What is the attitude of the CFTC while the SEC is frantically exporting?

For two consecutive days, the U.S. Securities and Exchange Commission (SEC) filed lawsuits against Binance, Coinbase and other two major exchanges, shocking the Crypto and even the entire financial industry.

While the SEC and its head Gary Gensler are frantically exporting information, Rostin Behnam, chairman of the Commodity Futures Trading Commission (CFTC), another major U.S. regulatory agency, will also attend a hearing of the House Agriculture Committee on "Providing Clarity to the Digital Asset Spot Market" today. Earlier, Rostin had published the full text of today's testimony on his personal social media, from which we may be able to get a glimpse of the agency's current attitude towards Crypto.

Below is the full text of Rostin’s testimony, compiled by Odaily Planet Daily.

Chairman Thompson, Senior Commissioner Scott, and fellow Commissioners, thank you for this opportunity.

On the need for legislative action

Since testifying before the Senate two years ago, I have stressed the need for legislative action to address the lack of regulation in digital commodity markets. I have made clear in my testimony to Congress and other public statements that bringing this volatile market under regulation will protect customers, ensure market resilience and stability, and prevent risks from spilling over into the traditional financial system.

I’m not the only one who thinks this way. Last year, the Financial Stability Oversight Council unanimously released a report on “Financial Stability Risks in Digital Asset Markets.” One of the core recommendations in the report was a call for Congress to enact legislation to fill the apparent regulatory gap in the spot market for non-securities digital assets.

Events over the past year have added urgency to these recommendations. The bankruptcy of several large digital asset platforms wiped out billions of dollars of customer funds; multiple large market participants were suspected of engaging in shady manipulation with affiliated trading platforms; and cybersecurity vulnerabilities were continuously exploited by hackers, resulting in billions of dollars in fund losses...

Leaving billions of dollars of customer funds and investments in largely unregulated entities is a recipe for disaster. However, recent history provides us with many actionable lessons. After the 2008 financial crisis, this Commission worked on a bipartisan basis to reform the previously unregulated swaps market. These reforms were based on core principles of sound market regulation and designed to include transparency, reporting, and registration requirements.

These measures are necessary to prevent potential crises in the future, and they have now become effective regulatory rules in the derivatives market. In fact, during the bankruptcy of the FTX Group, a related entity regulated by CFTX avoided a similar outcome (it should refer to Ledgerx, a derivatives exchange that was once affiliated with FTX), and this is precisely because CFTC regulation requires that any registered entity must ensure customer funds isolation, sufficient financial resources, and proper governance. In other words, the entity is able to protect customer funds and continue to operate from an operational perspective.

I believe that similar, time-tested regulatory measures should be imposed on digital commodity markets, with a focus on protecting customer assets, monitoring trading activity, prohibiting conflicts of interest, and enforcing strict cybersecurity standards.

Regulatory priorities

I encourage Congress and the executive branch to continue to focus on the regulatory gaps in digital commodities, and I fully support the Commission's efforts to develop legislation to grant the CFTC more authority. However, any new laws considered by Congress must not undermine existing laws. If securities laws apply, the Securities and Exchange Commission (SEC) should use its strong authority to protect customers and address information gaps between securities issuers and investors in the market.

I would like to emphasize that in any legislation on this issue, Congress should focus on the following:

1. Stronger customer protection

In a market as novel and technologically complex as digital assets, strong customer protection is critical. Congress should ensure that the CFTC has full authority to require registered entities to make necessary disclosures on matters such as investment risks, cybersecurity risks, mining, settlement practices, and other related activities to ensure that customers receive the best price, and to require registered entities to segregate and protect customer funds in the event of a platform failure.

We also know that these markets are often promoted as a form of “financial inclusion,” yet their users are the most vulnerable to the inherent risks of these assets and predatory financial schemes. Any legislation in this area should recognize this dynamic, and further work and research is needed to better understand how these populations interact with this market and ensure they are adequately protected.

2. More comprehensive regulatory powers

In the absence of federal market regulation, digital asset markets have been plagued by fraud and manipulation. The CFTC has been proactive in policing these markets, bringing 85 cases and imposing more than $4 billion in fines and restitution.

However, our legal authority in the digital commodity token spot market is limited to the extent that we can only take action after fraud has occurred. A more complete regulatory system should give the CFTC the power to proactively set rules to minimize fraud. This should include setting strict standards for preventing conflicts of interest, setting rules to maintain fair, open and transparent markets, and actively monitoring the trading activities of market participants.

3. New mandates require more funding

Currently, the CFTC is the only financial market regulator that relies on congressional appropriations. Other financial regulators have self-funding mechanisms, which provides greater assurance that their fiscal year budget requests will be fully funded. For regulators that assume new powers, Congress must provide the agency with the resources necessary to assume the new powers. Regulation of digital commodity markets will impose new responsibilities on the CFTC, and the fulfillment of these responsibilities cannot be accomplished solely with our existing resources.

I want to thank the Committee again for the opportunity to testify today. I am pleased that the Committee is working to address tough policy issues in the digital asset space, particularly addressing existing regulatory gaps. Of course, there is more work to be done, and I stand ready to engage with this Committee and Members of Congress on this legislative proposal to ensure that it addresses all key considerations for this emerging market.