Senate Agriculture Committee Chair Debbie Stabenow on Dec. 1, 2022, pushed back against critics who warn her proposed cryptocurrency framework would establish the Commodity Futures Trading Commission (CFTC) as the chief crypto regulator while stripping authority from other financial agencies.
The Michigan democrat’s remarks, during a committee hearing examining the collapse of crypto exchange FTX, were made in support of the Digital Commodities Consumer Protection Act of 2022, a measure that had been supported by former FTX CEO Sam Bankman-Fried and as a result faces new headwinds following Bankman-Fried’s downfall.
The measure, cosponsored by Sen. John Boozman of Arkansas, the top republican on the panel, would require digital commodity trading platforms to register with the CFTC and implement safeguards to prevent abusive trading practices and protect customer assets, among other requirements.
Critics say the bill would grant the CFTC broad new authority to regulate the crypto space at the expense of the SEC. Financial reform group Better Markets, in a fact sheet released a day before the hearing, warned the Stabenow-Boozman bill “expands the definition of commodity, restricts the historic definition of securities, and will result in endless litigation because the longstanding legal test for securities will have to be changed to take account of this legislative action.”
Stabenow addressed the issue in her opening remarks.
“I’ve said this before and I’ll say it again. The Digital Commodities Consumer Protection Act does not 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,” she said. “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.”
FTX’s implosion has resulted in a cascading string of failures in the crypto industry, and spurred lawmakers to move forward on existing legislative proposals while at the same time forcing them to revisit the bills to address revelations of mismanagement and lack of basic controls at the exchange. CFTC Chairman Rostin Behnam, the lone witness at the hearing who has praised the Stabenow-Boozman bill, told Sen. Chuck Grassley that “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’re going to learn more information about FTX in the coming weeks and we will certainly take that information and share it with the committee,” he said in response to a question from the Iowa Republican. “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 crypto entity and conflicts of interest, obviously an issue that many members have talked about today given the brazen conflicts that occurred at the non-regulated entity. And 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.”
FTX on Nov. 11 announced that it, affiliated trading firm Alameda Research and about 130 other affiliates had begun Chapter 11 bankruptcy proceedings following a failed merger with rival exchange Binance, with Bankman-Fried replaced by new CEO John Ray, who oversaw the Enron bankruptcy. Ray, in a subsequent court filing, accused the company of a “complete failure of corporate controls,” among other criticisms, and said he has answered numerous inquiries from federal authorities, including the SEC. The collapse has left the exchange owing billions and raised questions around the misuse of customer funds, including those loaned to Alameda, which reportedly used FTX’s own native token FTT as collateral. Fears that the collapse would become contagion for the industry began coming true this week, with crypto trading platforms BlockFi announcing a Chapter 11 bankruptcy filing and Bitfront announcing it would be shutting down.
Absent any new framework set out by Congress, the SEC today has couched its crypto industry enforcement in the traditional “Howey Test” established in the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co., to define the assets as securities. Under that test, an investment contract – which is classified as a security under the Securities Act of 1933 – must involve an investment of money in a common enterprise, with an expectation of profit from the efforts of a third party. SEC Chair Gary Gensler has argued that the “vast majority” of the nearly 10,000 crypto tokens on the market are securities. (See Gensler Pushes Back Against Crypto Industry Claim that SEC Has Not Provided Regulatory Guidance in the Sept. 9, 2022, edition of Accounting & Compliance Alert.)
Behnam, in his testimony, said he has asked Congress directly for clear authority “to impose our traditional regulatory regime over the digital asset commodity market.”
“I have not been shy about my encouragement of bills that contemplate shared responsibility for the CFTC and the Securities 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,” he said.
The hearing comes a day after Senate Banking Committee Chairman Sherrod Brown, also a member of the Agriculture Committee, sent a letter to Treasury Secretary Janet Yellen seeking “input and partnership to develop a broad framework for all crypto assets.”
“Congress and the financial regulators must work to get all of this right,” Brown wrote. “As more crypto failures occur, the age-old adage is more true than ever—if it seems too good to be true, it probably is.”
This article originally appeared in the December 2, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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