CFTC Lures Crypto Community: Changes, Consultations

In the last weeks, countries like the U.K., the United Arabs Emirates and even the U.S. have increased their efforts to lure the crypto community and attract investments by pledging crypto-friendly regulatory environments.  

In the U.S., lawmakers have introduced proposals to legislate certain aspects of crypto wallets, stablecoins or even central bank digital currencies, but the bulk of the regulatory oversight still lies on regulators.  The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are arguably the leading agencies in the U.S., but their relationship with the crypto community couldn’t be more different.  

While The SEC has maintained a rather formal and distant approach with the crypto community — one of its commissioners, Hester Peirce, even suggested that the agency should promote more dialogue with the companies it oversees — the CFTC has adopted a more participative approach, gaining admiration among the crypto community. 

The latest example of this mutual respect among the CFTC and the crypto community is the current consultation to amend some of its registration rules for derivative clearing organizations (DCO). 

The request comes from LedgerX, LL.C d.b.a. FTX US Derivatives (FTX), a cryptocurrency exchange co-founded by Sam Bankman-Fried, who has previously praised the CFTC for its openness in talking to crypto firms. 

The CFTC has received inquiries from DCO or potential DCO applicants seeking to offer clearing of margined products directly to participants, such that participants would not clear through a futures commission merchant (FCM) intermediary (non-intermediated model).  FTX has submitted a request to amend its order of registration as a DCO to allow it to modify its existing non-intermediated model.  FTX currently clears futures and options on futures contracts on a fully collateralized basis.  FTX proposes to clear margined products while continuing with a non-intermediated model. In a nutshell, FTX’s proposal would allow margining to happen every ten seconds, while existing U.S derivatives exchanges set margins only once daily. This would be possible due to the very nature of digital assets and blockchain technology. Additionally, FTX would introduce a direct-to-investor model, removing the dependency on intermediary FCMs. 

The CFTC is seeking feedback about the possible implications for the market and how this would affect different rules and requirements.  

The overwhelming majority of the 387 submissions not only support the proposed changes, but they praise the CFTC for this initiative. 

“The Commission should be lauded for undertaking a deliberate, public process for evaluating whether to approve the Proposal. We are pleased to see this important commitment to the vitality of our financial markets continue under Chairman Behnam’s leadership,” said Joshua Sterling, partner at Jones Day. 

“We thank the CFTC for creating a public forum for deliberating upon the merits of whether to approve this proposal, and we applaud the CFTC’s ongoing commitment to creating an environment of public participation in the pursuit of deeply considered responsible regulation in an area of rapid innovation and increasing technological development,” said Paul Fusaro, president at Bitwise. 

While the large majority of comments show positive views, this may not reflect the whole picture — PYMNTS has confirmed that a significant number of the individual submissions are an exact copy, and it is difficult to verify the identity of the sender. Some individuals disagree with the proposal, suggesting that this kind of leverage in the crypto space is extremely risky. 

“Extending leverage in the futures and options market is no different than extending a ‘marker’ to a degenerate gambler at a casino,” read a comment from digital asset manager Nick Black.  

Whether the CFTC will accept FTX’s proposal entirely or with amendments is yet to be seen, but it is likely that the CFTC’s approach to offer rule changes and open consultations will bring more positive feedback from the crypto community. The last time that the SEC modified its definition of “exchanges” in February 2022, the crypto community reacted very differently, with some organizations calling it “unconstitutional.”

Last week, the CFTC extended the period to submit comments from April 11 to May 11. 

Read More: SEC’s Campaign Against Crypto Lending Grows Beyond Coinbase