[Senate Hearing 117-612]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 117-612

                       WHY CONGRESS NEEDS TO ACT:
                 LESSONS LEARNED FROM THE FTX COLLAPSE

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            December 1, 2022

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry 
           
           
           
           
           
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                                 ______

                    U.S. GOVERNMENT PUBLISHING OFFICE 

51-393 PDF                 WASHINGTON : 2024 















           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY


                 DEBBIE STABENOW, Michigan, Chairwoman
PATRICK J. LEAHY, Vermont            JOHN BOOZMAN, Arkansas
SHERROD BROWN, Ohio                  MITCH McCONNELL, Kentucky
AMY KLOBUCHAR, Minnesota             JOHN HOEVEN, North Dakota
MICHAEL F. BENNET, Colorado          JONI ERNST, Iowa
KIRSTEN E. GILLIBRAND, New York      CINDY HYDE-SMITH, Mississippi
TINA SMITH, Minnesota                ROGER MARSHALL, Kansas
RICHARD J. DURBIN, Illinois          TOMMY TUBERVILLE, Alabama
CORY BOOKER, New Jersey              CHARLES GRASSLEY, Iowa
BEN RAY LUJAN, New Mexico            JOHN THUNE, South Dakota
RAPHAEL WARNOCK, Georgia             DEB FISCHER, Nebraska
                                     MIKE BRAUN, Indiana

                 Erica Chabot, Majority Staff Director
                 Chu-Yuan Hwang, Majority Chief Counsel
                    Jessica L. Williams, Chief Clerk
               Fitzhugh Elder IV, Minority Staff Director 
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
                            C O N T E N T S

                              ----------                              

                       Thursday, December 1, 2022

                                                                   Page

Hearing:

Why Congress Needs to Act: Lessons Learned from the FTX Collapse.     1

                              ----------                              

                    STATEMENTS PRESENTED BY SENATORS

Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan...     1
Boozman, Hon. John, U.S. Senator from the State of Arkansas......     3

                                WITNESS

Behnam, Hon. Rostin, Chairman, Commodity Futures Trading 
  Commission, Washington, DC.....................................     4
                              ----------                              

                                APPENDIX

Prepared Statements:
    Behnam, Hon. Rostin..........................................    48

Document(s) Submitted for the Record:
Brown, Hon. Sherrod:
    North American Securities Administrators Association, Inc., 
      letter of support..........................................    54

Question and Answer:
Behnam, Hon. Rostin:
    Written response to questions from Hon. John Boozman.........    60
    Written response to questions from Hon. Ben Ray Lujan........    66
    Written response to questions from Hon. Raphael Warnock......    67
    Written response to questions from Hon. Roger Marshall.......    68
    Written response to questions from Hon. Deb Fischer..........    70


 
                   WHY CONGRESS NEEDS TO ACT: LESSONS  
                      LEARNED FROM THE FTX COLLAPSE

                              ----------                              


                       Thursday, December 1, 2022

                                        U.S. Senate
          Committee on Agriculture, Nutrition, and Forestry
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m., in room 
G50, Dirksen Senate Office Building, Hon. Debbie Stabenow, 
Chairwoman of the Committee, presiding.
    Present: Senators Stabenow [presiding], Brown, Klobuchar, 
Bennet, Gillibrand, Smith, Durbin, Booker, Lujan, Boozman, 
Hoeven, Ernst, Marshall, Tuberville, Grassley, Fischer, and 
Braun.

STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE 
    OF MICHIGAN, CHAIRWOMAN, U.S. COMMITTEE ON AGRICULTURE, 
                    NUTRITION, AND FORESTRY

    Chairwoman Stabenow. Good morning. I call the Committee to 
order. We appreciate Chairman Behnam being with us this 
morning.
    One month ago, the crypto market was rocked by reports that 
Alameda Research, a trading firm affiliated with crypto 
exchange FTX, was in financial trouble. Alameda's balance sheet 
was propped up by a crypto token that FTX had created. In a 
matter of days, FTX and most of its affiliated companies 
collapsed into bankruptcy. At best, these events uncovered an 
alarming lack of internal controls and egregious governance 
failures. At worst, Sam Bankman-Fried and his inner circle lied 
to and stole from over one million customers, some of whom have 
lost their life savings.
    Meanwhile, the fallout continues across the crypto 
ecosystem. For over a year, this Committee has been examining 
the risks posed by the lack of Federal oversight of the crypto 
industry. The Chairman of the Commodity Futures Trading 
Commission (CFTC), with us today, Russ Behnam, spoke about this 
issue at his confirmation hearing. At that hearing, Mr. Behnam 
discussed the agency's enforcement actions against crypto firms 
but warned that they were just ``the tip of the iceberg.'' 
Since that time, members of this Committee have been working on 
a bipartisan basis to advance legislation that would give the 
CFTC regulatory authority over the trading of crypto tokens 
that are not securities.
    To be clear, there currently is no Federal market 
regulation of spot crypto assets that are not securities. These 
include Bitcoin and Ether, the two most heavily traded crypto 
assets. The White House and the Financial Stability Oversight 
Council have urged Congress to close this gap. The Digital 
Commodities Consumer Protection Act (DCCPA) does exactly that, 
and I want to thank Senator Boozman as my partner, and I want 
to thank our co-sponsors as well.
    I have said this before and I will say it again: the 
Digital Commodities Consumer Protection Act does not take 
authority away from other financial regulators, nor does it 
make the CFTC the ``primary'' crypto regulator. Because crypto 
assets can be used in many different ways, no single financial 
regulator has the expertise or the authority to regulate the 
entire industry.
    We continue to work with our colleagues on the Senate 
Banking Committee, and at the Securities and Exchange 
Commission and other financial regulators, to bring greater 
protections to this market, regardless of whether the asset is 
a security or a commodity.
    The crisis created by FTX further confirms the need for a 
whole-of-government approach to regulating this market. The 
risks of trading crypto have come into sharp focus in the past 
few weeks, but we have known about them for years. The lack of 
clear, consistent rules has allowed crypto to flourish, despite 
harmful conflicts of interest, an absence of responsible 
governance and risk management, and a failure to safeguard 
customer assets. This is the very conduct our legislation is 
designed to prevent.
    Where Federal regulators, including the SEC, already have 
authority to register and oversee crypto firms, they must use 
that authority. Fraud prosecutions are a critical tool, but far 
too often, they are brought after customers' money has been 
lost, with little recourse for those affected. Senator Boozman 
and I have called today's hearing to do two things. First, to 
understand what went wrong at FTX. We will not have all the 
answers today because the story is just beginning to unfold, 
but the Committee will hear from Chairman Behnam about what may 
have triggered such a staggering collapse in such a short 
period of time. Second, we want to ensure that the Digital 
Commodities Consumer Protection Act sufficiently addresses 
these risks.
    One thing is already apparent: the crypto industry lacks 
the customer protections that Americans expect and deserve when 
trading in U.S. markets. When exchanges accept customer funds 
for trading, they must not be allowed to gamble with those 
funds. They must not be allowed to invent products that have 
little to no intrinsic value and accept them as collateral for 
loans. They must not be allowed to self-deal.
    FTX did all of those things, emboldened by a lack of 
Federal oversight. Let me just conclude by saying that there is 
one exception in this story. One exception is LedgerX, a 
derivatives exchange and clearinghouse purchased by FTX and 
registered with the CFTC. John Ray, the CEO appointed to 
navigate the FTX companies through bankruptcy, said that 
LedgerX has a ``solvent balance sheet'' and ``responsible 
management.'' Customer money was safeguarded and is accounted 
for. The DCCPA replicates these protections for digital 
commodity markets. If our bill had been law, FTX's conduct 
would have been illegal and could have been prevented.
    Congress must act to pass legislation that will hold this 
industry to the same rules as traditional financial 
institutions and close gaping holes in our regulations. If we 
fail to meet this responsibility, consumers will continue to be 
harmed, and hardworking Americans will continue to lose 
billions of dollars at the hands of bad actors, like FTX.
    That is why we are here, and I am going to turn now to my 
colleague and partner in this effort, Senator Boozman.

       STATEMENT OF HON. JOHN BOOZMAN, U.S. SENATOR FROM  
                   THE STATE OF ARKANSAS 

    Senator Boozman. Thank you, Madam Chair, for calling 
today's very, very important hearing.
    The sudden bankruptcy of FTX, a Bahamas-based 
cryptocurrency exchange that, at its peak, was the world's 
third-largest crypto exchange by volume, has been truly 
shocking. Public reports suggest a complete lack of risk 
management, conflicts of interest, and misuse of customer 
funds. There is simply no place for such behavior, especially 
in our financial markets.
    A failure of this magnitude requires Congress to analyze a 
number of things: what happened, the scope and scale of the 
impact to U.S. consumers and investors, what could have 
prevented this, and what the potential market effects are or 
systemic risks were.
    This hearing will allow the public to learn what happened 
from the perspective of the CFTC, a frontline regulator, the 
agency's response, and the tools the agency needs to protect 
U.S. customers and investors in the future.
    Many have asked, why is the Ag Committee involved in this? 
The Ag Committee is involved because this Committee, and no 
other Committee in the Senate is responsible for the oversight 
of the Nation's commodity markets. Bitcoin, although a 
cryptocurrency, is a commodity. It is a commodity in the eyes 
of the Federal courts and the opinion of the SEC Chairman. 
There is no dispute about this. If there are exchanges where 
commodities are traded, be it wheat, oil, or Bitcoin, then they 
must be regulated. It is simply that simple. The choice not to 
regulate leaves consumers at the mercy of those who would prey 
upon them.
    The FTX failure is an unacceptable reoccurrence. A foreign 
entity fails and U.S. consumers and businesses get hurt as a 
result. The choice not to regulate, or opting for a regulation 
by enforcement approach, drives entities offshore and out of 
the U.S. regulators' purview. When these offshore entities 
fail, U.S. consumers still get hurt, but U.S. regulators can 
only watch from afar.
    The CFTC is the right agency to regulate digital 
commodities. When given the necessary authorities, the CFTC has 
consistently demonstrated its willingness to protect consumers 
via enforcement actions against bad actors. It also has a 
pragmatic, principles-based agency approach that enhances 
consumer protection by building and implementing constructive, 
workable regulatory structures for markets to function in. 
There is no better example of this than the CFTC's regulation 
of the futures market, which has proven to be one of the most 
resilient markets, in large part because of the CFTC's tried 
and trusted principles-based regulatory regime. The CFTC 
regulates markets through core principles that prevent 
conflicts of interest, prohibits abusive trade practices, 
protects customer funds and informs investors about market 
risk.
    Chairman Stabenow and I have drawn from these consumer 
protection-based principles and the agency's expertise in 
regulating evolving and complex markets and applied them to 
digital commodity spot markets. I welcome today's hearing to 
explore how the CFTC would have used the Digital Commodities 
Consumer Protection Act in this situation and to flesh out what 
regulatory gaps we need to fill to prevent such occurrences 
from happening again.
    Long before the FTX's collapse, the Chairwoman and I began 
working, drafting legislation to address the need for 
regulation in digital commodity spot markets. Speaking for 
myself, I can tell you that between my staff and I, we have had 
a transparent process, taking at least 240 meetings this year, 
with a wide variety of stakeholders that informed the 
legislation that was introduced in August and continues to 
inform my thinking as Chairwoman Stabenow and I refine the 
DCCPA.
    A lot of hard work has gone into the Digital Commodities 
Consumer Protection Act. It is the result of a bipartisan 
coordination and widespread stakeholder engagement encompassing 
nearly the entire digital asset and financial services 
ecosystem. It also incorporates consumer advocacy and academic 
input and regulatory technical assistance. The bill is a good-
faith effort to establish a constructive regulatory framework 
that provides the CFTC with the resources and the authority 
necessary to protect consumers and retail investors while 
promoting industry innovation in digital commodity spot or cash 
markets.
    I am confident that CFTC is the right agency for an 
expanded regulatory role in the digital commodity spot market 
and I remain committed to advancing a final version of the bill 
that will allow for the creation of safeguards the market 
desperately needs, and certainly even more so in the wake of 
the FTX collapse.
    I look forward to Chairman Behnam weighing in on the events 
of the FTX collapse, giving the perspective on the state of the 
industry, the role the CFTC is playing in protecting U.S. 
consumers, and ensuring efficient derivatives markets. I 
welcome his insight on the bill.
    With that I yield back.
    Chairwoman Stabenow. Thank you so much, Senator Boozman.
    Russ Behnam is Chairman of the Commodities Futures Trading 
Commission, well known to the Committee. We welcome you today 
and we appreciate hearing from you on this really important 
topic. Please proceed.

    STATEMENT OF HON. ROSTIN BEHNAM, CHAIRMAN, COMMODITY 
        FUTURES TRADING COMMISSION, WASHINGTON, DC 

    Mr. Behnam. Thank you, Chairwoman Stabenow, Ranking Member 
Boozman, and members of the Committee, for the opportunity to 
appear before you today.
    The events of the past few weeks embody, in the most 
regrettable way, the perilous state of the digital asset 
market. For years many have recognized that a patchwork of 
Federal-and State-based regulation is an unsuitable substitute 
for a comprehensive approach. We are here today because many 
Americans invested in a novel product and will likely lose 
money because digital asset markets lack the basic protections 
that we have all come to expect and have made American 
financial markets the envy of the world.
    In the absence of stringent and uniform standards, the 
digital asset market rapidly expanded. With nominal barriers to 
entry for new products and new consumers, massive speculative 
interest has taken the place of legitimate market forces, 
putting the American public at significant risk. We are here 
today because the latest events involving FTX lay bare the 
consequences and demand accountability. As I have stated 
publicly many times before, I strongly believe that we need to 
move quickly on a thoughtful regulatory approach to establish 
guardrails in these fast-growing markets of evolving risk, or 
they will remain an unsafe venture for customers and could 
present a growing risk to the broader financial system.
    Failure to act will leave consumers who have made 
investments in digital commodities largely unprotected. Unlike 
other Federal financial regulators, the CFTC lacks the 
necessary and direct authority to write rules and to oversee 
this marketplace. Instead, we may only reach it through more 
limited authority activated when fraud or manipulation has 
already occurred. While we can and do hold perpetrators 
accountable when we find fraud or manipulation, for the victims 
of the scheme it is already too late.
    The CFTC does not have direct statutory authority to 
comprehensively regulate cash digital commodity markets. 
Instead, the Commission's jurisdiction resides with its more 
limited fraud and manipulation enforcement authority. In the 
absence of direct regulatory and surveillance authority in the 
underlying cash market, CFTC enforcement activity begins with a 
referral or whistleblower tip from an external source. Despite 
this limitation, the CFTC has brought more than 60 enforcement 
cases in the digital asset space since 2014, with total 
penalties of just over $820 million. Alone, in Fiscal Year 
2022, more than 20 percent of our total 82 enforcement actions 
involved digital assets.
    As I suggested over a year ago, the fraud that we are able 
to prosecute is likely a fraction of what exists in the 
shadows. Limited enforcement authority is 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 by a 
regulator such as the CFTC. By the time the CFTC is able to 
exercise its fraud and manipulation authority, it is already 
too late for defrauded customers.
    Identifying unique elements of the digital asset commodity 
markets that distinguish it from other cash markets, I have 
asked Congress for clear authority to impose our traditional 
regulatory regime over the digital asset commodity market. I 
have been greatly encouraged by the efforts from Congress to 
date.
    I have not been shy about my encouragement of bills that 
contemplate shared responsibility for the CFTC and the 
Securities and Exchange Commission, where the SEC would utilize 
its existing authority and reporting regime requirements for 
all security tokens, while the CFTC would apply its market-
based rules for the more limited subset of commodity tokens 
which do not have the same characteristics of security tokens.
    In September, I appeared before you in support of the 
Digital Commodities Consumer Protection Act, which benefited 
from the expertise of CFTC staff who worked closely with some 
members of this Committee to establish a framework similar to 
the CFTC's current and effective regulatory framework over the 
derivatives markets. I have been encouraged by the bipartisan 
and bicameral support that recognizes the need for guardrails 
around the burgeoning digital asset economy and calls for 
regulation to impart transparency, accountability, stability, 
customer protections, and oversight across digital assets.
    In light of recent events, the CFTC stands ready to 
continue working with this Committee and other Members of 
Congress in revisiting existing proposals to ensure every known 
weakness, risk, and failure is addressed in legislation.
    It has been easy to fall into analysis paralysis, compelled 
to endlessly debate the utility of the underlying technology, 
how to ensure responsible innovation, and how flexible or 
restrictive regulation should be, both exclusively around 
digital assets and inclusively amongst traditional financial 
instruments. Our highest priorities must be the protection of 
customer property and promotion of fair, stable, and resilient 
markets. If we are going to ensure that FTX and other firms 
that are subjecting customers to billions of dollars in losses 
are appropriately regulated and held accountable, we need to 
act promptly to apply a comprehensive regulatory regime.
    Most of the coverage about FTX in the past weeks has 
focused on the over 130 different entities that filed for 
bankruptcy, which includes an offshore-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. Of 
significantly less focus is the entity registered with and 
overseen by the CFTC, a derivatives exchange and clearinghouse 
called LedgerX LLC.
    Since 2017, LedgerX has been registered with the CFTC as a 
designated contract market, swap execution facility, and 
derivatives clearing organization. LedgerX is one of the few 
FTX entities to not file for bankruptcy. The CFTC has been in 
near daily contact with LedgerX as well as the third-party 
custodians it uses to hold both cash and digital assets. Based 
on the information presented to us at this time, LedgerX 
customer property remains secure and LedgerX has the financial 
resources to continue operating for the foreseeable future.
    We are continuing to closely monitor LedgerX, but the 
initial evidence suggests that in the collapse of the broader 
FTX universe, CFTC regulations are working to ensure that those 
registered with the CFTC are in a position to protect customers 
and continue market operations. The lesson here is clear: 
thoughtful, comprehensive regulation works to protect customers 
and prevent the type of events that have befallen the other FTX 
entities.
    Invariably, the questions we are all obligated to answer as 
regulators are, ``How did you let this happen?'' and ``How will 
you prevent this from happening again?'' In the pivotal moment 
we find ourselves in, the answer to both questions is: 
comprehensive, market regulation. At the CFTC we lacked the 
authority to comprehensively regulate the digital commodity 
market and to prevent this from happening again. We must be 
provided appropriate authority by Congress, and without new 
authority for the CFTC there will remain gaps in a Federal 
regulatory framework, even if other regulators act within their 
existing authority. In fact, the recent Financial Stability 
Oversight Council Report concludes that, ``A regulatory gap 
exists in spot markets for crypto assets that are commodities 
and not securities.''
    The CFTC will remain vigilant with respect to our 
registered entities, using our existing fraud and manipulation 
authority to the fullest extent of the law, and engage with 
this Committee to ensure you have as much information as 
needed.
    I look forward to answering your questions and thank you 
for the invitation today.

    [The prepared statement of Mr. Behnam can be found on page 
48 in the appendix.]

    Chairwoman Stabenow. Thank you very much, Mr. Chairman. We 
will have seven-minute rounds because of the importance of this 
issue and having our one witness today.
    Chairman, you testified that CFTC has a limited window into 
FTX operations apart from the one entity that you talked about, 
LedgerX, which is registered with the CFTC. Based on the 
visibility that you have into LedgerX and the information that 
you learned from discussions with other regulators or FTX, what 
can you tell us about the cause of the FTX collapse?
    Mr. Behnam. Thank you, Senator, for the question. I say at 
the beginning very clearly the LedgerX relationship was 
essentially walled off from other affiliates and other entities 
in the FTX family. We had a lens into FTX, and as I have stated 
and as you have recognized, the entity is healthy, it is 
solvent, it is operational, and we know where customer money 
is. The limitations of our authority stopped at that entity, 
and the sort of reciprocal relationship is for those same 
reasons that we were walled off from going past the regulated 
entity, the other FTX entities were not able to pierce through 
LedgerX and potentially take customer money, which obviously, 
as a regulator, that is the priority.
    In terms of what happened and what we are learning, 
obviously a lot of information continues to come in. As we look 
at what we have learned thus far, it seems like a classic 
liquidity crunch that really forced a run on the institution. 
Over a series of days there were concerns about the health of 
the FTX entity and all of the affiliates, and at that point, as 
we have learned, a number of the customers and investors 
started to withdraw their funds, which really cascaded into a 
massive withdrawal of funds, which at some point FTX had to 
stop those withdrawals and then ultimately file for bankruptcy. 
A lot of indications about comingling and not using custody to 
protect customer property, and a series of conflicts of 
interest which you also pointed out.
    These are the things that we have learned so far but 
continue to monitor the situation. Ultimately it looks like a 
classic run based on a liquidity crunch.
    Chairwoman Stabenow. Thank you. FTX had requested that CFTC 
amend LedgerX's clearinghouse license, and the agency was 
reviewing that proposal at the time of their bankruptcy. Could 
you please describe for the Committee the agency's interactions 
with FTX and its former CEO regarding this request, as well as 
the status of the request before it was withdrawn?
    Mr. Behnam. Thank you, Senator. I will try to be as concise 
and comprehensive as possible. It is an important question.
    FTX was dogged in their pursuit of getting an approval for 
this application for the clearinghouse. Certainly I cannot 
speak to the number of meetings necessarily that Mr. Bankman-
Fried and his team had with staff. I do know they were in the 
building quite a bit, talking with staff about the details of 
the application.
    I can, though, share with this Committee with respect to 
me. My team and I have taken an initial review of my calendar, 
and what we have observed is that my team and I met with Mr. 
Bankman-Friend and his team. Over the past 14 months we met 10 
times in the CFTC office, at their request, all in relation to 
Derivative Clearing Organizations (DCO), this clearinghouse 
application. Nine out of the 10 times we were in Washington. 
One was at a widely held conference in Florida earlier this 
year.
    In addition, there were two phone calls, I believe, and a 
number of messages, all in relation to the DCO application, 
providing us updates, suggesting that they were answering 
questions from different divisions, and trying, a I said, to 
doggedly move the application along and to get it approved.
    I would say it is really important to understand that by 
law, by statute, we needed to address and respond to the 
application. We did not have flexibility to put it on the side 
of the desk or disregard it. We had to respond to it. Knowing 
the importance of the issue and the very strong feelings on 
both sides of the application, both in support and opposition, 
I made a decision very early to be as transparent as possible 
with the process. In March of this year we put out a request 
for information, a series of questions to the public, trying to 
get as much stakeholder input. We received 1,500 responses to 
that request for information.
    In May of this year we had a public roundtable on non-
intermediation, specifically on non-intermediation and not the 
FTX application because this application was not the first of 
its kind, and I will tell this Committee it is not going to be 
the last of its kind either. This will continue to be an issue 
for the CFTC.
    All that said, this application had the potential impact 
far beyond FTX itself. It had the potential impact across 
market structure, across derivatives markets, and potentially 
across all financial markets. It was for that reason that I 
decided, me, as Chairman, to be personally engaged as much as 
possible. There were very, very strong feelings about this 
application, and I felt I needed to be engaged as the Chairman 
of the agency. That meant directly with FTX and Mr. Bankman-
Fried, but that meant with other CEOs of public interest 
groups, of clearinghouses, of exchanges, of academics and 
regulators as well.
    In many respects this is consistent with what I have done 
in the past, but it is also consistent with recognizing the 
importance of the issue. I want to be responsive to 
stakeholders, I want to be respectful to stakeholders, and I 
want to have an open-door policy so that my team and I can 
learn as much possible.
    With regard to the last question, and I know there has been 
a number of reporting lately about the status of the 
application and where it was, the application was applied or 
submitted in December of last year. As of the withdrawal date, 
which was, I believe, November 11th of this year, there was no 
decision. There were more questions than answered. There was no 
decision or recommendation from staff. There was no pressure 
from any outside sources. As I said, we were doing what we were 
obligated to do by law. We were being very careful and surgical 
in examining the issue, and including as many people and 
stakeholders as possible to better inform our decision.
    Chairwoman Stabenow. Thank you very much. Last question 
before turning to my colleagues, would the conduct that led to 
FTX failure have been prohibited under the Digital Commodities 
Consumer Protection Act? If you could speak briefly.
    Mr. Behnam. Sure, Senator. Based on what we know thus far, 
a lot of the issues that have arisen and sort of come to light 
are significant conflicts of interest, significant allegations 
of comingling customer money and house money, lack of books and 
records, lack of corporate governance and risk controls, just 
to name a few. These are, from our understanding in working 
with you on the DCCPA, core elements of the DCCPA.
    I certainly think given the events of the recent past we 
should take a fresh look, but the DCCPA does address these 
issues and would have prohibited those actions from occurring 
at FTX.
    Chairwoman Stabenow. Thank you. Senator Boozman.
    Senator Boozman. Thank you, Madam Chair, and thank you 
again, Mr. Chairman, for being with us to testify about what 
has happened, and so importantly about the potential for future 
bad things happening to consumers if Congress does not act and 
get some authority to both you and the SEC so we can prevent 
these things from happening in the future.
    While this is not my view, over the past week I have read 
multiple articles that suggest the CFTC is a soft-touch 
regulator. Do you have a response to that?
    Mr. Behnam. Senator, I just patently reject that 
suggestion. I think you and I have talked about this before. I 
have talked about this to this Committee. Again, I think it is 
just a lack of insight into the CFTC and what we do, and I 
think if individuals took at harder look at our record, both 
from a regulatory perspective and an enforcement perspective, 
they would understand that we are the farthest thing from a 
light-touch regulator. We are one of the strongest, most 
respected regulators in the world, especially around 
derivatives markets.
    You know, I have been thinking about this a lot, given the 
narrative that has been building, and my response comes with a 
few thoughts about what we do and what we have done 
historically.
    First, as we have discussed, let us think about LedgerX and 
the entity that we regulate. Of all the 130 entities in the FTX 
family, the few that survived, one is the CFTC-regulated 
entity. Solvent, operational, and customer money is where it is 
supposed to be.
    I would also point to our enforcement record. Since the 
last time I was with this Committee we closed out our Fiscal 
Year 2022 enforcement record. Over $2.5 billion in assessed 
penalties on a $320 million budget. Of those cases, 82 cases, 
20 percent digital asset cases, and strong cases, precedential 
cases across all digital asset markets, including DeFi. These 
are not sham cases just looking for a headline.
    The third thing I would say, and Senator, you sort of 
alluded to this in your opening statement. Looking back to 2008 
and the financial crisis, the tsunami that wiped the financial 
markets and the economy across the globe, the one area that was 
sort of a beacon of financial market regulation were cleared 
derivatives. Futures markets were able to know where customer 
money was and return customer money to its owners. That 
regulatory framework served as a model for the swaps reform 
that this Committee enacted in Dodd-Frank, and ongoing right 
now there is a discussion about Treasury market reform in 
clearing Treasury markets. Cleared derivates are the model for 
that market as well.
    Just a couple of indications of the importance, the 
efficacy, and the strength of derivatives markets that are 
implemented and enforced by the CFTC.
    Senator Boozman. Very good. I think you have answered this 
but I think we need to be very, very clear about it. If FTX.com 
had been a registered U.S. exchange, would the CFTC have been 
able to mitigate what happened?
    Mr. Behnam. Senator, you know, with our current authority 
the answer is no. We need the authority to get into a CFTC-
registered exchange. As you point out, if we have that 
authority and they were registered, given what we know from the 
facts about conflicts of interest, comingling funds, books and 
records, we would have been able to prohibit it.
    I would point to what we are doing with LedgerX. On a daily 
basis, our staff is in direct communication not only with 
LedgerX but the custodians themselves, able to identify 
customer property and customer money. Imagine that scenario 
with FTX US. If we had a daily lens into the location of 
customer money and customer property, you can imagine given 
what we have learned about what has happened with FTX, we could 
have certainly prohibited many of the actions that we are 
hearing about.
    Senator Boozman. Do you agree that the FTX collapse shows 
the need to, No. 1, bring entities into the U.S. to enable 
regulatory oversight into them, and No. 2, create a framework 
focused on regulating custodians, exchanges, and scrutinizing 
conflicts of interest relating to common ownership and control 
of exchanges and on-venue trading firms?
    Mr. Behnam. Absolutely, Senator. You know, I think 
naturally if there was a regulatory framework in the U.S. you 
would see a number of entities, perhaps, migrate to the U.S. 
and register, and this would bring the transparency that is 
direly needed around all the issues you stated.
    These are core fundamentals of market regulation. These are 
core fundamentals of CFTC regulation, ensuring that there are 
no conflicts of interest, and that an individual entity cannot 
wear multiple hats, offering different services to the same 
customer, making sure that money is not comingled between house 
and customers as well. Having books and records to examine, 
being able to audit financial statements, having disclosures 
for customers. These are core elements that have served U.S. 
markets, U.S. derivatives markets so well for decades.
    As we continue to see this digital asset market exist and 
interest from retail speculative investors, we need to bring 
these principles into this market in order to protect 
customers. There are gaps, gaps, gaps in this regime, and we 
have to fill this gap in order to protect customer money.
    Senator Boozman. Very good. I want to take a moment to 
focus on a specific DCCPA provision, the dealer definition. My 
concern is that if we require CFTC registration in the digital 
asset context for U.S. entities who do not trade with any 
retail counterparties and do not offer trading with margin 
leverage or custody, we set a precedent for future Congresses 
to call for these same requirements in traditional commodity 
markets, which would be wholly inappropriate. Even though the 
activity is the same, I am also concerned with diluting the 
CFTC's resources away from protecting retail participants by 
overreaching on who is required to register.
    Do you agree that the priority focus should be protecting 
retail from fraudulent leveraged selling practices, similar to 
the way the CEA currently requires registration of retail 
foreign exchange dealers?
    Mr. Behnam. Senator, I think absolutely the priority should 
be retail customers and retail investors. I have said that many 
times. Given the risks and the knowledge gap and the education 
gap, the focus certainly should be on retail investors.
    Senator Boozman. Good. Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much. Senator 
Klobuchar.
    Senator Klobuchar. Thank you very much, Madam Chair. Thank 
you for joining us, Chairman.
    As has been explained by my colleagues, at its peak FTX was 
revealed to have been a shell game in which the company gambled 
with customer money through its hedge fund. The $8 billion hole 
in FTX's balance sheet not only raises questions about 
regulatory oversight and transparency but also about market 
structure and how centralized and interconnected much of the 
digital asset market is. I am going to start with something 
that kind of leads off of what Senator Stabenow was asking 
about.
    When retail investors purchase traditional financial assets 
like stocks through cash markets, the transaction is typically 
carried out through several different entities, including a 
broker, an exchange, and a clearing and settlement company. 
FTX, like many other digital asset companies, consolidated 
several of these processes under one roof. To what extent did 
centralization and vertical integration of FTX play into its 
ability to conceal operational risk and fraud from regulators, 
auditors, and investors? Would rules about conflicts of 
interest requiring transparency and disclosure make a 
difference to manage risks in the future?
    Maybe answer the centralization question and then how you 
fix it.
    Mr. Behnam. Yes. Senator, this question about vertical 
integration is a key question. It is one that we were dealing 
with, with the application that FTX had before us. I said this 
earlier in my opening statement. We have to be mindful of this 
structure because the FTX application was not the first to the 
CFTC and it is not going to be the last. It is a very important 
issue that we need to think about.
    The Financial Stability Oversight Council mentioned 
vertical integration as a risk or a potential risk. You know, 
on one hand it is a product of technology and the ability to 
have direct execution to a trading platform or a clearinghouse, 
and there may be merit there. As you point out rightfully, 
there are a lot of potential risks, and that ability to 
consolidate control over multiple parts of a trade execution or 
a trade as sort of evolution.
    It may have made it easier for FTX. I do not know exactly 
because really this goes to the point of a lack of regulation 
and a lack of insight into FTX and what was happening within 
the entity, and whether or not anyone was identifying these 
issues. Obviously conflicts of interest, which you have 
identified, is a serious issue.
    Senator Klobuchar. Something that clearly contributed to 
the collapse is the fact that the exchange took customer funds 
that it was supposed to safeguard and then lent it to its 
sister company, Alameda Research, that made reckless gambles, 
it appears, with that money.
    My colleagues already asked about the requirement to 
register. What should be done? Could you talk about what you 
think the role of the SEC should be in this balancing with what 
role you should be? In a perfect world, how do you think this 
would work, because we clearly are living in an imperfect world 
when you look at the collapse that we just saw.
    Mr. Behnam. Well, I think the responsibilities would 
largely be the same, but they would be drawn on the line of 
what is a security token and what is a commodity token. Much of 
the market structure that both the SEC and the CFTC implement 
is similar in terms of overseeing trading platforms, the 
exchanges, the clearinghouses, and the broker-dealers or the 
intermediaries. In addition, the investment advisors and the 
market makers which is, as you mentioned, the Alameda 
institution.
    If we have regulatory authority and regulatory insight into 
these institutions then we can impose the requirements around 
conflicts of interest, about separation of customer money and 
house money, about disclosure requirements for investors, about 
books and records that regulators can frequently, or even at 
will, examine when needed, having an auditing function. These 
are all again core elements that both the CFTC and SEC impose 
on regulated entities, and I think at its fundamental 
foundation nothing needs to change in terms of what we do now 
with what we should do with digital asset markets.
    Senator Klobuchar. Okay. The cash market is dominated, you 
know, for digital assets by retail investors who may not 
understand the differences in protections offered by digital 
asset market platforms and traditional financial service 
companies. Consumers have been inundated with crypto 
advertising--anybody that watches Superbowl knows what I mean--
aimed at stirring feelings of urgency, stoking fears of missing 
out. For the securities market, brokers must follow the SEC's 
best interest rule and FINRA's suitability standard which sets 
rules of the road for the types of instruments brokers can 
recommend to clients.
    Do you believe there should be parallel investor 
protections between digital commodity companies acting as 
brokers and prospective investors? What additional practices 
should be required of digital commodity brokers?
    Mr. Behnam. Absolutely. In terms of disclosures to 
investors, the best interest rule, and similar rules are 
absolutely needed to ensure that investors understand the risks 
of the underlying asset. I have said this many times about the 
distinguishing factors between commodities and securities and 
what an ongoing disclosure about the underlying asset would be.
    In terms of disclosures to investors before they invest, 
knowing what they are investing in, and how they are doing it, 
those types of requirements are critically important, and we 
are doing what we can with what we have right now to provide as 
much information to investors who are using our markets for 
Bitcoin, futures, and other similar products.
    Senator Klobuchar. You believe more must be done.
    Mr. Behnam. One hundred percent.
    Senator Klobuchar. As soon as possible.
    Mr. Behnam. Yes.
    Senator Klobuchar. Okay. Last question. In many cases, 
cryptocurrency companies have utilized social media platforms, 
including the accounts of influencers and celebrities, to 
create hype for digital asset products. Last month, the SEC 
fined Kim Kardashian $1.26 million for failing to disclose she 
was paid $250,000 to promote a cryptocurrency token on her 
Instagram account. The FTC has called the blend of social media 
and cryptocurrency, quote, ``a combustible combination for 
fraud,'' and found that--this is a quote--``Since the start of 
2021, more than 46,000 people have reported losing over $1 
billion in crypto to scams.''
    How does the CFTC plan to work with the SEC, FTC, or any 
other alphabet agency to combat the growing nexus of fraud 
between digital commodities and social media?
    Mr. Behnam. Senator, we work with both agencies, all 
agencies, actively right now. We are in close collaboration on 
enforcement matters. We are in close collaboration on getting 
advisories out and word out in terms of customer protections.
    This is not new or not different than what we have done 
historically, in the swaps market or the futures market. We 
will continue to do that. We have a shared interest in 
protecting customers and filling gaps in the marketplace. There 
is no doubt in my mind that Chairman Gensler and I will 
continue to do that to the extent that authorities provide it.
    Senator Klobuchar. Thank you very much.
    Chairwoman Stabenow. Thank you very much. Senator Marshall.
    Senator Marshall. Thank you, Madam Chair. I wish we were 
here today to talk about Michigan football and Ohio State.
    Chairwoman Stabenow. Me too. Go Blue.
    Senator Marshall. We have a real serious subject here. 
Chairman, thank you for joining us.
    Where we are with cryptocurrency today reminds me of where 
we were with nuclear physics in the late 1940's and the early 
1950's. Two weeks ago, a nuclear bomb went off in the financial 
world. We know that nuclear physics can be good. There can be 
bad from it. Just like as we try to understand and think about 
the uses of digital currency, we all understand there is an 
upside to it. There is definitely a downside to it.
    Where my question is with this is, No. 1, do you think that 
crypto should be held to the same standards as banking, and No. 
2, even if we were to pass legislation today, I think it will 
take six months to years to really get our hands around it. Do 
you ever consider that there should just be a pause in this 
cryptocurrency digital world until we get our arms around it?
    Mr. Behnam. Senator, thanks for the question. My concern 
is, and I have said this many times, as a market regulator, as 
someone who has observed these markets for years, going back to 
2017, their growth, the intersection with the CFTC, I do not 
have the luxury to sit back. I think no matter what, whether it 
is in the U.S. or offshore, these markets are going to exist. 
There is going to be participation by institutional and retail 
investors.
    Senator Marshall. You agree our arms are not around this. 
They are not close. Even with this legislation, would our arms 
be around the potential problems to the American public?
    Mr. Behnam. Fully, I would say probably not, but it would 
be a significant step and a significant improvement to provide 
disclosures, to provide----
    Senator Marshall. Do you think that they should be held--
crypto should be held to the same standard as a bank?
    Mr. Behnam. I think our banking and market regulations are 
sound. They have worked well, and they have proven to be 
efficient and effective. As the DCCPA does, we should 
essentially model any regulation around crypto off of what has 
worked in the past.
    Senator Marshall. What would be the impact on our Nation's 
economy if digital replaced the U.S. dollar as the world 
currency?
    Mr. Behnam. Senator, I do not know for sure, but given, you 
know, obviously, a lot of movement overseas by China and other 
countries, I think it is important, and I think you and I have 
had this discussion. The Federal Reserve is taking this very 
seriously and understanding that technology is going to disrupt 
a lot of things, including financial markets and financial 
systems, and potentially our existing currency system. At least 
investigating and seeing what the potential is and what the 
risks are is critically important for both our economy, our 
labor market, and potentially national security.
    Senator Marshall. That is a great segue to my questions 
about national security. I am sure the other members of the 
dais would agree. When we travel abroad and sit down with the 
national security officials, if not their first, their second 
concern is about how digital currency is being used, 
specifically ransomware--$600 million paid in ransomware last 
year, that we know of. That is certainly an underestimate.
    Anybody in the financial world understands the cyberattacks 
that are going on and how ransomware has basically sprung its 
own little economy, that you have to purchase ransomware 
insurance now, $1,500 per million dollars of coverage, on 
average.
    When we talk about human trafficking, drug trafficking, 
again, crypto is the major currency being used. How can we ever 
get our arms around that in those worlds when there are bad 
actors out there?
    Mr. Behnam. Senator, I will say Treasury does a fantastic 
job through Financial Crimes Enforcement Network (FinCEN) and 
The Office of Foreign Assets Control (OFAC) doing what it can 
with what it has, but a more comprehensive regime and 
regulatory oversight over all of these markets I think would be 
a huge step in the right direction. We will never be able to 
comprehensively cover every element and fraud and people who 
are going to just intentionally break the law. You are right. I 
agree with you. Much illicit activity is happening right now 
using this technology and these assets as the sort of 
foundation and base.
    Sitting back, in my mind, is not an option. We have to use 
every tool we have and create new tools----
    Senator Marshall. I agree with you, but I just do not see 
the tools yet. No one has shown me, in a laboratory, on paper, 
what those tools look like. Again, this feels like a nuclear 
bomb is going off and we are not getting our arms around it. 
That is why we should be considering a pause.
    Ninety percent of the Dark Web drug sales are done with 
cryptocurrency. Would you agree with me that cryptocurrency is 
a threat to our national security?
    Mr. Behnam. Potentially it is a threat to our national 
security.
    Senator Marshall. Potentially. I mean, we have 200 
Americans dying every day from fentanyl poisoning, and I assume 
most of those drug--the money laundering going on is done with 
crypto. Human trafficking. I do not think it is theoretical. I 
think it is happening every day.
    Mr. Behnam. Senator, I do not know the statistics, but yes, 
if it is in fact true then yes, it is a national security 
threat and it is something that we have to take very seriously. 
Again, I do not see how we put a pause on it. From a U.S. 
perspective we could try to ring-fence the country from crypto, 
but it is going to exist offshore.
    We learned yesterday from the existing CEO of FTX that two 
percent of the customers' exposure were from the U.S. That is 
not supposed to happen. Somehow two percent of U.S. customers 
have exposure to FTX. Folks will find a way to get exposure to 
offshore entities or activities, even if it is prohibited in 
the U.S., and we have to do something about that.
    Senator Marshall. Okay. This next one is more of a 
technical question. Under the current provisions of the 
Commodity Exchange Act and CFTC regulations, any bank or trust 
company in the U.S. is a good location for customer money, 
securities, and property. Senate Bill 4760, the Digital 
Commodities Consumer Protection Act (DCCPA), pushed by FTX, 
restricts to insured depository institutions, insured credit 
unions, and any digital commodity platform.
    Would you support the expansion of good locations to 
include any bank or trust company, and if so, why or why not?
    Mr. Behnam. I think given what we have learned and 
certainly what has happened in the past few weeks, we have to 
take a fresh look to ensure that whatever happened at FTX 
cannot happen again and that the DCCPA is tightened up to 
ensure that there are no holes and no gaps in the regulation 
and that we ensure customer money is safe and that no illicit 
activity or fraud could occur.
    Senator Marshall. Thank you so much, Chairman. It is a 
tough job, and whatever we need to do to put wind beneath your 
sails is what we need to be doing.
    Thank you so much. I yield back.
    Chairwoman Stabenow. Thank you. Senator Smith.
    Senator Smith. Thank you, Madam Chair. Thank you very much 
to both you and Ranking Member Boozman for holding this hearing 
today, and thank you for being here, Mr. Chair.
    The collapse of FTX has been shocking, but I think it would 
be hard to say it is surprising. There is still a lot that we 
need to learn about what has happened, but it looks like this 
crypto exchange and its related trading firm, Alameda Research, 
completely failed to safeguard the money that people entrusted 
them with. We should not lose sight of the fact that billions 
of dollars essentially evaporated overnight, and that was real 
money, including the retirements and savings of Americans who 
had no idea that their savings were at such rich.
    The fact is that these crypto assets are highly volatile 
and risky, and that risk is made worse by a lack of basic 
consumer protections. This is why I have joined Senator Durbin 
and Senator Warren to call on investments firms like Fidelity 
to keep crypto out of retirement plans.
    Look, people can invest or bet or gamble or risk their 
money on anything that they choose to, but in a free and fair 
market, as you have been saying, Mr. Chair, they should at 
least be able to count on a fair playing field so they do not 
get gamed or scammed.
    Chair Behnam, I would like to look at FTX and the crypto 
world generally and just sort of make clear what is happening 
and what is not happening today. Exchanges and firms that buy 
and sell stocks and commodities are required to keep their 
company many separate from their customers' money. They cannot 
gamble with their customers' money like it is their own. That 
is correct.
    Mr. Behnam. Correct.
    Senator Smith. Is that required of crypto exchanges right 
now?
    Mr. Behnam. No.
    Senator Smith. Does any Federal agency have enforcement 
authority to require that?
    Mr. Behnam. I believe the Securities Exchange Commission 
has authority.
    Senator Smith. Okay. When a firm is being paid by their 
customers to give advice on how to invest their money they are 
required to put their customers' interests first, not their own 
business interests. That is their fiduciary responsibility. 
That is correct, right?
    Mr. Behnam. Correct.
    Senator Smith. Is that required of crypto exchanges right 
now?
    Mr. Behnam. No.
    Senator Smith. Does any Federal agency have enforcement 
authority to require that?
    Mr. Behnam. Again, in clarifying my previous response with 
respect to the SEC, over security tokens, not commodity 
tokens----
    Senator Smith. Right.
    Mr. Behnam [continuing]. is where the gap exists between us 
and the SEC. Based on my understanding and hearing from the 
Chairman himself that they do have the authority to police this 
market.
    Senator Smith. Okay. All right.
    Mr. Behnam. The security market.
    Senator Smith. Right. Right. Because your distinction is 
what kind of a thing this is. Is it a commodity thing or is it 
a stock thing.
    Mr. Behnam. Correct.
    Senator Smith. Right. Companies that are investing other 
people's money are required to get the best possible price, by 
looking at the best deal across multiple markets. Right? That 
is called best execution. Is that required for crypto trading 
right now?
    Mr. Behnam. No.
    Senator Smith. Okay. Is there any enforcement authority 
anywhere in the Federal Government that would require that?
    Mr. Behnam. Again, if my assumption based on the authority 
the SEC has over security tokens, that they can impose the same 
requirements that they impose on traditional securities, then 
based on that sort of logic they would have that authority over 
security tokens.
    Senator Smith. Okay. Okay. I have one last question. Banks 
and other financial services firms have a duty to know who 
their customers are. That is how we protect against money 
laundering and keeping crooks and criminals from using 
legitimate businesses to wash their dirty money. Is that the 
case for crypto-related enterprises?
    Mr. Behnam. I think this is a little bit distinguishable 
from your previous questions because this goes to some of the 
State money transmitter licenses that exist for these crypto 
exchanges on a State-by-State basis. There are registration 
requirements with FinCEN, which would have AML and KYC 
requirements. With that in mind I think there might be some 
element of what your concern and issues are, but maybe not has 
comprehensive as a Federal regulatory regime over the 
marketplace that we have with traditional markets.
    Senator Smith. Thank you. Thank you.
    I appreciate the brevity of your answers because I think 
that what this shows us, the crypto world of FTX shows us what 
can happen when there are not basic consumer protections. You 
know, I do not care whether you are buying wheat or stocks or 
FTT, which is the digital coin that was created by FTX, or 
whether you are buying some derivates of those assets, the 
market should be fair and not rigged, and that is the problem.
    I would also argue that we know how to do this. Crypto is a 
new thing, but the rules of the road for how to ensure that 
markets are fair and that financial institutions, you know, 
know what is happen, I mean, those rules are not new. It seems, 
Madam Chair, that our job is to figure out how we can enforce 
the laws that we have and then plug the holes where those holes 
exist or we are going to see more disasters like FTX.
    Mr. Behnam. Agree.
    Senator Smith. Thank you.
    Let me just ask one last question because I have a bit more 
time. There are obviously real concerns about the FTX collapse 
and future swings in crypto markets as this instability has 
unfolded. Since you serve also, Chair Behnam, on the Financial 
Stability Oversight Council (FSOC), and I am sure that this is 
something that you think about as well, the impact of crypto on 
general financial stability, could you comment on that and how 
you see that issue?
    Mr. Behnam. I think thus far it has not been of huge 
concern, and if you look back to the spring when we had the 
Terra Luna collapse and now with the FTX collapse, the banking 
system and the market system have been largely siloed from the 
crypto system, and I think that is a testament to the value of 
our banking regulatory system and our market system, and 
keeping that crypto market out.
    At this point, given its current size--and I was here a 
year ago and I think we were talking about $3 trillion in 
market cap and now it is well under $1 trillion itself--there 
is no direct impact to financial stability. It is not something 
that I think we can rest our laurels on. We have to think about 
what-ifs and what may happen in the future.
    These are the types of things that concern me is we cannot 
just assume things will remain the same and things will be 
safe. We have to be aggressive. We have to be thoughtful of 
different scenarios, and we have to assume, with gaps in the 
system, as you pointed out, future crises will continue to 
occur.
    Senator Smith. Thank you very much. Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much. Senator 
Tuberville.
    Senator Tuberville. Thank you, Madam Chair. Thank you, 
Chairman, for being here. It kind of reminds me of sitting in a 
chair after I got the heck beat out of me in the football game 
and knowing the other team did not go by the rules and I had to 
explain why. There is really no way around it. We have screwed 
this up. You have got to have rules. We have all seen this 
coming.
    I have invested in crypto. I did not get as deep as some of 
these people have gotten but it is a mess and it is going to 
get worse if we do not get control of it. We have got 
confidence that you will, with our help. We have been trying to 
help.
    You know, this country needs to be the leader in the world 
in financial regulation, you know, all the innovation, and if 
we do not we are going to be in trouble. China has got their 
own digital currency that is cranking up. You know, it is a 
huge problem. I have got people calling me from everywhere 
going, ``What are we going to do? What are we going to do about 
this?'' Well, it is new. It is totally new, and you go through 
some hard times, and unfortunately you have got a lot of people 
that have lost money in this. We have got to get control of it 
so people get confidence in digital currency. Bottom line.
    I have got just a couple of questions here. First of all, 
you said you met with Sam, and, of course, we have had him in 
hearings before. Have you gotten any texts or emails with him 
over the years?
    Mr. Behnam. Yes. In addition to I pointed out to Senator 
Stabenow's question, I mentioned there was this sort of dogged 
desire to get this application approved, and my approach to 
that application given the issues and the strong feelings was 
that I needed to be as transparent and open with him and FTX as 
well as other CEOs who felt the same.
    There were a number of emails and messages back and forth, 
all about the application, about the status of the application. 
Some of the messages were about scheduling the ten meetings I 
mentioned. It was about updates, giving us, again, this dogged 
approach to we submitted answers to the questions from the 
division, or we have more data, to just support their advocacy 
of this application, all in relation to the application.
    Senator Tuberville. Okay. Good. Thank you.
    Chairman Gensler is using this collapse to argue that the 
SEC should run point on crypto regulation, but he has 
repeatedly cutoff pathways for crypto firms to register at his 
agency. What have you done at the CFTC to encourage digital 
asset firms to register and enter the regulatory fold?
    Mr. Behnam. Senator, that is a great question but this is 
at the heart of the problem. We have had, since really 2016 and 
2017, we have seen an influx of these crypto firms coming to 
the CFTC to list derivatives products, whether on incumbent or 
existing registered exchanges, but also crypto firms buying 
existing derivatives exchanges and starting to list crypto 
derivatives. New products emerging and new ways that the crypto 
community can get into derivatives exchanges.
    Ultimately--and this is the reference I think you are 
making--in terms of regulation of cash markets, right, the spot 
market, we simply do not have authority to register cash market 
exchanges or any intermediary broker-dealer or entity within 
that structure, and that is what concerns me. This is the gap. 
This is the gap that exists. This is the gap that FSOC pointed 
out, and ultimately, again to your point, if we do not do 
something customers are going to continue to lose money and we 
are going to be right back here again in a couple of months.
    Senator Tuberville. Exactly. On another point here, going 
back to FTX, you know, these major environmental social 
governance, ESG, ratings companies gave FTX high markets, very 
high marks, for corporate governance. We have since learned 
that the exact opposite was true.
    What Federal agency is responsible for auditing these ESG 
rating reports? What needs to be done to protect investors from 
inaccurate reporting by ESG rating companies? Can these people 
be sued when they do something like this?
    Mr. Behnam. Senator, you know, I think it would depend on 
if these are products that are being traded and there is an ESG 
rating on it, then naturally I think if it was as security 
financial product it would be the SEC that would have to come 
up with some sort of rating mechanism. I do not know for sure 
that it would necessarily be the SEC or potentially another 
department that might have the authority.
    You point out a potential gap in who are the rating 
agencies. This was an issue in 2008, with the financial crisis. 
Who was overseeing rating agencies and what are the conflicts 
of interest there, and what actions are they taking, and it is 
truly an objective rating to give consumers and investors the 
information that they need?
    Senator Tuberville. Should this be in some kind of bill 
that we do with crypto?
    Mr. Behnam. To the extent that the issue you raise is a 
significant problem and one that crypto firms are getting ESG-
related ratings, then I think it is something that we should 
talk about further. This goes to the heart of disclosures and 
customer information, which is, I think, a part of at least the 
DCCPA and the bills that are being proposed. Investors need 
information. We need to bridge the gap between an issuer, a 
rating agency, and an investor so they know exactly what 
information they have and they can make the most informed 
decision.
    Certainly I would welcome the opportunity to work with you 
and see if we can do something in this space.
    Senator Tuberville. Well, as we go through this 
investigation hopefully if we look into some of these investors 
into FTX we find out did you look at this ESG report, did you 
look at their credence? Did you invest because of that? 
Somebody could get in trouble over this, and we need to really 
look into this. We have got people out there doing things they 
should not be doing, especially when it comes to finances and 
people losing millions and millions of dollars.
    I look forward to working with you. I know you will get 
control of it. I look forward to people having the opportunity 
to continue to invest in crypto but also understand that there 
are rules and regulations.
    Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much. Senator Brown.
    Senator Brown. Thank you, Madam Chair. I welcome Chair 
Behnam. Nice to see you again. Thanks for serving in so many 
capacities in our country, and thank you, Chair Stabenow, for 
holding this hearing. We just briefly, quietly, talked about 
his important this is, so thank you.
    The failure of FTX is shocking to all of us, not only for 
the misconduct but also for the speed of the collapse. Many 
critical questions have emerged about the abuse of customer 
funds and also about the business model in conflicts of many 
other crypto firms also. It is troubling the contagious effect 
as FTX's connections across the crypto markets have pushed 
other firms into failure. You know all that, of course.
    We must make sure we learn the right lessons from this 
failure. It means creating a framework that safeguards a 
traditional financial system, that protects consumers, that 
does not put the crypto companies first. Yesterday I wrote to 
Secretary Yellen. I look forward to working with her and all 
the financial regulators to achieve that.
    Chair Behnam, one of the more troubling issues related to 
crypto is its role in illicit finance and the threat it poses 
to national security. While I did not hear his comments, 
Senator Marshall's comments, I was told he spoke eloquently and 
directly about the importance of safeguarding our national 
security in light of some of the crypto abuses.
    The Banking, Housing, and Urban Affairs Committee, which I 
chair, held a hearing in March about cryptocurrencies, how they 
provide hackers and scammers anonymity and immediate 
transferability, facilitating cybercrimes like ransomware 
attacks. That month, a North Korea State-sponsored cyber group 
carried out one of the largest virtual asset heists ever, worth 
over $600 million, and then laundered the proceeds. We need to 
be vigilant about that.
    FinCEN recently reported that Bank Secrecy Act filings 
related to ransomware reached over $1 billion in 2021, more 
than double what they were in 2020. We do not know what 2022 
will show, but we need to be concerned.
    My questions, first question. Do we need to make combatting 
the use of crypto and illicit finance more of a priority across 
all of the Federal regulators?
    Mr. Behnam. Yes, Senator, thank you for the question. Thank 
you for the letter also to Secretary Yellen. We did see it, and 
certainly look forward to working with you and Treasury 
Department.
    This is an enormously important issue you pointed out. 
Senator Marshall raised it as well. There is so much opacity 
and potential activity in the shadows around illicit activity 
using cryptocurrency and digital assets. You know, as you 
pointed out, Treasury is doing an excellent job with the tools 
they have. I think there is a technology curve that we are all 
learning and trying to climb right now to understand how this 
technology works and to identify illicit activity. We will 
certainly, to the extent we have within our enforcement 
authority, work with Treasury, work with OFAC, FinCEN, as you 
said, under the Bank Secrecy Act and other authorities, to make 
sure we are rooting out any illicit activities possible.
    I would say comprehensive regulation, as you suggested and 
proposed, is going to be an important and critical tool to take 
a step in the right direction and identify all of this illegal 
activity.
    Senator Brown. Thank you. You play an important role in 
this. I appreciate you acknowledging Treasury and their action 
plan to mitigate the illicit finance risk of digital assets, 
what they issued in September. That is a key step, and the fact 
that you all understand how this is cross-agency, so thank you.
    The FTX collapse demonstrates the inherent conflicts, and 
even worse, self-dealing in some crypto business models. We 
know it is important to avoid dangerous incentives in the 
financial service industry. For example, banks have 
restrictions on proprietary trading and transactions with 
affiliates, as do registered investment companies. Would not 
safe, similar safeguards make sense for crypto firms?
    Mr. Behnam. Absolutely. The idea that we have, as you 
pointed out--and just thinking about the markets that the SEC 
oversees, that we oversee--the idea that an exchange can act as 
a dealer, can act as a lender, can act as a custodian, just 
does not work. It does not exist in our existing traditional 
financial system, and I think those same principles and 
regulations should apply to crypto.
    Senator Brown. Are there other conflicts that should be 
addressed or prevented? Have you thought about looking at that?
    Mr. Behnam. Based on what we know with what happened to FTX 
and then certainly what we know with other traditional crypto 
firms and the services that they offer to clients, it seems to 
be the exchange-traded function, the market-making function, 
the broker-dealer function, lending function, and a custodian. 
That is a long list of things that typically do not occur by a 
single institution.
    There may be other things certainly worth looking into. We 
would work with you and your staff. Those are core elements 
that we see the services being provided and certainly could 
never be allowed in traditional financial systems.
    Senator Brown. Thank you, and I appreciate working with 
Chair Stabenow, your focus on your jurisdiction here that 
crypto products understanding touch not only commodities 
markets, what you work on, but also securities and banking. 
Your comments have already indicated what you think about that, 
but one more last question to expand on that.
    Would you commit to continue working with the other 
regulatory agencies to minimize these gaps and to make sure 
consumers in the financial markets are fully protected?
    Mr. Behnam. Senator, it is the absolute, most important 
priority. There has been a narrative about a power grab. This 
the farthest thing from it. It is about filling a gap and doing 
what we can do as a commodity market regulator to fill the gap, 
the protect customers, and to prevent us from having to be here 
again talking about another bankruptcy.
    Senator Brown. Thank you, and I have had individual 
conversations, one-on-one and through the committee process, 
with a number of the other regulators, especially SEC, and even 
the Fed, a little more distantly the Fed, and Treasury and FDIC 
and all of them. Of course, I understand your sincerity here 
and your genuineness and how important that is.
    Last point, Madam Chair, I ask the Chair's consent to enter 
into the hearing record a letter from the North American 
Securities Administrators Association, highlighting 
considerations for Congress.
    Chairwoman Stabenow. So ordered, without objection.

    [The following letter can be found on page 54 in the 
appendix.]

    Senator Brown. Thank you. I yield back. Thank you.
    Chairwoman Stabenow. Thank you. Senator Grassley.
    Senator Grassley. Thank you, Madam Chairman. When I bring 
up the word whistleblower I do not do it in legal sense of the 
word, whistleblower, but I always try to get people like you to 
listen to what is going on in the department and take action on 
it, so people do not have to become what you call official 
whistleblowers.
    We have heard many reports that people involved with FTX 
had concerns about its business practices. Unfortunately, it 
does not appear that anyone stepped forward to report on what 
was going on. Did your office receive any reports of wrongdoing 
involving FTX, and if not, do you believe employees would have 
stepped forward if the program was better publicized?
    Mr. Behnam. Senator, we did not receive any tips or 
whistleblowing activity about FTX, and we looked at that very 
thoroughly over the past few months to ensure that was the 
case, and that is, in fact, the case. We did not receive 
anything.
    I certainly appreciate your support of our whistleblower 
program. It has been extremely effective in supporting our 
enforcement division and the enforcement actions we have 
brought at record-breaking numbers. We do everything we can at 
the agency, but I will commit to do more than we are doing to 
ensure that whistleblowers feel safe and protected and that 
they come to us without fear of retribution.
    Senator Grassley. Since we got my bill passed, do you have 
the money to pay the whistleblowers?
    Mr. Behnam. We are currently in a good place, but I think 
we do need to continue to work on making sure that the program 
is effective. The reason that we have had a challenge is not a 
bad reason. It is because we have awarded so much money to 
whistleblowers, and the cases we have brought have been so 
significant. I hope that continues because we have a huge 
participant pool and a lot of fraud that we need to police. I 
appreciate your support in working with us and will ensure that 
your bill is passed and it supports the program and that we can 
continue making these significant payments to whistleblowers.
    Senator Grassley. You told us in previous testimony how 
many times you met with representatives of FTX. Sam Bankman 
said that he has spent tens of thousands of hours with the 
CFTC. In regard to you personally, have you made your calendar 
public, and if not, when could we expect that that happens?
    Mr. Behnam. Thanks, Senator. As I mentioned to Senator 
Stabenow, we have taken an initial look at my calendar, and as 
I said we have had, over the past 14 months, 10 meetings with 
Mr. Bankman-Friend and his team. There were two phone calls and 
a few messages all related to either scheduling the meetings or 
giving us information about an application. I would just 
emphasize that to you. The relationship that the CFTC had with 
FTX was about the regulated clearinghouse, LedgerX. It had 
nothing to do with the activity that was happening offshore or 
the spot exchange, which we do not regulate.
    As I said, they were dogged in their approach to getting 
this clearinghouse application approved, which meant Mr. 
Bankman-Friend and his team meeting a lot of CFTC staff over 
the course of many, many weeks and months, and many meetings, 
as I said, 10 meetings with me and other communications to just 
share information with us, update information about the 
application, and doggedly give us as much information in 
advocacy of their application.
    That said, we will take a fresh look, given the initial 
review, and get that up to the Committee as soon as possible.
    Senator Grassley. In regard to just what you said about 
LedgerX, and I think you have answered some of my questions, 
but did the CFTC ask for any financial information or 
organizational charts, and can you provide the Committee what 
FTX shared with your Commission?
    Mr. Behnam. Senator, it is an important question and 
unfortunately our legal limitation, in terms of authority to 
ask questions or to examine entities, stopped at the regulated 
entity. We, at the CFTC, do not have legal authority to police, 
to examine, or to ask questions about an unregulated entity. 
The only circumstance is if we get a whistleblower tip, if we 
get a referral, or if we have information that is going to meet 
the test to get a subpoena in court after passing the 
Commission vote. That is the only way we could then start 
asking questions and use subpoena authority to start 
investigating or examining a non-registered entity.
    This really goes to the heart of an issue that we have 
right now. I will say in contrast, that legal limitation is the 
same reason that customer money in the LedgerX entity is safe 
and it is where it is supposed to be. I certainly look forward 
to working with you, if you would like, to see if there can be 
a change to that authority, but it is a delicate balance that 
we have to approach. To repeat myself, there is no existing 
authority to ask questions beyond the regulated entity.
    Senator Grassley. You know, the guy that is now CEO of FTX, 
he was involved with the Enron liquidation. He said he has 
never seen such a complete failure of corporate controls and 
complete absence of trustworthy financial information. Getting 
back to what Bankman-Fried said about FTX spending tens of 
thousands of hours with the CFTC, I would like to know how did 
the CFTC miss this complete lack of corporate control?
    Mr. Behnam. Senator, John Ray, who is the individual you 
are referencing, when he talks about complete lack of controls 
he is talking about the non-CFTC companies. Chairwoman Stabenow 
mentioned, in her statement, that John Ray made a statement 
about LedgerX, the CFTC entity, and he said there is good 
governance, there is liquidity, there is capital, and it is 
fully operational, and it is in good shape. John Ray was very 
clear that the CFTC-regulated entity is healthy, capitalized, 
and operational, and that is in stark contrast to the non-
regulated entities.
    It is for that reason exactly, and the limitation that I 
shared with you earlier, that we do not have legal authority to 
go beyond the regulated entity. Since the regulated entity was 
fully in compliance, fully operational, and met all of the 
legal requirements of the CFTC, we had no basis or reason to 
sort of pierce through the entity and start fishing or asking 
questions about affiliate entities or non-CFTC-registered 
entities.
    Senator Grassley. In regard to the bill that was introduced 
in August, or sometime this summer, and have you been working 
with people on that legislation, is there anything in that 
legislation that ought to be rewritten, from what we know now 
from FTX?
    Mr. Behnam. Senator, thanks for the question. Certainly 
given the circumstances of the past few weeks I think we should 
take a pause and look at the bill and make sure there are no 
gaps or no holes. We are going to learn more information about 
FTX in the coming weeks, and we will certainly take that 
information and share it with the Committee.
    Two things that have come to mind in terms of what we have 
learned thus far and where the bill may be strengthened: 
disclosures around financial information of the entity, the 
crypto entity, and the conflicts of interest. Obviously, an 
issue that many members have talked about today, given the 
brazen conflicts that occurred at the non-regulated entity. I 
think there should be an effort, both by the Committee, and we 
certainly look forward to supporting you, in tightening and 
strengthening the conflicts of interest provisions.
    Senator Grassley. Thank you.
    Chairwoman Stabenow. Thank you very much. I am going to 
turn now to someone who has spent a whole lot of time on this, 
and thank you for your leadership and co-sponsorship of the 
bill, Senator Gillibrand.
    Senator Gillibrand. Thank you. thank you, Chairman Behnam, 
for being here, and thank you for taking the Committee through 
what happened here and what role the CFTC has played and could 
play in the future. I want to drill down on a couple of areas 
where I still see risks that are coming ahead.
    I think you have made it very clear to the Committee that 
comprehensive legislation is necessary. Senator Lummis and I 
wrote a very broad bill for all committees of jurisdiction, 
including the Banking Committee, including the Finance 
Committee, including the Intelligence Committee.
    What the Ag Committee has done is focused on your 
jurisdiction, and this bill that the Chairman and Ranking 
Member have put together is quite comprehensive. I will be very 
grateful for you to give us the guidance about how to improve 
that as well as the framework bill that Cynthia Lummis and I 
put together.
    I am very concerned about the issues that you have talked 
about today, and I am very concerned specifically with the 
potential of future problems. Responsible governance is 
something that we have talked a lot about today, and the 
absence of which really contributed to the FTX's debacle, 
especially its foreign-registered entity. For Senator Grassley, 
the difference between the foreign entity and the U.S.-based 
entity is not necessarily clear.
    I am on the Intelligence Committee, and so I am very 
concerned about who owns and who controls our critical 
infrastructure, such as platforms engaging in financial 
exchange and custodial services. My concerns is particularly 
acute where foreign interests may conflict with those of the 
United States, and of course, the FTX debacle has shown bad 
actors, foreign and domestic, can contribute to global digital 
asset markets' nefarious ends, harming United States consumers.
    The CFTC's current rules, I understand, provide that where 
ownership of the CFTC-licensed exchanges changes at the holding 
company's level, as when FTX US purchased the CFTC-registered 
LedgerX digital asset derivatives exchange last year, the 
registrant has to notify the CFTC of the change of control. The 
Commission's current rules do not require detailed information 
about purchase of the entity or its beneficial owners, nor do 
the current rules allow the Commission, where appropriate, to 
require conditions to the transaction to manage risk or to 
block the sale in exceptional circumstances.
    For example, if a hypothetical Chinese actor wants to 
acquire this entity who has questionable background and perhaps 
criminal activity undisclosed, this is something that the CFTC 
should be able to inquire about.
    Specifically, please tell us how you would address these 
issues under our legislation for digital asset platforms, 
particularly those that actually serve retail markets.
    Mr. Behnam. Thanks, Senator Gillibrand. An extremely 
important question, and you rightfully point out the existing 
authority for the Commission to ask questions about an 
acquisition or some sort of corporate combination is limited. 
It is essentially a notice filing, at best. Given the 
circumstances of the recent weeks, this is not an issue that is 
infrequent for the CFTC. We see a lot of consolidation and M&A 
activity in the derivatives space. I think it is an important 
issue, particularly with your interest around cyber and 
critical infrastructure.
    This is not unlike the CFIUS process in some respects, 
which this Committee has been very focused on over the years. 
What can we do to strengthen that authority for the CFTC to be 
able to ask questions, to be able to demand books and records, 
to be able to demand information about personnel, management, 
system safeguards, going to your cyber issue, so that we can 
better screen and evaluate the acquiring company, and what role 
or impact it might have on the CFTC-regulated entity.
    Senator Gillibrand. Mm-hmm. Then to follow on Senator 
Grassley's line of questioning about the undisclosed conflicts 
of interest, obviously Sam Beckman-Fried had several other 
entities that were double-dealing or using assets that should 
have been not located in an area where he could have used them. 
We had allegations of inadequate books and records. We have 
allegations of how FTX's own tokens were reportedly used as 
collateral by customers and affiliated entities for massive 
loans. These are just enormous numbers of conflicts of interest 
that will be investigated.
    Please describe, under the proposed legislation by both 
Senator Boozman and Senator Stabenow, as well as the more 
framework-oriented bill with Cynthia Lummis, how the CFTC would 
address these conflicts, and does that legislation provide the 
Commission with sufficient leeway to ensure identification, 
mitigation, disclosure, and where appropriate, prohibition of 
these conflicts?
    Mr. Behnam. Senator, you know, this goes to the heart of 
market regulation, I mentioned this before, these issues that 
you rightfully point out around conflicts of interest, about 
custody of funds, about books and records to examine, about 
financial resources, to make sure that an entity has financial 
resources to be a going concern over a period of time.
    I think that current bill is very effective in addressing 
nearly all of these issues. As I said to Senator Grassley, I 
think it is important that we tighten the conflicts of interest 
provisions because of the egregious nature of what we learned 
with FTX, and I think there is a way to do that. Disclosures to 
customers about financial resources also will be an important 
issue to address, and I certainly look forward to working with 
you on that.
    In terms of authority, and our experience at the CFTC, when 
we are able to impose these requirements on a regulated entity 
it is quite workable and effective. I will use the LedgerX 
entity as an example. On a daily basis, we know where the 
customer money is, and we do not have to go through LedgerX. We 
go directly to the custodian with direct access to know and 
identify the customer money. Books and records, on demand we 
are able to examine books and records. These are just some 
examples of the direct relationship that regulation provides, 
and I think in the case of crypto and the bill, DCCPA, and your 
bill with Senator Lummis, these would be the authorities we 
have, and we could impose them and bring much more transparency 
to these unregulated entities.
    Senator Gillibrand. Okay. I have one last question that you 
may not know the answer to. In your testimony you just said 
that you thought that approximately two percent of FTX's 
customers of the international entity were U.S. persons. That 
would lead me to understand that either FTX lied or was 
untruthful about their business, and they actually should have 
been registered with the CFTC or the SEC under current rules 
and subject to CFTC's fraud and manipulation authority.
    How can the CFTC investigate more aggressively to deploy 
its current enforcement authority where overseas exchanges in 
fact have such significant and actual business within the U.S., 
putting U.S. persons and the U.S. economy and other entities at 
risk?
    Mr. Behnam. Thank you, Senator. I am happy to share this 
with the Committee, but this was a disclosure document made by 
John Ray yesterday. It is a pie chart, and it says where the 
lost customer money is across the globe. There are huge amounts 
of money in some sort of island jurisdictions, two percent 
there is a sliver from the U.S. I feel fairly confident there 
are a number of U.S.-based entities that have entities 
registered offshore that were trading that will have exposure, 
and that is a huge issue. We should always think about 
institutions that have offshore entities that could potentially 
bring risk back to the U.S.
    From a retail perspective, and this is just my 
understanding, I have heard this for a number of years, some 
savvy retail investors are able to go around the virtual 
private networks, these VPNs that essentially act as the 
firewall in an activity that happens offshore. That is an area 
that we could potentially look at. I do not know if it is an 
area that the CFTC has the expertise to look at, but perhaps we 
can work with other Federal agencies to see how we can protect 
those firewalls and prohibit U.S. customers from getting around 
those prohibitions.
    Senator Gillibrand. I think this issue is one that the 
Committee needs to understand. When you have a foreign-
registered entity there are limitations about what we can 
actually regulate and how we can provide the oversight and 
accountability. The examples that I brought up today are 
examples that could impact other businesses.
    That is why I would like you to do some deep thinking about 
in this particular market of digital assets, where there are 
always these workarounds and these abilities to get access to 
different markets, and then the related lack of registration 
where there should be, it is going to be something that you 
will have to wrestle with, and I am certain this Committee 
wants to help. Because if you heard from every person's 
testimony here so far, their constituents are very nervous 
about how this impacts U.S. markets and how it impacts U.S. 
persons. That is why I think the bill that the Chairwoman and 
Ranking Member have put together for this Committee is so 
essential.
    If we do not regulate this industry we are going to see 
more collapses, more bankruptcies, and a head-in-the-sand 
approach is absolutely unacceptable. We are very eager to work 
with you on solutions.
    Mr. Behnam. Thank you, Senator.
    Chairwoman Stabenow. Thank you very much. Senator Fischer.
    Senator Fischer. Thank you, Madam Chairman. Thank you, Mr. 
Chairman, for being here today.
    There are a lot of questions that are around FTX's self-
minted exchange token, FTT, and it seems clear that FTX and 
Alameda Research used FTT and the token--I think it is 
pronounced Solana--to inflate their own valuations, and then 
misused it as collateral in their risky business investments 
and their ventures.
    Mr. Chairman, would the Digital Commodities Consumer 
Protection Act provide the CFTC or the SEC regulatory authority 
over transactions in FTX's exchange token, the FTT?
    Mr. Behnam. From my understanding there was a sort of 
compensation mechanism with the FTT token. There was an 
incentive mechanism. I am just sort of talking in real time 
here. Based on that incentive mechanism it probably suggests 
characteristics that are more like a security and not a 
commodity. If that is the case--this entity you are talking 
about is offshore, but let us assume it is onshore, onshore 
being in the U.S.--then there would be authority within the SEC 
to oversee that organization.
    Senator Fischer. Under the DCCPA would the CFTC or the SEC 
have regulatory oversight over the Solana token?
    Mr. Behnam. I do not want to opine on the Solana. I think 
either way, if we consider Solana a commodity under the DCCPA, 
that authority would be provided to the CFTC. If Solana--and 
work needs to be done, sort of analysis needs to be done--if 
Solana is a security then the SEC has existing authority to 
police the Solana token.
    Senator Fischer. How many of tokens are traded on the FTX 
US platform? Would the CFTC have spot market oversight under 
the proposed legislation?
    Mr. Behnam. Under the proposed legislation the CFTC would 
have authority to register spot exchanges. In that scenario 
then the FTX US entity would have been required to register 
with the CFTC. We would have had to go through a process to 
figure out which tokens are commodities and which are 
securities. The commodity tokens would have been listed on the 
CFTC registered exchange. I think we have talked about this--
there is likely going to be dual registration, which is not 
uncommon in our financial markets, between securities and 
commodities, and with that registration and that lens into the 
registered entity we would be able to prohibit conflicts of 
interest.
    Senator Fischer. That is going to be helpful in the future.
    Mr. Behnam. Senator, it goes to the core of the issue. It 
is critically important. It is the gap that exists that 
provides and presents customer protection risks.
    Senator Fischer. Okay. With the Digital Commodities 
Consumer Protection Act it instructs the CFTC to write rules 
and guidelines for all aspects of the legislation, including 
rules related to customer protection, margin, or leverage 
trading of digital commodities, conflict of interest, lending 
activity, reporting of trades, and other information, and 
stablecoins.
    Mr. Chairman, what kind of timeline and rulemaking process 
do you expect to take place if this would become law?
    Mr. Behnam. Senator, a tough question.
    Senator Fischer. It takes you guys forever. Let us be 
honest.
    Mr. Behnam. We would work vigorously and hard to get this 
done. I have obviously been a huge advocate for authority and 
understanding the risk that exists every day that goes by 
without action. As the Chairman, I am not willing to accept 
that responsibility.
    Quickly, just for 20 seconds, using the post-financial 
crisis experience as an example, the CFTC was able to implement 
over 60 rules, significant rules, over the swaps market, in a 
period of about three years. If we can cut that 60 number, and 
it would be cut significantly with the DCCPA, probably down to 
single digits, I am confident that we would do everything in 
our power to get the rules done as soon as possible, and 
hopefully within a 12-month to 18-month basis.
    Senator Fischer. Would it be helpful if Congress would 
provide more guidelines?
    Mr. Behnam. Around the statutory provisions?
    Senator Fischer. Yes.
    Mr. Behnam. Well, it is a difficult balance because as 
drafted now--and again, we need to take a fresh look at the 
bill, given the circumstances of the past few weeks--but it is 
a balance between providing sufficient statutory authority and 
direction but not too much, not too prescriptive such that the 
agency cannot evolve with the marketplace through the 
rulemaking process.
    Obviously, as you know, the statutory process, the 
legislative process is a key critical component, but the 
rulemaking process, which goes through the APA, the public 
comment and reporting period, this is a critical element of the 
process, and I think as drafted now, notwithstanding some 
changes that we may need to make given the circumstances of the 
past few weeks, it is drafted in a very good way that balances 
prescription and direction with enough flexibility to evolve 
with changing technology.
    Senator Fischer. Mr. Chairman, when you were here last 
before the Committee you and I had what I thought was a really 
good exchange on the important role that State security 
regulators play in the patchwork of financial regulatory 
systems that we have. As a former State securities regulator 
yourself you know that State security regulators have a strong 
record of protecting and educating investors in matters 
involving those digital assets. I do worry that communication 
between the Federal and State regulators is lacking, 
specifically as it comes to these digital assets.
    Do you support inviting State security regulators to have a 
seat at the table and be more involved in in the Federal 
advisory boards and working groups related to these assets?
    Mr. Behnam. Senator, absolutely. I was talking to Senator 
Tuberville about this before the hearing started, and 
mentioning Senator Brown submitted for the record the letter 
from NASAA which was submitted yesterday. I spoke to the head 
of NASAA, Joe Borg, a few weeks ago, just to share notes with 
what is going on with FTX. As you and I discussed the last time 
I was here, and in my experience as a State regulator, this is 
boots on the ground at the local level. It could not be more 
important to have State security regulators working with local 
officials, working with local investors and local communities 
to make sure people understand the risks and understand 
information that they need in order to invest their money 
appropriately.
    Senator Fischer. Thank you, and thank you for the work you 
do.
    Mr. Behnam. Thank you.
    Chairwoman Stabenow. Thank you very much. I will turn now 
to Senator Lujan, and thank you for being a co-sponsor of this 
legislation.
    Senator Lujan. Well, thank you, Madam Chair, and to our 
Ranking Member as well, for bringing us together yet again but 
for your leadership on this issue as well. Mr. Chairman, thank 
you for being with us again.
    When FTX acquired LedgerX it acquired an entity that was 
fully licensed and regulated by the CFTC. Despite this fact, 
widespread accounts at FTX and FTX US were mismanaged at the 
highest levels. Mr. John Ray, who is overseeing the bankruptcy 
filing, highlighted the scope of corporate negligence in the 
Chapter 11 filing for FTX when he said, quote, ``Never in my 
career have I seen such a complete failure of corporate 
controls and such a complete absence of trustworthy financial 
information as occurred here,'' from the guy that oversaw the 
liquidation of Enron. It is pretty startling.
    My question, Mr. Chairman, and if you can answer this yes 
or no, did the CFTC have legal authority to examine the 
governance structure, balance sheet, or other financial 
documents for any entity other than LedgerX that was associated 
with this acquisition?
    Mr. Behnam. No.
    Senator Lujan. Are there other instances where unregulated 
entities have acquired CFTC-regulated products being legally 
offered to U.S. consumers and what risks does this pose to 
American consumers?
    Mr. Behnam. Senator, and this, I think, goes to the 
conversation I had with Senator Gillibrand, it is important as 
a lesson learned about what conflicts and what relationship a 
CFTC-regulated entity has with other affiliates, both in the 
U.S. and across the globe. Currently the authority is limited 
to essentially a notice filing, where the registered entity 
would only have to give notice to the CFTC that they are being 
acquired or they are in some sort of consolidation or 
combination with another entity. Obviously, as we are learning 
now, this has huge potential impacts on U.S. investors.
    I would say this. For the same reasons that we, the CFTC, 
were not able to look into the other affiliates, which John Ray 
described as essentially a disaster, it was those same legal 
reasons that the FTX affiliates, while all of this illegal 
activity was happening, were not able to pierce through the 
LedgerX entity and potentially steal or use U.S. customer money 
out of LedgerX. That is a tough balance. It is something we 
should think about collectively. My job is to protect U.S. 
customer money in CFTC-regulated entities, and knowing what we 
did with LedgerX and what we are currently doing, that is what 
I am focused on.
    Certainly what we are learning, we should think about 
whether the policy is appropriate, whether it needs to change, 
and whether or not there are risk offsets to allowing us to go 
past the registered entity and what those risks are and what 
that cost benefit is between the registered entity and the non-
registered entities.
    Senator Lujan. What is the CFTC currently doing to ensure 
customer funds on LedgerX are safe?
    Mr. Behnam. Thanks, Senator, for the question. We are in 
communication on a daily basis with both LedgerX and also the 
custodian, and we have a more direct relationship with the 
custodian to ensure that customer property, customer money is 
at the custodian. This is both digital assets and also fiat 
money. We continue to have that relationship. The entity is 
operational. It is well capitalized. It has financial resources 
for 12 months on a rolling basis. It has books and records that 
we can examine. We are ensuring all conflicts of interest and 
every requirement under CFTC law is met today and in the 
future.
    Senator Lujan. I appreciate that. I will be asking you to 
submit an answer to this in the record, so I will make sure I 
get it to you and I will submit it to the Committee. What 
corporate governance standards should be required for exchanges 
like FTX US? I know that is a long answer but I am very 
interested in hearing from you directly on that.
    Mr. Chairman, the last time you appeared before the 
Committee you stressed that on issues like conflicts of 
interest you would regulate spot digital assets similarly to 
how the derivatives market is currently regulated. Digital 
assets, however, are very different from traditional 
commodities and stocks. Since these assets are not tied to 
equity in a company, tangible good, or hard currency there is 
more volatility. Entities and tokens can be deeply 
interconnected through smart contracts, and when the asset 
itself is digital the risk from security vulnerabilities and 
hacks are much higher.
    My question is what special considerations are necessary 
when setting rules for digital commodity platforms?
    Mr. Behnam. Senator, thank you for the question. I stand by 
what I said probably a few months ago and I probably said many 
times in the past and even today. The core fundamental of 
market structure are what we should rely on and lean on and 
anchor ourselves in as we think about what a regulatory 
structure would look like for digital assets. However, you make 
an extremely important point that there are distinguishing 
factors between traditional assets, whether it is a commodity 
or a security, and digital tokens, whether they are securities 
or commodities.
    I think the two key elements, or essentially what you raise 
is custody and cybersecurity, and how are we going to utilize 
the tools we have in terms of custody and how we custody 
digital assets and what do we need to do, from a CFTC 
perspective it is called system safeguards, to protect the 
entity and the institutions from potential cyber hacks and 
cyberattacks.
    Those are things that would come through the rulemaking 
process, but I certainly would welcome a rethink of the current 
DCCPA to strengthen those guidelines around cybersecurity 
through system safeguards, and that is a core principle, or 
what the custodian relationship is and what minimum 
requirements a custodian of digital assets should have in order 
to protect those assets and appreciate some of the fluctuations 
and the volatility that these assets have, because they are 
intertwined with a much larger system of financial resources.
    Senator Lujan. I appreciate that. Madam Chair, I have a few 
other questions. I will submit them into the record, and I 
yield back.
    Chairwoman Stabenow. Thank you very much, Senator Lujan. 
Senator Thune, who is also a co-sponsor of the bill.
    Senator Thune. Yes indeed. Thank you, Madam Chair and 
Ranking Member Boozman, for having today's hearing and giving 
us the opportunity to examine this recent collapse. Chairman, 
thank you for appearing in front of the Committee today.
    My dad, who was born before the stock market crash, and 
then went through the Great Depression, always said, ``If it 
seems too good to be true, it probably is.'' I think it looks 
like this whole thing, there just was not any there, there. I 
mean, I do not know how they were able to pull this off for as 
long as they did. Obviously being offshore and not being 
subject to the visibility that regulators might otherwise have. 
It is just really pretty stunning. I am, as I think everybody 
is here, I think, deeply troubled by all the information that 
has come to light as it relates to what appears to be, at the 
very least, some incredibly serious wrongdoing on the part of 
FTX.
    I think that whole collapse, again, underscores the need 
for greater oversight and transparency of the digital asset 
marketplace. I think that is why we need a comprehensive, 
regulatory approach for digital assets that ensures that 
Federal regulators have the proper tools to oversee this 
market, and it is increasingly clear that Congress needs to 
act, and needs to act soon.
    Could you describe what enforcement actions the CFTC has 
taken or is considering to take following the collapse of FTX?
    Mr. Behnam. Senator, unfortunately I cannot talk about 
ongoing investigations. As I have said before in the past, we 
will utilize every tool we have to the fullest extent of the 
law to bring wrongdoers to account. As I have said this before, 
and we have probably talked about this, it is an extremely 
powerful tool we have, enforcement over digital assets, but 
given this limited authority, which you just referenced, 
unfortunately when we act it is often after the fact because 
the information that allows us to bring an enforcement action 
in digital asset cash commodity markets is only because 
information is coming to us from outsiders, from referrals, 
from tips, from whistleblowers. This is in stark contrast to 
some of the surveillance tools and examination tools that we 
would have if we had a comprehensive regulatory framework over 
digital asset commodities.
    Senator Thune. Is your full Commission engaged on this, on 
this issue?
    Mr. Behnam. Absolutely.
    Senator Thune. Are the CFTC and SEC collaborating on this 
investigation?
    Mr. Behnam. Yes.
    Senator Thune. Is CFTC currently considering--and I know we 
are talking about a statutory legislative, some guidance on 
this--currently considering changes to its approach for 
oversight enforcement activity of other digital commodity 
platforms since the collapse, absent the legislative framework 
we are talking about?
    Mr. Behnam. I think if we think about--it really comes down 
to the limited authority. We have a number of incumbent 
exchanges that have a wide variety of financial assets in the 
commodities space that also list Bitcoin and Ether futures 
contracts. There are a number of sort of new, startup trading 
platforms that are listing similarly situated futures contracts 
in Bitcoin and Ether. As I mentioned earlier, we have had 
incumbent or native crypto firms buy existing licensed CFTC 
exchanges and start listing contracts.
    The authority for us to go beyond that registered entity is 
limited. We have limited lens into the cash market, and this is 
no different in agricultural complex or energy or metals 
complex. Essentially it is when we get information about 
potential fraud or manipulation in a cash market is really the 
only time we have that ability to go through the futures market 
and start scoping around the cash market, and that is the 
handcuff we have. That is the gap that we have, that we are not 
able to fill right now.
    Senator Thune. You did discuss--I know it has been talked 
about some here already--LedgerX in your testimony. What would 
you say, in terms of the characteristics of the two, what sets 
LedgerX apart from FTX?
    Mr. Behnam. Senator, just quite simply it is a CFTC 
regulatory regime.
    Senator Thune. They are registered.
    Mr. Behnam. I mean, it is a forceful, strong, transparent 
regime that they have to comply with, and if they did not 
comply with it there would have been consequences.
    Senator Thune. Are there, I mean obviously, learned from 
their registration with CFTC that we ought to consider?
    Mr. Behnam. I think, as I mentioned to Senator Gillibrand 
and Senator Lujan as well, this question about our ability to 
pierce through--I use that word--the regulated entity. In this 
case, the questions that I am getting today we have gotten in 
the past. There have been some suggestions which are just false 
that we had some authority to go into the FTX entities. We 
simply did not. It is a limitation. It is a wall-off of our 
authority, and I think that might be something to consider.
    I would say it comes with risks, and that is what we need 
to balance, because what are those risks? Those risks are I 
could not come before this Committee today and tell you I know 
exactly where customer money is in the LedgerX entity, and that 
is what worries me, right? If we had that reciprocal 
relationship with nonregistered entities, these other FTX 
affiliates, would that have given the FTX affiliates an 
opportunity to fish around LedgerX and potentially take that 
customer money, in which case that is not a message I want to 
be sharing with you.
    Senator Thune. Right. In terms of sort of the global 
situation--these are traded globally--regulatory structure in 
other places around the world, are there some that can act as 
sort of a model for how we might do things here, and does the 
lack of regulation other places create the kind of systemic 
risk that seems like could be very real in this industry, 
absent that?
    Mr. Behnam. Senator, it is an important question because I 
think right now, in the regulatory community, and having 
conversations with my colleagues here in the U.S. and overseas, 
it is this balance between validation and risk management and 
customer protections, and I err on the side of customer 
protections and risk management. I am not suggesting my 
colleagues do not care about that. That is the No. 1 priority. 
You could see how this concern of if we regulate it you are 
going to validate it, and why are we validating? Because a lot 
of people think that, you know, not unlike what your father 
told you, like if it is not there, what is the there, there, 
and if it is too good to be true.
    From my perspective as a market regulator I do not think we 
can regulate this out of existence, and even if we tried to 
regulate it outside the borders of our country it would still 
exist elsewhere, and that risk would inevitably come back to us 
through retail or institutional. I do not want to keep coming 
back to this Committee after another bankruptcy or after 
another failure. It is just too important to take action. I 
will remain agnostic on the success or failure of the 
technology. That is not my job. My job is to protect customers, 
to fill gaps, and to tell this Committee what I think is 
important to do so that your constituents do not lose money and 
do not have the information they need to arm themselves when 
they are making investment decisions.
    Senator Thune. Yes. Very good. All right. Thank you. 
Thanks, Madam Chair.
    Chairwoman Stabenow. Thank you very much. Senator Durbin.
    Senator Durbin. Thank you, Madam Chair, and thank you, 
Chairman Behnam, for being with us today.
    I am glad that we are having this hearing. I know that we 
have thought about it a few weeks back. The world has changed 
pretty dramatically, and it really became more compelling for 
us to move forward on this. I am glad that you are here.
    I know a little bit more about your agency than some 
because the CFTC is a major regulatory agency when it comes to 
a massive investment industry in the city of Chicago. I have 
watched it through the years as a member of the House, as a 
member of the Senate, and have a great deal of respect for it. 
I have always felt that you are a legitimate cop on the beat, 
and that is one of the reasons why the integrity of the process 
in Chicago is respected, not just Statewide and nationwide but 
worldwide. I want you to be strong and appropriately funded to 
regulate an industry which is very important to the State that 
I represent. That is my intro. That is not bad, right?
    Mr. Behnam. Senator, I could not be more happy and thankful 
for that statement.
    Senator Durbin. Let us talk about FTX for a minute. Less 
than three years old, supposedly worth $32 billion, one million 
users, and it collapsed overnight. I saw where Mr. Bankman-
Fried was tweeting--I suppose that is where his users get their 
information--and he led them right up to the edge of the cliff 
and then they fell off and could not recover what they had 
invested in the process.
    I just might add, I think it should be noted by all the 
members on this Committee there will be a reporter waiting in 
the hall--I have already talked to her this morning--who will 
ask you, ``Did he ever contribute to your campaign?'' I said, 
``Oh, no. I never heard of the man.'' She said, ``You are 
wrong, Senator. He contributed to you.'' The cryptocurrency 
people are active politically, and they are trying to achieve a 
political end here. It is their right as citizens of this 
country to do that. It really calls on us to make sure that 
whatever we do is credible under those circumstances.
    How long will it take to unpack the FTX mess, to be able to 
understand exactly what happened and where it stands today?
    Mr. Behnam. Senator, I think, you know, we have a cursory 
understanding of what happened. We mentioned this today, the 
comingling of funds, the conflicts of interest, the lack of a 
custodian to separate those funds, the lack of books and 
records. As John Ray has said, just the sort of complete 
disaster from risk controls. I think that is fine at a cursory 
level. I think it is going to take months, probably, before we 
truly understand the extent and scope of the failure.
    Senator Durbin. Who is going to do that investigation?
    Mr. Behnam. Senator, as I mentioned to Senator Thune, you 
know, we are a civil enforcement agency. We are using the full 
extent of our power under the law to police any infraction or 
violation of the law. I know our sister agencies across the 
U.S. and the globe are doing that as well. Enforcement cases 
take time but we are moving expeditiously and we understand the 
importance of this.
    Senator Durbin. This legislation, which is before the 
Committee to consider, is to enhance or improve your authority 
in this area. Is that correct?
    Mr. Behnam. It is to fill a gap over commodity spot tokens. 
Correct.
    Senator Durbin. All right. I find this interesting and I 
want to put it in this perspective. It seems to me there is a 
competition, at least at the Capitol Hill level, between those 
who believe there should be no regulation, that this is the new 
world order. You do not need the faith and credit of any nation 
or known entity as long as your computer program is 
sophisticated enough. I am skeptical of that, personally, but 
that seems to be one point of view.
    The second point of view is CFTC is a nice agency but it is 
a small agency, and this is a big, big problem and challenge. 
If it is going to take you months to figure out what happened 
to one of the larger players when they collapsed overnight, how 
are you going to maintain the daily regulation of this industry 
that is, at least until the recent collapse, was mushrooming in 
size? There are some who say you have got a fundamental problem 
that you are facing here. When you want to fund the CFTC's 
activities you come hat-in-hand to Members of Congress because 
you need an appropriation. The SEC is largely funded by fees 
charged to those who are using the regulated entities.
    Now I know that you ask for a user fee as part of this, but 
as I understand it your general appropriation is in the $300 
million range for CFTC. Is that correct?
    Mr. Behnam. $320 million.
    Senator Durbin. You believe that the user fees you are 
asking for from this digital industry will generate how much?
    Mr. Behnam. Senator, it depends on how much appropriators 
at the low end, and that would obviously require collaboration 
with us. What we would have to do if the DCCPA passed, at the 
agency level, is determine what funds we needed to implement 
the rules and to enforce and impose the rules, and then provide 
a request to you and you would set the level, not unlike the 
SEC, and then we would collect those fees requisite with what 
you set the level at.
    Senator Durbin. Ultimately Congress has something to say 
about the user fees.
    Mr. Behnam. You have all to say.
    Senator Durbin. The reason I am doing this is to put it in 
the context. Mr. Bankman-Fried, my contributor, and people just 
like him, are going to be spending a lot of money to make sure 
there is as little regulation as possible. Unfortunately, you 
are a captive of a process that is driven by politicians like 
myself. What assurance do we have that you are going to have 
adequate resources--the staff, the technology, the people--over 
and above the authority to execute any kind of meaningful 
regulation of an industry which is almost impossible to 
describe, let alone regulate?
    Mr. Behnam. Senator, a couple of things. I want to agree 
with you on your point about regulation versus nonregulation. 
This area needs to be regulated. All components of it need to 
be regulated, without a question.
    Second, in terms of responsibilities and, you know, this 
narrative of small or weak agency could not be farther from the 
truth. I shared that with Senator Boozman, and I could give you 
reasons why.
    We have a separation of duty and a separation of 
responsibilities at the agency in terms of months-long 
enforcement action that is done by the enforcement team. They 
are best-in-class in the world, and they are laser-focused on 
this right now, and they will get the job done. That is 
completely separate than our policy divisions and those that 
regulate entities and do the day-to-day work of examinations 
and regulation of our institutions, including the institutions 
in your State.
    In terms of why I am going to be honest and be very 
forthright about what I need to do, what I need to do, I am 
always happy to come before this Committee and tell you what I 
think and tell you what I need, but I would much rather be at 
the CFTC doing my job right now. I am going to tell you what I 
need because I need to do my job, and I need to fulfill the 
mandate that you provide to me. If you provide me authority to 
oversee cash market commodity digital tokens I will be very 
transparent with you about what I need to fulfill that 
responsibility, 110 percent.
    Senator Durbin. I do not question your commitment to this, 
your honesty, or your experience. You are going to go through a 
political process to determine whether you have dollar one to 
deal with this.
    The last thing I will say is I have heard some of my 
colleagues say, ``We have got to move on this, fast. We have 
got to be the leader in the world when it comes to 
cryptocurrency.'' I do not know if they are saying that now as 
they did a month ago, the notion that some people have actually 
articulated to me, ``Do you realize Malta is on the march in 
terms of becoming a major factor in cryptocurrency? How about 
Portugal? How about El Salvador?''
    Well, I am just telling you, I happen to believe, 
reflecting on Chicago, your agency and the SEC for a moment, 
there is a hell of a lot more credibility when the United 
States says this is properly regulated and the world can 
respect it, and we ought to take the time to make sure we not 
only salve our consciences but make sure that we provide the 
resources to get that kind of regulation.
    Thank you very much for being here.
    Mr. Behnam. Thank you, Senator.
    Chairwoman Stabenow. Thank you very much. Senator Hoeven.
    Senator Hoeven. Thank you, Madam Chairman.
    Mr. Chairman, you talked a little bit about LedgerX, but is 
LedgerX the only part of FTX that you actually have regulatory 
authority over? Are there other aspects of the company that you 
have regulatory authority over, or just LedgerX?
    Mr. Behnam. Senator, in terms of direct authority, LedgerX 
is the only entity that we have direct oversight over. There is 
a commodity pool operator, I believe, that is called Ledger--it 
might be LedgerPrime, and it is mainly regulated by the 
National Futures Association, which is a self-regulatory 
organization, an SRO. There is an indirect relationship, but I 
did want to mention that to you, in full transparency.
    To answer your question directly, the single entity that we 
regulate and have the most direct relationship with is LedgerX.
    Senator Hoeven. What is the status, financially, of LedgerX 
at this point in terms of assets and obligations, and in terms 
of your ability to make sure that it retains those assets to 
cover its obligations?
    Mr. Behnam. It is solvent. It is operational. I know where 
the customer money is on a daily basis, through direct 
communications with both LedgerX and the custodian which holds 
the digital assets and the money, the fiat money. The company 
has financial resources for up to 12 months on a rolling basis. 
There are books and records that we can examine on a daily 
basis.
    Senator Hoeven. Are you able to, with the authorities you 
have, make sure that dollars, resources, assets, are not 
siphoned off away from LedgerX? I mean, you are telling us that 
LedgerX is your responsibility, based on the authorities you 
have for this larger company, FTX. Right?
    Mr. Behnam. Correct.
    Senator Hoeven. You are saying that it is solvent, it is 
operating, it has assets to meet its obligations.
    Mr. Behnam. Correct.
    Senator Hoeven. Are you able to make sure it stays that way 
so that those resources are not dissipated to these other 
entities of the larger company?
    Mr. Behnam. I would say absent fraud, we are able to do 
that, and I think particularly in this moment in time, where 
the majority of the 130 entities are going through bankruptcy, 
and there is a laser-focus from John Ray, the current CEO of 
FTX, and there is a lot of scrutiny about LedgerX and the other 
entities, it would require a significant, significant act to 
have money move out of that entity without approval or that 
would violate our laws and take them out of compliance and put 
that entity in any jeopardy.
    Senator Hoeven. You feel you are doing everything you need 
right now to try to maintain the solvency of LedgerX.
    Mr. Behnam. It has been the No. 1 focus since we learned 
about the potential for the bankruptcy is to make sure customer 
property at the LedgerX entity, the CFTC-registered entity, 
stays exactly where it is. That is why we are having daily 
communications with both the custodian and the registered 
entity.
    Senator Hoeven. Well, and those goes to my broader question 
is okay, then to properly regulate crypto you have to start 
with defining, are you regulating the commodity aspect of it, 
the securities aspect of it, or the currency aspect. Correct? 
First, how do you define it, and then how do you determine who 
regulates or has that jurisdiction, and then third, how do you 
coordinate it between yourself, the SEC, the Federal Reserve, 
Treasury, and so forth?
    Mr. Behnam. Senator, I will first say, from a potential 
currency or payments element--and this probably goes to 
stablecoins--if it is, in fact, or a product is used as more of 
a payments or currency element, it would be outside of the 
CFTC's remit. In terms of the security or commodity question, 
you and I, I think, maybe have had this discussion before, but 
it really goes to the heart, at least today, of the traditional 
legal analysis of what a security is and what a commodity is.
    That said, there are unique characteristics of these 
digital commodities. It will require hard work and 
collaboration between us and the SEC to further define what 
characteristics make up a digital commodity and a digital 
security.
    The DCCPA exempts securities. I have said this before. The 
DCCPA and other similar bills are not a power grab. It is 
filling a gap in the commodity cash market. If we do not fill 
the gap, there will be fraud and there will be customer losses 
in the future. I am confident the CFTC, the SEC, I am 
committing to you that we will work together, we will figure 
out a path forward to have a reasonable, productive, and 
effective means to figure out what is a security token and what 
is a commodity token, and who should regulate.
    Senator Hoeven. How do you do that? How do you do that with 
all those other agencies, make that determination and sort out 
the jurisdiction, and make sure that you have the authorities, 
and then apply that not only from the standpoint that you are 
dealing domestically, in a global market, with all these 
different products? How do you do that?
    Mr. Behnam. Senator, you know, we have done it historically 
with futures products and swaps products. Just to give you a 
hypothetical in how we play this out, if the DCCPA or a similar 
bill were passed into law and I had authority to oversee these 
cash markets, I think the first steps that would happen is I 
would speak with my counterpart, Chairman Gensler. We would 
have our teams get together and start to flesh out a framework 
for what are the main characteristics of security tokens, what 
are the main characteristics of commodity tokens, and then just 
work through more granular details of what unique 
characteristics are. You know, we have, I think, on the biggest 
exchange in the U.S. 200-plus tokens being traded. We would 
have to go through each token and figure out what are the 
characteristics and is it a security or a commodity. That sets 
precedent. That is the benchmark and the foundation for the 
future. It is a process we have done in the past, and we can 
continue to do it in the future.
    Senator Hoeven. Should this legislation, whether it comes 
out of this Committee or Banking or one of the other committees 
of jurisdiction, have some kind of clearinghouse mechanism, 
like you often have in financial markets, to sort that out, in 
order for all this to work?
    Mr. Behnam. I will say this, is I want to impart on you 
that we can do this, but if that is something you are 
interested in I would certainly welcome the opportunity to work 
with you. The balance that we always have to strike with 
statute versus regulations, especially in an industry like 
this, I need a steer and a direction from you. I need 
prescription to give me a clear path forward of what my mandate 
is. It should not be too prescriptive to the extent that the 
technology can outrun the law, because it is going to be a lot 
easier for me to change rules through the public comment 
process than obviously you to change the law.
    Senator Hoeven. It does go to exactly what we have been 
talking about here, and that is looking at the legislation 
before this Committee to make sure that it does all the things 
it needs to do, not only so you can enforce the crypto aspects 
under your jurisdiction but so that you can coordinate with the 
other financial agencies that are going to need to be involved 
to deal with crypto on a broad basis, not only in this country 
but globally.
    Mr. Behnam. Absolutely, Senator, and I think especially 
given the circumstances that we are in today and what happened 
in the past few weeks, that elevates the need to just take a 
fresh look and to see where there may be gaps, where we can 
strengthen the bill. I would say this: strengthening the bill 
and filling the gaps is one thing. We need to move forward as 
soon as possible. We do not want this to happen again in the 
next few months and have the risk of customers losing money 
because of these gaps.
    Senator Hoeven. Thank you.
    Mr. Behnam. Thank you.
    Chairwoman Stabenow. Thank you very much. I will indicate 
there is a vote going on. I will be stepping away to vote. 
Hopefully our members who are here have already done that. We 
have members that are left. I am going to leave the gavel in 
Senator Boozman's hands, and I told him I would be watching 
him.
    Senator Boozman. I get a little bit of responsibility here.
    Chairwoman Stabenow. That is right. Thank you, Mr. 
Chairman, for being here, but I apologize that I need to step 
away. Thank you.
    Senator Boozman.
    [Presiding.] Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman. I have been 
waiting to be called on all morning, and obviously it was new 
leadership that was required in the Committee in order to be 
called on. T hank you. I am grateful for that. Thank you, Mr. 
Chairman, for being here today.
    One question I have and something that has given me pause 
is just thinking about why FTX would have lobbied so hard for a 
bill that it could never comply with. Do you have any insight 
into that at all?
    Mr. Behnam. Senator----
    Senator Bennet. I am sure you have thought about that.
    Mr. Behnam [continuing]. I have thought about that myself, 
and you kind of hit the nail on the head, right, because I 
cannot speak to what Mr. Bankman-Fried or anyone at FTX was 
thinking when they were advocating for regulation. The 
remarkable thing is to think about it in the context of 
compliance, right, and what we have learned about the FTX 
entities. Just thinking about the bill that Senators Stabenow 
and Boozman introduced, you know, they would have been so far 
out of compliance that it would not have even been possible.
    Senator Bennet. I was happy to hear you say earlier to 
Senator Grassley that you thought in the wake of what has just 
happened that we need to keep an open mind about what this 
legislation ultimately is going to look like, and you have 
already suggested a couple of provisions that you think we 
ought to add. I think probably everybody on the Committee would 
share that view--I hope that they would--and the need to act 
urgently at the same time.
    One of the things that worries me is we have to regulate 
here. We have to do it. One of the things that worries me is 
that we might inadvertently be giving the seal of approval to, 
you described it as----
    Mr. Behnam. Validation.
    Senator Bennet [continuing]. validation, to Senator Thune, 
but the seal approval to a global enterprise that we do not 
know enough about to say to Colorado's teachers and 
firefighters, you know, this is stuff you should invest your 
pension money in. I mean, can you talk about some of the risks 
here? You said that you would err on the side of accountability 
and err on the side of consumer protection. That is the right 
impulse to have. It does not make it any less complex, the 
balance there that we have got to strike.
    Mr. Behnam. No, it does not. I have had these conversations 
with my colleagues in the regulatory space about, you know, 
what does this mean in terms of systemic risk, what does it 
mean? We have been now through two major crises, if you think 
about the spring and Terra Luna and now FTX, and the 
traditional, regulated banking system is safe.
    Senator Bennet. No contagion.
    Mr. Behnam. No contagion. No even market resiliency issues. 
Let's keep it that way. Why would we even dabble in the idea of 
changing? What I always come back to is, you know, especially 
since 2008, after the crisis, we have been through a lot of 
bumps in the past two years with COVID and then the Russia-
Ukraine war and the impact on volatility in commodity markets 
and markets generally. Our regulations work. They work very 
well. Our markets are resilient. The improvements we made after 
2008 are very impactful and effective.
    My thought process is, yes, I understand that there has 
been no contagion, but I have to think about that risk to 
customers and this idea that gaps exist and that future crises 
might happen. I cannot just sit back and not do anything. I 
always lean back on the fact that our regulations work. If we 
did bring this into the regulatory fold then what are we 
essentially accomplishing? We are eliminating the probability 
of these FTX-type implosions occurring.
    Senator Bennet. How do we eliminate or prevent contagion 
from happening as a result of one of these? I am not arguing 
that there shouldn't be regulation. I am arguing that we need 
to do it in as intelligent a way as we possibly can.
    Mr. Behnam. We eliminate contagion by applying the same 
principles of financial regulation that we apply to traditional 
finance to the digital asset space.
    Senator Bennet. Let me ask you about that. I am not an 
expert in digital assets, but if there were not an existing 
regulatory structure here, if we did not have an SEC and we did 
not have a CFTC, why would it make sense to lodge the 
responsibility to make these determinations about whether it is 
a security or a commodity and all the other determinations you 
were just talking about with Senator Hoeven in two agencies 
versus one? Are there bad things that could happen as a result 
of having that disparate oversight?
    Mr. Behnam. You know, we have very different missions. The 
SEC is a capital formation and an investor disclosure-based 
agency. We are a risk management and price discovery agency.
    One thing that I have been very cognizant of since becoming 
Chair, and I was a commissioner since 2017, you know, there is 
this debate about the two market regulators is not new. It has 
been going on in this body for years. Standing alone, as I have 
conversations with my colleagues across the globe, the CFTC and 
the SEC are two of the largest regulators, and regulate the 
largest markets in the world, by far. Standing alone we are 
immensely impactful and have huge remits, far greater than any 
other regulator in the world. It is for those reasons, I think, 
where it is effectively separate and each agency accomplishes 
its goals.
    To your point about do we miss anything, I would just point 
to the markets we oversee. This issue about securities versus 
commodities really first came up in the early 1980's, with 
futures products. There are security futures and there are 
commodity futures. Both of them are commodity futures but they 
are security futures. This came up after the financial crisis, 
security-based swaps and commodity swaps. We have done, the two 
agencies, a very comprehensive job in filling all the gaps. 
There are essentially no gaps, and I feel very confident today 
telling you that we could do the same thing in the digital 
asset space.
    Senator Bennet. Just with the last 40 seconds I have, can 
you please--you have said it already today once or twice--
define the gap for us as you understand it.
    Mr. Behnam. There, based on the SEC's statement, authority 
to regulate security tokens. The CFTC, the authority stops 
right now at derivatives markets. We only regulate financial 
products whose price is based on an underlying commodity. The 
gap that exists is what is called cash commodity digital 
tokens. The Securities and Exchange Commission does not have 
authority to regulate or oversee any commodity, and we, the 
CFTC, do not have any authority to regulate cash commodity 
markets.
    Senator Bennet. Thank you. Thank you, Mr. Chairman.
    Senator Boozman. Senator Braun.
    Senator Braun. Thank you, Mr. Chairman. I have been 
watching and it has been an interesting conversation. Let's 
talk about currency itself. That seems to be the most important 
part of the discussion.
    Do you think anything with the volatility that crypto has 
shown can ever become a medium of exchange in the sense that 
fiat and sovereign currencies have become? You look at that 
analog, you do not have near as many exchanges. I just looked 
to see how many exchanges are out there. I mean, it is a couple 
of pages full.
    Do you think, in the long run, we will get through with 
this interesting technology that has so much to offer, not only 
on the provenance of stuff but to be kind of that foundation 
for currencies? Will volatility, the way we have seen it, do 
you think that is just the early stages of it, or do you think 
it will be inherent to cryptocurrency going forward?
    Mr. Behnam. Senator, I think, one, you can never predict 
what is going to happen, but I would say if we look in the 
past, say, 12 months, from the beginning of 2022 to where we 
are right now, and especially focusing on the events in the 
crypto digital asset space in April and May, when Terra Luna 
and some of these bankruptcies at these large lenders and hedge 
funds occurred, the price movement of--and I am going to use 
Bitcoin as the most prominent example--moved significantly 
downward from a much more elevated price, and then the spread 
or the volatility has really narrowed, more so than it ever has 
historically. We have largely been in a $5,000--which is a huge 
move, right, relative to what you are saying--but relative to 
the history of the Bitcoin volatility. In the past six months 
it has been very narrow relative to its past.
    Is that a sign of things to come? Possibly. Could we end up 
in a situation where Bitcoin or other digital currencies really 
start to narrow and you have that pressure from buyers and 
sellers where that range is much more narrow? It is possible.
    I would say also, quickly, the foundation of the technology 
is really an issue. The costs, from a payments perspective, 
which I am sure you have read about, those are issues that I 
think have to be figured out in order for the application of 
these tools in traditional finance and payment systems to be 
applied.
    Senator Braun. The other thing we can kind of turn the page 
back to, the dot-com explosion had a lot of these 
characteristics. Many of those stocks went up ten times on 
public issue, and ended up maybe either being of no value or 
selling way under, and kind of the same dynamic there. We will 
see over time.
    Security or commodity? Would you not think that the 
entities within, the exchanges, maybe ought to be regulated by 
the SEC, and whatever we end up with that has more 
characteristics of a commodity, the currencies, end up being 
regulated by your agency? Is there any need that it would have 
to be regulated all by one or the other?
    Mr. Behnam. I made this comment before, Senator, and I 
appreciate the question that, you know, under existing 
authority, for the SEC they cannot oversee a commodity, right, 
any commodity class, whether it is----
    Senator Braun. We are still trying to define what they are 
and what all the elements are within it.
    Mr. Behnam. We are. I think many of the characteristics 
should really be driven by historical precedent about what a 
commodity is and what a security is. I said this before. If we 
look at the Howey test from 1946, it is an investment money in 
a common enterprise with the expectation of profit from the 
work of others. Those are the core characteristics of a 
security, and those same fundamental characteristics should be 
applied to a digital commodity. There probably will likely be 
different things that we have to add and think about, but 
fundamentally that is what we are thinking about. Because the 
SEC was created to bridge information gaps between issuers and 
investors. The CFTC was created to create a market-based 
structure so that commodities can be traded in a transparent, 
fair, and resilient way.
    Senator Braun. That is probably a pretty good paradigm. At 
least now a lot of it is structure simply because those are the 
existing guidelines as well.
    Here, I think is the biggest issue. This is a fledgling 
concept. It is arcane to many. It also looks like it has got 
huge potential, because when you look at sovereign currencies, 
those have not, in terms of a medium of exchange, it a hostage 
to whatever your fiscal policies and your central banking 
policies are as well.
    You know, I think we really need to err on the side of 
making sure that we do not smother it, overregulate it. It 
definitely needs some regulation so that we do not take what 
might be the salvation for many places that do not even have a 
country that performs in a sovereign way, let alone a currency.
    How aware are you of the fact that--I look at Bernie 
Madoff. You know, he was a guy that was a crook involved in 
retirement. We are going to have some of that here now, and we 
might be looking at that being litigated as well. You still do 
not want to take the exception, the outliers, and take 
something this new, this unknown, and put a wet blanket on it 
for all the future potential it has. Just give me your general 
thoughts on that.
    Mr. Behnam. Senator, you know, I am going to focus on my 
responsibility as a market regulator and coming to you and 
telling you what I am seeing in markets and the risks to 
customers and where the regulatory----
    Senator Braun. Do you want to make an opinion on that, 
outside of bailiwick?
    Mr. Behnam. Maybe in the hallway but probably not right 
now.
    [Laughter.]
    Senator Braun. Fair enough. Good conversation.
    Mr. Behnam. Thank you, Senator.
    Senator Boozman. Senator Booker.
    Senator Booker. Mr. Chairman, thank you very much.
    Senator Boozman. Best for last.
    Senator Booker. Thank you, sir, for that, and thanks for 
the work that you have done. It has been a really bipartisan 
effort to try to create a regulatory regime that would protect 
against many of the issues we have discussed. It is good to see 
you, and you have been extraordinarily available to me and my 
team as we have been trying to forge a path forward to protect 
consumers, create more transparency, and I just have a lot of 
respect for you, not only because you are from New Jersey but 
because you do a heck of a good job, so I am grateful.
    We know millions of Americans now have been scammed by this 
colossal FTX failure. Their exposure has lost a lot of folks 
their resources, and for some people their hopes and dreams and 
security.
    We have the responsibility, as you know, and a lot of my 
colleagues have expressed already, to really understand the 
impacts of this deception, what are the real regulatory gaps to 
help to inform our regulatory actions, and how we can work to 
create a new space with a lot of abuse, how we can make sure 
that there are actually opportunities within it for the future.
    Chairman, when you and I last spoke in the Committee I 
communicated that I actually had a lot of optimism, not in 
these coins or any particular commodities but the underlying 
technology that there could be hope that we could see, often 
for lower-income folks who are dealing with banks that 
overcharge or have ridiculous fees, that we could begin to 
create more expanded opportunity for people that are often 
either abused by the banking system as it stands right now or 
who do not have access to a lot of the conveniences and 
opportunities within the banking system. I am still hopeful 
that this technology can provide economic opportunities for the 
underbanked and folks who have been left behind by traditional 
financial institutions. That said, without legislation like the 
DCCPA, we are leaving these same groups of people, that I am 
most concerned with, really vulnerable, as we have just seen.
    We know that there are issues in the industry, and have 
been said by my fellow Committee members, from the scams, 
fraudsters, risky, over-leveraged projects, inadequate 
disclosure, and more that are really causing these 
difficulties. I think that FTX blowup is actually indicative of 
other things that have happened that maybe not have captured as 
much attention.
    I am a supporter of the Digital Commodities Consumer 
Protection Act and still believe that the provisions within it 
would have solved many of the problems we have seen recently, 
had FTX been registered in the United States, which is a big 
issue we are not really focusing on. Many of the actions that 
have been allegedly perpetrated actually have been crimes in 
this country for over a century. The legislation is not going 
to solve everything, but I think it is important that we move 
forward with providing a regulatory framework that can protect 
consumers.
    The first question, I just want to set some things 
straight, and you have touched on them a bit, but it has been 
widely discussed in the media that the Stabenow-Boozman bill, 
of which I am a proud co-sponsor, is an SBF bill, or an FTX 
bill. This does not match any of the experience I have had with 
the legislative process. Sam Bankman-Fried did give a lot of 
feedback, as did many others, from industry, from academia, 
from the policy community, from your shop, and beyond. 
Everyone's feedback was considered by the Chair and the Ranking 
Member, who I think did an extraordinary job in getting input 
from lots of folks.
    Can you speak a little bit more to this allegation or this 
idea of the involvement of FTX? You talked about your calendar 
and what they were talking about, but can you speak to the 
involvement of FTX in the process of developing the piece of 
legislation that you have been such a principal advisor to us 
on?
    Mr. Behnam. Thank you, Senator. As far as I know, given 
conversations that we have had with the Committee--because as 
you pointed out we were very engaged in providing technical 
assistance and legal analysis, which is, you know, typical 
process for an authorizing committee and the agency it 
oversees, and we are continuing to look forward to doing that 
with you as we think about the bill going forward. As I noted, 
the Chairwoman and Ranking Member were very inclusive in their 
exercise of inviting folks in.
    We took a lot of meetings. You know, I mentioned that I met 
with Mr. Bankman-Fried and his team ten times, and we had some 
message exchanges, mostly about this application for the 
clearinghouse. Certainly as meetings go and conversations go we 
were talking about meetings he was having with other regulators 
or discussions he was having----
    Senator Booker. I am going to cut you off. I think you made 
my point for me. You met with me a handful of times on this, 
and I am just a junior Senator from New Jersey. I imagine 
collectively you have met with us dozens and dozens of times, 
members of this Committee, including testifying. In the private 
conversations we had your mission is not about the wealth of 
individuals. It is about the protection of consumers and 
financial security for Americans. Is that correct?
    Mr. Behnam. Yes, 100 percent.
    Senator Booker. 100 percent. Okay. Financial criminality is 
just not new, as I have said. We know that FTX is accused of 
crimes, of things that have been crimes for a long time. In 
those cases, enforcement and transparency appear to be the most 
important issues. We know, in the financial world, your agency, 
as well as the FTC, have done a lot of work in enforcement.
    The Digital Commodities Consumer Protection Act, among 
other things, was written to bring more resources to Commodity 
Futures Trading Commission's ability to create enforcement in 
this space.
    Would you, in my remaining seconds, expand upon the 
authority and resources enumerated in the bill that have given 
you the ability to prevent something like what recently 
happened with FTX--again, if FTX had been registered in the 
United States--what are the tools that this bill would give you 
to protect consumers and prevent some of the things alleged 
with FTX?
    Mr. Behnam. Senator, thank you. Just quick context is right 
now--I have said this before--every enforcement action we bring 
in the digital asset space is because someone comes to us, and 
that is not healthy, and that is not good. It touches--as the 
Chairwoman said, I said this--the tip of the iceberg, right? 
There is a whole area in the shadows.
    We need registration of exchanges. We need surveillance of 
market activity. We need direct relationship with custodians 
who are holding customer money so that we can prohibit and 
prevent money moving around that is not house money. There are 
so many tools in a comprehensive, regulatory framework that 
will put us, as boots on the ground, in the entity to prevent 
all of these illegal activities.
    Senator Booker. Thank you very much. Mr. Chairman-slash-
Ranking Member, I really want to thank you. This has been one 
of the better bipartisan experiences I have had, to try to do 
what is necessary to bring transparency, bring accountability, 
bring regulation, and create a real enforcement agency that has 
the resources to go after people doing bad things. Thank you.
    Senator Boozman. Well, thank you so much for being here. As 
Senator Booker just alluded to, this really has been a very 
helpful hearing. What we want to try and do is just give you 
the tools in your toolbox to protect consumers.
    I was the Chairman of the Financial Services Subcommittee 
on Appropriations a couple of Congresses ago. I had the 
opportunity to work with Chairman Gensler in his role that you 
have right now, and I really enjoyed working with him. He is a 
very talented guy. I have really enjoyed getting to know you 
and your staff and the great job that you all are doing, again, 
you all being a very talented team.
    You have got a portion of this. The SEC has got a portion 
of it. I know that you all have the ability and the want-to to 
get this done. A lot of this is going to depend on you all 
getting together and just helping us figure out a path forward. 
We do have to find that path in an expeditious way or we are 
going to wind up talking about the new FTX in the not-too-
distant future.
    With that the meeting is adjourned. Thank you.

    [Whereupon, at 12:33 p.m., the hearing was adjourned.]

      
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