Behnam, who has led the Commodity Futures Trading Commission since last year, testified that without sufficient regulations, collapses like that of FTX are more likely to occur. He implored lawmakers to give the CFTC increased regulatory authority to prevent fraud and malfeasance in the digital asset space, saying that the FTX collapse demands 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,” he said.
During the hearing, Behnam expressed his view that there need to be regulations in place to prevent cryptocurrency exchanges from having affiliated hedge funds that trade on the platform, a nod to the role that Alameda Research, which was closely tied to FTX, had in the company’s spectacular downfall.
“Those platforms must be restrained by conflicts of interest rules and mandatory separation,” he said. “They cannot be allowed to take on conflicting roles such as operating an exchange while also trading against customers on that exchange. The CFTC and SEC must have direct insight into these platforms with the authority to surveil ongoing trading activity, conduct examinations, and approve material changes to the platform’s business.”
Disgraced FTX founder Sam Bankman-Fried has faced heat for how closely tied Alameda was to his company and allegations that the two entities commingled client funds. During a live interview conducted on Wednesday, Bankman-Fried was grilled about the connection, although he claimed he wasn’t knowingly committing fraud.
“I didn’t knowingly commingle funds,” Bankman-Fried claimed.
“I wasn’t running Alameda,” he said. “I was nervous because of the conflict of interest of being too involved.”
During Thursday’s hearing, which is just the first about cryptocurrency regulation and the FTX collapse following the implosion, Behnam explained that while the CFTC has the power to go after fraud, regulations should better empower the agency to act before it is too late. He also said that the CFTC’s fraud prosecution likely only represents a fraction of the misconduct being conducted in the shadows.
He said that limited enforcement capability is not a substitute for “comprehensive regulation” by which dealers, custodians, trading platforms, and other digital asset participants must be registered and subject to direct oversight from regulators like the CFTC.
“By the time the CFTC is able to exercise its fraud and manipulation authority, it is already too late for defrauded customers,” Behnam said. “Comprehensive regulation protects customers on the front end by stopping fraud before it occurs.”
During the hearing, Behnam also expressed support for the Digital Commodities Consumer Protection Act, which counts both Republican and Democratic co-sponsors. The bill would specifically close regulatory gaps by requiring all digital commodity platforms (brokers, dealers, trading facilities, etc.) to register with the CFTC.
The legislation would hand the CFTC oversight of crypto trading, although Bankman-Fried was a major supporter of the bill, causing some lawmakers to question whether new legislation to regulate crypto might be in order.
Sen. Sherrod Brown (D-OH), who is chairman of the powerful Banking Committee, has been critical of the legislation and told Politico this week that he would be releasing his own bill related to cryptocurrency regulation sometime next year.
FTX’s collapse has put fire to the feet of lawmakers to act, given the scale of the implosion and its repercussions for the cryptocurrency sector, causing other major companies to fall. FTX was valued at $32 billion in a financing round before the collapse this year. It was also the third-largest crypto exchange by volume, after Binance and Coinbase.
“Where we are with cryptocurrency today reminds me of where we were with nuclear physics in the late 1940s and early 1950s. Two weeks ago a nuclear bomb went off in the financial world,” said Sen. Roger Marshall (R-KS) during Thursday’s hearing.
Bitcoin, the flagship cryptocurrency, got slammed by the FTX collapse and subsequent fallout. Bitcoin dropped as low as $16,100 this week, marking a more than 20% slide from just before the company fell apart.
Later this month, the House Financial Services Committee will also hold a hearing to investigate FTX’s descent into bankruptcy. The committee expects to hear from the companies and people involved, including Bankman-Fried, Alameda Research, Binance, FTX, and others.