurred when FTX had purchased LedgerX. She stated that the CFTC’s current rules do not require detailed information about the purchasing entity of a CFTC-licensed exchange or the beneficial owners of the purchasing entity. She also stated that the CFTC’s current rules did not allow for the CFTC to impose conditions on the transaction to manage risk or to block the sale of an exchange under exceptional circumstances. She remarked that the CFTC should be permitted to inquire about exchange transactions involving suspicious parties. She asked Chairman Behnam to discuss how the CFTC would address digital asset platform transaction issues. She expressed particular interest in addressing digital asset exchange transactions that involve retail market exchanges.
  • Chairman Behnam remarked that the CFTC’s ability to review exchange transactions was very limited. He stated that consolidation was common within the derivatives space and that this consolidation had implications for cybersecurity and critical infrastructure. He expressed interest in expanding the CFTC’s authority to review transactions involving CFTC-regulated entities.
• Sen. Gillibrand then discussed how former FTX CEO Sam Bankman-Fried had several other entities aside from FTX that appeared to be engaged in double-dealing activities. She also mentioned how there were allegations that FTX had maintained improper recordkeeping systems and that FTX tokens had been improperly used as collateral for loans. She asked Chairman Behnam to discuss how current legislative proposals under consideration would address conflicts of interest within the digital assets space. She also asked Chairman Behnam to indicate whether these legislative proposals would provide the CFTC with sufficient authority to ensure identification, mitigation, disclosure, and prohibition of conflicts of interest.
  • Chairman Behnam remarked that the Digital Commodities Consumer Protection Act of 2022 would be effective in addressing conflicts of interest, custody of funds, recordkeeping practices, and the maintenance of adequate financial resources for cryptocurrency entities. He stated that the Committee should refine the legislation’s conflicts of interest provisions in response to FTX’s “egregious” actions. He also stated that the Committee should ensure that this legislation would address disclosures to customers about financial resources. He then remarked that the CFTC had generally experienced success when imposing the aforementioned types of requirements on its regulated entities. He stated that the CFTC’s regulation of LedgerX had enabled the CFTC to know where the platform’s customer funds were on a daily basis. He noted how the CFTC could access this information directly through the custodian of LedgerX’s funds. He also mentioned how the CFTC could examine LedgerX’s books and records on demand. He stated that the current legislative proposals under consideration would enable the CFTC to bring more transparency to the cryptocurrency space.
• Sen. Gillibrand then mentioned how Chairman Behnam had previously testified that about 2 percent of the customers for FTX’s international entity were U.S. residents. She stated that this response suggested that FTX had lied about their business and should have been registered with the SEC or the CFTC. She asked Chairman Behnam to discuss how the CFTC could more aggressively investigate overseas exchanges that were engaging in business within the U.S.
  • Chairman Behnam stated that this 2 percent figure came from FTX’s current CEO and indicated that this 2 percent figure referred to the share of losses by Americans stemming from the collapse of FTX’s international entity. He stated that many U.S.-based entities likely had offshore-registered entities that were trading with FTX’s international entity. He called this situation problematic as it could expose the U.S. to international financial risks. He also discussed how many savvy U.S. retail investors were able to use VPNs to access offshore exchanges. He commented that while the CFTC probably lacked the technological expertise to address this practice on its own, he suggested that the CFTC could work with other federal agencies on preventing U.S. customers from bypassing prohibitions on foreign exchanges.
• Sen. Gillibrand remarked that the U.S. was limited in its ability to regulate and provide oversight to foreign-registered entities. She expressed interest in working to combat the evasion of U.S. foreign trading restrictions. She called the Digital Commodities Consumer Protection Act of 2022 essential and asserted that the U.S.’s failure to regulate the cryptocurrency industry would lead to more bankruptcies and exchange collapses.

Sen. Deb Fischer (R-NE):

• Sen. Fischer discussed how FTX and Alameda Research had used FTT (which was FTX’s own token) and Solana to inflate their own valuations. She indicated that FTX and Alameda Research then misused the tokens as collateral for their risky activities. She asked Chairman Behnam to indicate whether the Digital Commodities Consumer Protection Act of 2022 would provide the CFTC or the SEC with regulatory authority over transactions involving FTT.
  • Chairman Behnam noted that FTT involved an incentive mechanism and commented that this mechanism suggests that FTT resembled a security (rather than a commodity). He stated that the SEC would therefore have regulatory authority over FTT.
• Sen. Fischer asked Chairman Behnam to indicate whether the Digital Commodities Consumer Protection Act of 2022 would provide the CFTC or the SEC with regulatory oversight over the Solana token.
  • Chairman Behnam stated that if the Solana token were deemed to be a commodity, then the Digital Commodities Consumer Protection Act of 2022 would provide the CFTC with regulatory oversight authority over the Solana token. He stated that if the Solana token were deemed to be a security, then the SEC already possesses regulatory oversight authority over the Solana token.
• Sen. Fischer asked Chairman Behnam to indicate how many tokens were traded on FTX’s U.S. platform. She also asked Chairman Behnam to indicate whether the CFTC would have spot market oversight under the Digital Commodities Consumer Protection Act of 2022.
  • Chairman Behnam remarked that the Digital Commodities Consumer Protection Act of 2022 would provide the CFTC with the authority to register spot exchanges. He stated that this legislation would have required FTX’s U.S. entity to register with the CFTC and indicated that commodity tokens could be listed on CFTC-registered exchanges. He stated that exchanges will likely need to register with both the CFTC and the SEC and called this dual registration requirement common within the financial markets. He remarked that this registration would enable the CFTC to prohibit conflicts of interest.
• Sen. Fisher interjected to comment that this registration requirement would be helpful in the future.
  • Chairman Behnam asserted that this registration requirement would be critical for addressing regulatory gaps and customer protection risks.
• Sen. Fisher then noted how the Digital Commodities Consumer Protection Act of 2022 would instruct the CFTC to write rules and guidelines related to customer protection, margin trading of digital commodities, conflicts of interest, lending activities, reporting of trades and other information, and stablecoins. She asked Chairman Behnam to project the timeline for the development and implementation of these rules if the legislation were to be enacted into law. She commented that it generally took the CFTC a long time to develop and implement rules.
  • Chairman Behnam remarked that the CFTC would work “vigorously and hard” to implement the Digital Commodities Consumer Protection Act of 2022 if the legislation were to be enacted into law. He mentioned how the CFTC had been able to implement over 60 rules relating to the swaps market within a three-year period. He stated that the Digital Commodities Consumer Protection Act of 2022 would likely involve significantly fewer rules. He expressed confidence in the CFTC’s ability to swiftly develop and implement these rules. He estimated that this could be accomplished within 12 to 18 months.
• Sen. Fischer asked Chairman Behnam to indicate whether having more statutory guidelines would be helpful to the CFTC’s efforts to implement rules governing digital commodities.
  • Chairman Behnam remarked that Congress would need to provide sufficient statutory authority and direction without being too prescriptive. He commented that an overly prescriptive approach would inhibit the CFTC’s ability to respond to evolving marketplaces and technology. He stated that the Digital Commodities Consumer Protection Act of 2022 was currently drafted in a manner that balanced the needs for prescription, direction, and flexibility. He added that the legislation might need to be slightly modified to account for the lessons learned from FTX’s collapse.
• Sen. Fischer then discussed how state securities regulators played a key role in regulating the U.S. financial system. She expressed concerns that there was insufficient communication between federal and state financial regulators, especially regarding digital assets. She asked Chairman Behnam to indicate whether he supported efforts to involve state securities regulators more in federal digital assets advisory boards and working groups.
  • Chairman Behnam answered affirmatively. He mentioned how he had recently spoken to North American Securities Administrators Association (NASAA) President Joe Borg about the FTX situation. He noted how he had previously worked as a state securities regulator and remarked that state securities regulators played key roles to ensure that investors were adequately informed.

Sen. Ben Ray Luján (D-NM):

• Sen. Luján mentioned how FTX US had acquired LedgerX and noted how LedgerX was fully licensed and regulated by the CFTC. He mentioned how there were reports that both FTX and FTX US were mismanaged at the highest level. He asked Chairman Behnam to indicate whether the CFTC had legal authority to examine the governance structure, balance sheet, or other financial documents for any entity other than LedgerX that was associated with the FTX-LedgerX acquisition.
  • Chairman Behnam answered no.
• Sen. Luján asked Chairman Behnam to indicate whether there were other instances where unregulated entities have acquired CFTC-regulated products. He asked Chairman Behnam to address the risks posed to U.S. consumers by these types of acquisitions.
  • Chairman Behnam noted how CFTC-regulated entities that were being acquired by non-CFTC-regulated entities were only required to provide notice to the CFTC about the fact that they were being acquired. He stated that these types of acquisitions could significantly impact U.S. investors. He then remarked that the CFTC’s regulatory authority over LedgerX had protected LedgerX from the problems stemming from FTX’s other entities. He stated that policymakers should consider whether the CFTC should be able to look into non-CFTC-registered entities that were affiliated with CFTC-registered entities.
• Sen. Luján asked Chairman Behnam to address how the CFTC was working to ensure that customer funds on LedgerX were safe.
  • Chairman Behnam testified that the CFTC was in daily communication with both LedgerX and LedgerX’s custodian. He stated that the CFTC had a more direct relationship with LedgerX’s custodian to ensure that customer funds (including digital assets and fiat currency) were actually being held with the custodian. He remarked that LedgerX was operational and well-capitalized. He also indicated that LedgerX maintained books and records that were examinable. He further stated that the CFTC was working to ensure that LedgerX complied with all CFTC requirements.
• Sen. Luján asked Chairman Behnam to discuss the types of corporate governance standards that should be required for exchanges like FTX US. He requested that Chairman Behnam provide his response in writing to this question. He then noted how Chairman Behnam had previously told the Committee that the CFTC would approach the regulation of spot digital assets in a manner similar to derivatives. He stated however that digital assets were very different from traditional commodities and equities. He noted how digital assets were not tied to equity in a company, a tangible good, or a hard currency and commented that this meant that digital assets would face more volatility. He stated that entities and tokens could be deeply interconnected through smart contracts. He also highlighted how digital assets faced greater risks stemming from security vulnerabilities and hacks. He asked Chairman Behnam to discuss the special types of considerations that would be necessary for setting rules for digital commodity platforms.
  • Chairman Behnam remarked that the U.S. should develop regulatory structures for digital assets based on the “core fundamentals” of market structure. He acknowledged however that there existed distinguishing factors between traditional assets and digital tokens. He remarked that policymakers must account for custody and cybersecurity considerations surrounding these assets through the rulemaking process. He expressed his receptiveness to revising the Digital Commodities Consumer Protection Act of 2022 to further address these considerations.

Sen. John Thune (R-SD):

• Sen. Thune called FTX’s recent collapse “pretty stunning” and stated that this collapse had underscored the need for greater oversight and transparency for the digital assets marketplace. He contended that the U.S. needed a comprehensive regulatory approach for digital assets that would ensure that federal regulators have the proper oversight tools. He called for swift Congressional action on this issue. He then asked Chairman Behnam to describe the enforcement actions that FTX had taken or was pursuing in response to FTX’s collapse.
  • Chairman Behnam stated that he was unable to discuss the CFTC’s ongoing investigations. He remarked however that the CFTC would utilize all of its tools to the fullest extent of the law to bring wrongdoers to account. He stated that the CFTC’s limited authority often meant that it could only respond to incidents of wrongdoing (and not proactively prevent them). He explained that the CFTC must rely upon information from referrals, tips, and whistleblowers to bring enforcement actions within digital asset cash commodity markets. He remarked that a comprehensive regulatory framework for digital asset commodities would provide the CFTC with surveillance and examination tools to proactively police the digital asset cash commodity markets.
• Sen. Thune asked Chairman Behnam to indicate whether the full CFTC was involved in the investigation into FTX.
  • Chairman Behnam answered affirmatively.
• Sen. Thune asked Chairman Behnam to indicate whether the CFTC and the SEC were collaborating on efforts to investigate FTX.
  • Chairman Behnam answered affirmatively.
• Sen. Thune asked Chairman Behanm to indicate whether the CFTC was currently considering changes to its approach to oversight enforcement activities for other digital commodity platforms following FTX’s recent collapse.
  • Chairman Behnam noted how there were several incumbent exchanges with a wide variety of financial assets within the commodities space. He indicated that these exchanges also listed Bitcoin and Ethereum futures contracts. He also mentioned how there were new startup trading platforms that were listing similarly situated futures contracts involving Bitcoin and Ethereum. He further noted how many crypto native and incumbent firms purchase CFTC-licensed exchanges so that they can list these contracts. He stated that the CFTC had limited authority to provide oversight beyond CFTC-registered entities. He commented that the CFTC’s limited ability to oversee spot markets was also present in agriculture, energy, and metal markets. He stated that the CFTC was only able to investigate spot markets after it had received tips about fraud or manipulation in said markets. He stated that this limitation was impeding the CFTC’s ability to effectively oversee digital commodity platforms.
• Sen. Thune then asked Chairman Behnam to discuss how LedgerX differed from FTX.
  • Chairman Behnam stated that LedgerX was subject to the CFTC’s regulatory regime and commented that LedgerX’s failure to comply with this regulatory regime would have resulted in consequences.
• Sen. Thune asked Chairman Behnam to indicate whether there were any lessons that could be learned from LedgerX’s registration with the CFTC.
  • Chairman Behnam remarked that the CFTC had lacked the authority to directly investigate FTX and stated that the U.S. needed to consider expanding the CFTC’s oversight authority. He noted however that the current legal separations between LedgerX and FTX had enabled the CFTC to confidently conclude that LedgerX was in strong financial shape. He stated that the absence of these separations could have potentially caused LedgerX to experience its own financial difficulties when FTX had experienced financial problems. He elaborated that FTX might have attempted to redirect customer funds from LedgerX to bolster its finances had these separations not been in place.
• Sen. Thune asked Chairman Behnam to indicate whether there were any global regulatory structures for digital commodities that could serve as a model for the U.S.’s regulatory structure for digital commodities. He also asked Chairman Behnam to indicate whether a lack of regulatory structure for digital commodities was creating systemic risks.
  • Chairman Behnam remarked that international regulators were concerned about validation, risk management, and customer protection issues in their policy conversations around digital commodities. He stated that he tended to prioritize risk management and customer protections when approaching the issue of digital commodity regulation. He noted however many regulators were concerned that the development of regulations for digital commodities would provide implicit validation of these assets. He commented that these regulators did not believe that digital commodities had merits. He contended however that it would be impractical to regulate digital commodities out of business. He stated that digital commodities would likely continue to exist abroad if the U.S. were to aggressively restrict them and that the risks associated with these assets would inevitably travel back to the U.S. through retail or institutional investors. He remarked that he would remain agnostic regarding the success or failure of digital commodities technology and that his job was to protect investors.

Sen. Dick Durbin (D-IL):

• Sen. Durbin discussed how the commodities trading industry was very important for his state of Illinois and applauded the CFTC’s oversight of this industry. He then discussed how FTX’s collapse was very abrupt and highlighted how former FTX CEO Sam Bankman-Fried was a major political donor. He stated that the U.S. cryptocurrency industry was very politically active and was attempting to influence the public policy process. He asked Chairman Behnam to estimate how long it would take the U.S. to fully understand the reasons behind FTX’s collapse.
  • Chairman Behnam remarked that the U.S. currently possessed a “cursory” understanding of the reasons behind FTX’s collapse. He stated that these reasons included FTX’s commingling of funds, conflicts of interest, absence of a custodian to separate customer and institutional funds, improper recordkeeping practices, and absence of risk controls. He stated however that it would likely take months for the U.S. to fully understand the full extent and scope of FTX’s failure.
• Sen. Durbin asked Chairman Behnam to indicate which body would conduct the investigation into FTX’s collapse.
  • Chairman Behnam stated that the CFTC was a civil enforcement agency and testified that the CFTC was using all of its powers to police violations of the law. He also mentioned how the CFTC’s sister agencies (both domestic and foreign) were pursuing their own investigations into FTX.  He stated that enforcement cases took time to pursue and that the CFTC was moving “expeditiously” on this topic.
• Sen. Durbin asked Chairman Behnam to confirm that the Digital Commodities Consumer Protection Act of 2022 was meant to enhance the CFTC’s ability to conduct investigations into digital commodity issues.
  • Chairman Behnam stated that the Digital Commodities Consumer Protection Act of 2022 would enable the CFTC to oversee digital asset commodity spot tokens.
• Sen. Durbin remarked that the CFTC was effective but relatively small. He expressed concerns that the CFTC might not possess sufficient resources to oversee the growing digital commodities space. He further noted how the CFTC’s funding came from Congressional appropriations. He highlighted how the Digital Commodities Consumer Protection Act of 2022 would include a user fee. He noted how the CFTC generally received around $300 million per year from Congress. He asked Chairman Behnam to estimate how much money would be generated from the Digital Commodities Consumer Protection Act of 2022’s user fees.
  • Chairman Behnam stated that the amount of money generated from the Digital Commodities Consumer Protection Act of 2022’s user fees would be dependent on Congressionally-imposed levels. He explained that the CFTC would make assessments of how much money it would need to implement rules under the legislation and then Congress would set these user fee levels based on CFTC assessments.
• Sen. Durbin asked Chairman Behnam to confirm that Congress would have some influence over how much money the CFTC would receive in user fees.
  • Chairman Behnam remarked that Congress would solely determine the CFTC’s user fee levels.
• Sen. Durbin remarked that the cryptocurrency industry would spend large amounts of money to influence politicians and that these politicians would control the CFTC’s ability to raise funds under the Digital Commodities Consumer Protection Act of 2022. He asked Chairman Behnam to provide assurances that the CFTC would have adequate resources (including staff, technology, and people) to regulate the digital commodities industry.
  • Chairman Behnam first remarked that the digital commodities space needed to be regulated and disputed the assertion that the CFTC was a weak enforcement agency. He then discussed how the CFTC had a separation of duties and responsibilities. He indicated that the CFTC’s Division of Enforcement conducted the Agency’s enforcement actions and called this Division “best in class” globally. He noted that the CFTC’s Division of Enforcement was entirely separate from the CFTC’s various policy divisions that engage in regulations and examinations. He expressed his commitment to be transparent with the Committee about the CFTC’s needs if Congress were to provide the Agency with oversight authority over cash market commodity digital tokens.
• Sen. Durbin reiterated his concerns that the political process could limit the CFTC’s ability to adequately oversee the digital commodities space. He lastly called on the U.S. to prudently pursue cryptocurrency regulations and to not worry about the actions of other countries within this space.

Sen. John Hoeven (R-ND):

• Sen. Hoeven asked Chairman Behnam to indicate whether LedgerX was the only part of FTX that was subject to the CFTC’s regulatory authority.
  • Chairman Behnam stated that LedgerX was the only FTX-affiliated entity that the CFTC had direct oversight over. He also mentioned how FTX had a commodity pool operator that was mainly regulated by the National Futures Association, which is a self-regulatory organization (SRO).
• Sen. Hoeven asked Chairman Behnam to describe the current financial status of LedgerX in terms of assets and obligations.
  • Chairman Behnam testified that LedgerX was solvent and operational. He indicated that the CFTC could account for where LedgerX’s funds were on a daily basis. He testified that the CFTC could directly communicate with both LedgerX and LedgerX’s custodian. He stated that LedgerX had financial resources for up to 12 months on a rolling basis and maintained examinable books and records.
• Sen. Hoeven asked Chairman Behnam to indicate whether the CFTC was currently able to ensure that money, resources, and assets were not being siphoned away from LedgerX toward FTX’s other entities.
  • Chairman Behnam stated that the CFTC was currently able to protect against money, resources, and assets being siphoned away from LedgerX. He noted how LedgerX was currently under significant scrutiny and commented that it would take a “significant” act for funds to move out of LedgerX without approval.
• Sen. Hoeven asked Chairman Behnam to indicate whether the CFTC was currently taking all necessary actions to maintain the solvency of LedgerX.
  • Chairman Behnam stated that the maintenance of LedgerX’s solvency was the CFTC’s top focus since it learned about the potential for an FTX bankruptcy. He testified that the CFTC was in daily communication with both LedgerX and its custodian.
• Sen. Hoeven then discussed how cryptocurrency regulation was very complicated as cryptocurrencies could be viewed as securities, commodities, and currencies. He asked Chairman Behnam to address how regulators defined cryptocurrencies, determined regulatory jurisdictions, and coordinated their regulatory efforts.
  • Chairman Behnam first stated that cryptocurrencies that were used primarily for payments (such as stablecoins) would fall outside of the CFTC’s remit. He then noted how regulators must apply traditional legal analyses to determine whether a given cryptocurrency constitutes a security or a commodity. He stated however that digital assets possessed unique characteristics and asserted that the CFTC and the SEC would need to collaborate on refining definitions for digital commodities and digital securities. He emphasized that the Digital Commodities Consumer Protection Act of 2022 would not govern securities and commented that the legislation was not meant to provide the CFTC with a “power grab.” He asserted that the legislation was merely filling a regulatory gap in the commodity cash market. He warned that the U.S.’s failure to fill this regulatory gap would lead to fraud and future customer losses. He expressed the CFTC’s commitment to work with the SEC on developing a framework for defining digital securities and digital commodities.
• Sen. Hoeven asked Chairman Behnam to address how the CFTC could work with other federal agencies on determining who would have jurisdiction over certain digital assets. He also stated that the CFTC would have to consider the global nature of novel digital assets when considering its areas of jurisdiction.
  • Chairman Behnam mentioned how the CFTC and the SEC had historically worked together on regulating futures and swaps products. He stated that if the CFTC were provided with regulatory authority over digital commodity spot markets, then the CFTC would work with the SEC to develop a framework that defined the main characteristics of commodities tokens and the main characteristics of securities tokens. He further stated that the CFTC and the SEC would need to determine which tokens fell under their respective jurisdictions.
• Sen. Hoeven asked Chairman Behnam to indicate whether digital assets legislation should contain a clearinghouse mechanism to determine whether digital assets were a commodity, security, or something else.
  • Chairman Behnam remarked that the CFTC and the SEC were capable of determining which tokens would fall under their respective jurisdictions. He stated however that the CFTC would be willing to work with Sen. Hoeven on developing a clearinghouse mechanism to determine digital asset types. He remarked that policymakers would need to balance the need to provide direction to regulators to determine digital asset types with the need to provide regulators with flexibility to respond to novel asset types. He commented that it was easier for regulators to change rules through the public comment process than it was for Congress to change the laws.
• Sen. Hoeven remarked that the Committee must ensure that the passage of the Digital Commodities Consumer Protection Act of 2022 would enable the CFTC to coordinate with other financial regulators on cryptocurrency oversight.
  • Chairman Behnam stated that the Committee should review and revise the Digital Commodities Consumer Protection Act of 2022 to account for the lessons learned from FTX’s recent collapse. He called on the Committee to take swift action on the legislation so that the U.S. could be prepared to respond to future problems within the cryptocurrency space.

Sen. Michael Bennet (D-CO):

• Sen. Bennet asked Chairman Behnam to explain why FTX had aggressively advocated for the Digital Commodities Consumer Protection Act of 2022 when the company could have never complied with the legislation’s requirements.
  • Chairman Behnam stated that he could not speak on the reasoning behind FTX’s strategy of advocating for more robust digital assets regulation. He asserted that FTX could not have possibly complied with the Digital Commodities Consumer Protection Act of 2022’s requirements.
• Sen. Bennet expressed interest in reviewing and revising the Digital Commodities Consumer Protection Act of 2022 to account for the lessons learned from FTX’s recent collapse. He then raised concerns that U.S. digital assets regulation might provide a false sense of assurance to retail investors that these assets are safe. He stated that while he agreed with Chairman Behnam’s argument that the U.S. should ultimately err on the side of consumer protection in its decision to regulate digital assets, he commented that digital assets remained complex. He asked Chairman Behnam to discuss the risks associated with digital assets regulation.
  • Chairman Behnam noted how there had recently occurred two major cryptocurrency crises involving Terra Luna and FTX and stated that neither of these crises had impacted the traditional banking system. He mentioned how many regulators were concerned that regulating cryptocurrencies could increase the connections between the cryptocurrency space and the traditional banking system, which could later result in contagion. He stated however that U.S. financial regulations have proven effective in enabling the U.S. to weather market volatility. He remarked that digital assets regulation was needed to protect customers and to guard against future crises. He asserted that regulating digital assets would reduce the likelihood of future cryptocurrency crises from occurring.
• Sen. Bennet asked Chairman Behnam to address how the U.S. could eliminate or prevent financial contagion from happening as a result of a cryptocurrency crisis.
  • Chairman Behnam remarked that the U.S. could eliminate financial contagion through applying traditional financial regulation principles to digital assets.
• Sen. Bennet asked Chairman Behnam to explain the rationale behind the U.S. having separate regulators for commodities and securities. He also asked Chairman Behnam to address whether this disparate oversight of digital assets could have negative consequences.
  • Chairman Behnam stated that the SEC and the CFTC had very different missions. He elaborated that the SEC was focused on capital formation and investor disclosures while the CFTC was focused on risk management and price discovery. He stated that the debate surrounding the merits of having two market regulators was not new. He highlighted how the SEC and the CFTC on their own were two of the largest regulators in the world. He contneded that the agencies should be kept separate for the aforementioned reasons. He then remarked the SEC and the CFTC had successfully worked together to regulate futures and swaps products that do not fit neatly into traditional security and commodity definitions. He expressed confidence that the SEC and the CFTC could successfully collaborate on efforts to regulate digital assets.
• Sen. Bennet lastly asked Chairman Behnam to define the current gap in regulation within the digital assets space.
  • Chairman Behnam noted that the SEC had the ability to regulate securities tokens while the CFTC can only regulate derivative markets. He stated that the current gap in regulation refers to the inability of the SEC and the CFTC to regulate cash commodity markets.

Sen. Mike Braun (R-UT):

• Sen. Braun asked Chairman Behnam to indicate whether cryptocurrencies could eventually become widely accepted mediums of exchange considering their high levels of volatility. He asked Chairman Behnam to address whether these high levels of volatility were attributable to the nascency of cryptocurrencies or if these high levels of volatility would remain a feature of cryptocurrencies moving forward.
  • Chairman Behnam recounted how the price of Bitcoin over the previous 12 months had moved significantly downward. He indicated however that the volatility of Bitcoin prices had narrowed over this same period. He stated that this recent trend could signal that Bitcoin will become more stable in value in future years. He also discussed how many cryptocurrencies had high associated transaction costs. He stated that these costs must be addressed for cryptocurrencies to become more widely used in traditional finance and payment systems.
• Sen. Braun compared the recent volatility in the cryptocurrency market to the internet stock bubble of the late 1990s. He then asked Chairman Behnam to address whether both the SEC and the CFTC should play roles in regulating digital assets.
  • Chairman Behnam noted how the SEC was prohibited from overseeing commodities.
• Sen. Braun interjected to comment that the U.S. was still working to ascertain whether many digital assets were commodities or securities.
  • Chairman Behnam stated that historical precedent should inform determinations as to what constitutes a commodity and what constitutes a security. He noted how the test established under the U.S. Supreme Court’s decision in SEC v. W. J. Howey Co. (known as the Howey test) defines a security as an investment of money in a common enterprise with the expectation of profit from the work of others. He stated that these same fundamental characteristics should be applied to digital securities. He acknowledged that while the SEC and the CFTC would likely need to develop additional considerations for determining whether digital assets constitute securities or commodities, he asserted that the Howey test framework was generally sufficient. He noted how the SEC had been established to bridge information gaps between issuers and investors while the CFTC had been established to create a market-based structure so that commodities could be traded in a transparent, fair, and resilient way.
• Sen. Braun then discussed how sovereign currencies were heavily influenced by the issuing country’s fiscal and monetary policies. He stated that policymakers should remain cautious as to not overregulate cryptocurrencies so that they did harm people living in less stable countries. He asked Chairman Behnam to address whether he had concerns that the overregulation of cryptocurrencies could lead to the stifling of innovation and benefits.
  • Chairman Behnam stated that he would focus his remarks on the current state of the cryptocurrency space and the current risks that cryptocurrencies posed to customers.

Sen. Cory Booker (D-NJ):

• Sen. Booker stated that FTX had scammed millions of Americans and expressed his interest in learning lessons from this episode to inform future policymaking. He then remarked that he was optimistic regarding the potential benefits of the technology that underlaid cryptocurrencies. He expressed his hope that this technology could provide economic opportunities to underbanked Americans. He contended that Congress’s failure to pass digital assets legislation (such as the Digital Commodities Consumer Protection Act of 2022) would leave economically disadvantaged Americans vulnerable to scams, frauds, risky products, and inadequate disclosures. He expressed his support for the Digital Commodities Consumer Protection Act of 2022 and stated that the legislation’s provisions would have prevented many of FTX’s problems had FTX been a U.S.-registered company. He noted however that many of FTX’s actions have long been illegal. He then mentioned how there was a popular perception that the Digital Commodities Consumer Protection Act of 2022 was the legislative approach favored by former FTX CEO Sam Bankman-Fried. He noted that Sam Bankman-Fried was just one of many diverse stakeholders that had provided feedback on the legislation. He asked Chairman Behnam to discuss FTX’s involvement in the development of the Digital Commodities Consumer Protection Act of 2022.
  • Chairman Behnam first mentioned how the CFTC had provided technical assistance and legal analysis to the Committee as it worked to develop the Digital Commodities Consumer Protection Act of 2022. He stated that Full Committee Chairman Debbie Stabenow (D-MI) and Full Committee Ranking Member John Boozman (R-AR) had taken an inclusive approach in soliciting stakeholder feedback as they worked to develop the Digital Commodities Consumer Protection Act of 2022. He also mentioned how he had met with former FTX CEO Sam Bankman-Fried and his team ten times and noted that some of these meetings had touched on FTX’s conversations with lawmakers.
• Sen. Booker interjected to mention that Chairman Behnam had met with him personally to discuss the Digital Commodities Consumer Protection Act of 2022. He stated that Chairman Behnam had been focused on protecting consumers and ensuring financial security for Americans during these discussions. He then remarked that the issue of financial criminality was not new and that many of FTX’s actions have long been illegal. He highlighted how the Digital Commodities Consumer Protection Act of 2022 would provide the CFTC with more resources so that the Agency could better pursue enforcement actions within the digital commodities space. He asked Chairman Behnam to discuss how the Digital Commodities Consumer Protection Act of 2022 would provide the CFTC with the authority and resources to protect consumers and prevent market problems from arising.
  • Chairman Behnam remarked that the CFTC’s current enforcement actions within the digital assets space were all based on tips, which meant that the CFTC could only respond to crimes (rather than directly prevent them). He contended that there needed to be CFTC registration of digital assets exchanges and CFTC surveillance of digital assets market activity. He further called for the CFTC to have direct relationships with custodians holding customer funds so that the Agency could prohibit and prevent illegal transfers of customer funds. He concluded that the Digital Commodities Consumer Protection Act of 2022 would position the CFTC to prevent illegal activities within the digital assets space.
• Sen. Booker lastly thanked the Committee leadership for its bipartisan work to address the digital assets space.

Full Committee Ranking Member John Boozman (R-AR):

• Ranking Member Boozman remarked that the Committee was interested in working to equip the CFTC with the necessary resources and authorities to protect consumers within the digital assets space. He expressed confidence in the CFTC and the SEC’s capabilities to oversee the digital assets market. He stated that Congress and federal regulators would need to develop a new policy framework for digital assets to prevent future collapses of cryptocurrency entities.