August 17, 2022

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WASHINGTON—The head of the Commodity Futures Trading Commission called on lawmakers Wednesday to grant his...

WASHINGTON—The head of the Commodity Futures Trading Commission called on lawmakers Wednesday to grant his agency authority to regulate cryptocurrencies such as bitcoin, saying the “speculative fervor” around such assets has left investors in need of protection.

“My responsibility is to assume that it will continue to take root and that this technology will continue to emerge and wind itself into traditional finance,” Mr. Behnam said in response to a senator’s question about whether cryptocurrency is likely to grow its role in the financial system. “If we don’t approach the technology that way, we run the risk of stability and safety issues and soundness issues.”
Mr. Behnam suggested Congress pass a law that would allow the CFTC to regulate cash markets for certain types of cryptocurrencies—currently the agency is limited to regulating derivatives—and provide it with funding to conduct additional oversight. Such legislation would aim to fill a regulatory gap, as some types of cryptocurrency claim to fall outside the jurisdiction of the federal government’s other market regulator, the Securities and Exchange Commission.
The hearing came a day after the Justice Department said it seized over $3.6 billion worth of digital currency stolen during a hack of a cryptocurrency exchange, its largest financial seizure ever. Two suspects were arrested for allegedly trying to launder the proceeds.
Regulators in the Biden administration have likened the roughly $2 trillion cryptocurrency market to the Wild West and said it lacks the safeguards that protect investors in stocks, bonds or commodities. But they have struggled to apply the decades-old laws that govern those markets to the cryptocurrency industry, which is furiously lobbying Washington to avoid being regulated by the SEC.

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While the SEC hasn’t announced major actions against big crypto exchanges, the commission has threatened to sue companies offering crypto lending. WSJ’s Dion Rabouin explains why this one part of the crypto market has drawn such a strong reaction. Photo: Mark Lennihan/Associated Press

Both the CFTC and SEC cracked down on cryptocurrency projects and trading platforms they have considered to be breaking the law or defrauding investors. But neither agency has won undisputed oversight over the two largest cryptocurrencies: bitcoin and ether, which together represent about 60% of the entire market.
That is because of two things. First, many lawyers believe bitcoin and ether are, for legal purposes, commodities that fall outside the SEC’s jurisdiction. Second, the CFTC only has the power to regulate derivatives—such as futures and swaps—as opposed to cash or spot markets where the underlying assets are bought and sold.
“There is no one regulator, either state or federal, with sufficient visibility into digital-asset commodity trading activity to fully police conflicts of interest and deceptive trading practices impacting retail customers,” Mr. Behnam said in his prepared testimony.
The Senate Agriculture Committee, which along with its counterpart in the House oversees the CFTC, has begun considering the possibility of granting the agency that authority through legislation. The top-ranking Republicans and Democrats on both the House and Senate panels sent Mr. Behnam a letter last month asking whether he saw any shortfalls in the CFTC’s ability to police cryptocurrencies.
“Congress must work with regulators and the Biden Administration to design a framework that protects consumers and our environment and keeps our markets fair, transparent and competitive,”
Sen. Debbie Stabenow
(D., Mich.), the head of the committee, said Wednesday.
Mr. Behnam said the cash market for cryptocurrencies would benefit from CFTC oversight. Cash markets for other commodities, such as corn and oil, are dominated by companies. In contrast, the cryptocurrency market is full of individual investors. These investors often take on high amounts of leverage to trade. They also entrust their crypto tokens to trading platforms that have frequently lost funds to hacks and poor cybersecurity.

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“The CFTC is well situated to play an increasingly central role in overseeing the cash digital-asset commodity market,” he said.
After objecting for years to meaningful federal oversight, cryptocurrency lobbyists have recently shifted their focus to convincing lawmakers and regulators that the CFTC should have primary jurisdiction over their industry. They say the SEC’s rules for traditional securities like stocks and bonds would be impossible for most cryptocurrencies and trading platforms to comply with, as they impose significant disclosure requirements and liability upon issuers.
“I think the CFTC is in a very strong position to do this,” said
Sam Bankman-Fried,
the billionaire founder of cryptocurrency trading platform FTX, at Wednesday’s hearing. “I would love to see that jurisdiction expand to be able to provide federal oversight for the cash markets similar to how they do for derivatives markets today, both to provide consumer protection, protect against systemic risks, and provide a clear and consistent framework for the industry.”
Write to Paul Kiernan at [email protected]

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