In a CFTC oversight hearing of the House Agriculture Committee, members returned repeatedly to the topic of digital assets. In questions to CFTC Chair Rostin Behnam, members expressed concern about the need to protect customers while promoting innovation. Members also asked about the possibility of expanding CFTC authority over digital asset spot markets. Behnam reiterated his support for such an expansion but said the CFTC will need additional funding to extend its oversight.
The hearing, “The State of the CFTC,” was held March 31, 2022. Committee Chair Rep. David Scott (R-Ga) oversaw the proceedings. Behnam provided written and oral testimony.
Digital assets. Committee Ranking Member Rep. Glenn Thompson (R-Pa) said the CFTC is “well poised” to protect consumers engage with crypto trading venues in a manner that promotes innovation. Thompson pointed out that he published a draft discussion of the Digital Commodity Exchange Act in November. The bill is grounded in five principles:
- Foster innovation;
- Protect market participants;
- Reduce complexity;
- Promote principles-based regulation;
- Compliment existing authorities where appropriate.
Rep. Rick Crawford (R-Ark) asked if “crypto is here to stay,” to which Behnam responded yes. As to why it would be good to expand CFTC jurisdiction over crypto markets, Behnam said it is a largely unregulated market. He added that with the growth and scale of the market, along with the highly speculative nature and high retail participation, current regulation is not enough. It is incumbent on Congress and regulators to work together to have a structured regulatory regime around markets, which will protect customers, reduce market stability issues, create market resiliency, and possibly have the benefit of supporting innovation, said Behnam.
Rep. Rodney Davis (R-Ill) asked if Congress gives the CFTC additional jurisdiction over digital assets, should the CFTC have first crack at defining what a digital commodity is? Behnam answered yes.
Rep. Kat Cammack (R-Fla) noted that Behnam previously said in testimony to the Senate Agriculture Committee that the CFTC and the SEC must navigate a “thin line” when determining which agency has jurisdictional authority over the digital asset space. In addition, she said that Behnam stated in previous testimony that 60 percent of the digital asset space marketplace falls under the jurisdictional authority of the CFTC, and that the CFTC is prepared to assume the role of the primary regulator for cryptocurrency and blockchain technology. She asked what Congress is doing legislatively to ensure that the CFTC has spot market jurisdiction of the digital asset marketplace, and that it does not fall into the purview of an “overreaching SEC.”
Behnam clarified that the 60 percent figure referred to the value of two core digital assets, Bitcoin and Ether being roughly in the 55 to 60 percent range of the total digital asset market capitalization.
Regarding the “thin line,” he said it really is a balancing act and regulators collectively receive support and guidance from Congress as to how they are going to regulate the space. How will regulators prevent financial stability risks if the market continues to grow and scale at the current clip. How are they going to protect customers and ensure market resiliency?
“I'm a firm believer that American financial markets, both equity markets, security markets and derivatives markets, are the best, deepest and strongest in the world because of our regulatory structure. Because there are clear rules of the road. And bad actors are held accountable,” said Behnam. “And I think that same logic can be applied to the digital asset space.”
Customer protection. Ann McLane Kuster (D-NH) asked what are some core customer protections that would be needed in a regulatory framework for the digital asset market, and whether there are core principles in the Commodity Exchange Act that can be applied to protect consumers. Behnam said that in many respects, market structure can be very similar, despite assets that are traded on those markets being different. He believes it is important to use many of the market structure principles and the core principles as the building blocks for a regulatory market structure from a customer protection standpoint.
Customer protection is all about segregation of assets, said Behnam, which is very, very difficult with digital assets. The CFTC is working on this issue very hard because it is so different from traditional assets, execution, and settlement.
CFTC resources. Rep. Shontel Brown (D-Ohio) asked what Congress needs to do to support the CFTC. Behnam responded that though he fully supports CFTC authority over digital assets, the agency’s funding fell a little short this past fiscal year. The CFTC will be asking for more funding this year due to interaction with an increasingly large pool of market participants and increasingly large responsibility over growing markets.
According to Rep. Randy Feenstra (R-Iowa), digital currency costs about $100 million in the CFTC budget. That’s a “big deal,” said Feenstra. Behnam agreed the amount is “not insignificant,” but said the CFTC is “earning our paycheck.” There's a value for the CFTC to potentially have additional authority and protect markets and market participants, said Behnam, drawing a parallel to the CFTC’s expanded oversight over derivatives after the financial crisis of 2008.