[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
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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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available on http://www.govinfo.gov/
______
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
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Thursday, December 1, 2022
Page
Hearing:
Why Congress Needs to Act: Lessons Learned from the FTX Collapse. 1
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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
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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
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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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