All Things FinReg


The Senate Agriculture, Nutrition & Forestry Committee held a hearing, “Why Congress Needs to Act: Lessons Learned From the FTX Collapse,” on December 1, 2022, receiving testimony from Commodity Future Trading Commission (CFTC) Chairman Rostin Behnam. With the exception of very few exchanges during the Q&A portion of the hearing, the committee, which asked several questions about the CFTC’s oversight of FTX’s CFTC-registered affiliate, LedgerX, was supportive of the CFTC and did not lay much blame at the feet of the regulator. Rather, many senators were most eager to discuss robust, “whole of government” oversight and regulation of the digital asset economy.

Chairwoman Debbie Stabenow (D-MI) and Ranking Member John Boozman (R-AR), as well as others on the committee, reinforced their support for their bipartisan legislation, the Digital Commodities Consumer Protection Act (DCCPA), which would grant the CFTC the authority to regulate digital commodities and spot digital asset markets.

But whereas the various committees and other unofficial groups of would-be crypto regulators in the last Congress were content legislating within their own jurisdictions and working at their own pace, many senators at the hearing focused on the complexities of, and need for, comprehensive regulation and enforcement.

  • Senate Banking Committee Chairman Sherrod Brown (D-OH), also a member of the Agriculture Committee, will play a pivotal role if comprehensive legislation can come together. Recent versions of the DCCPA would exempt securities from the definition of digital commodities, leaving the future SEC regulation of digital securities both uncertain and unaddressed, which may not be politically acceptable in light of the FTX and other crypto firms’ bankruptcies. For his part, Chairman Brown expressed a desire to protect traditional finance from the FTX contagion and mused that any legislation to respond to the FTX collapse should not “advantage” digital assets.
  • Senator Amy Klobuchar (D-MN), the chair of the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights, asked Chairman Behnam about working with the Federal Trade Commission to target cryptocurrency fraud in social media such as the use of “celebrity endorsements.”
  • The topic of conflicts of interest was discussed at various times during the hearing. Senator Boozman noted the need for a framework that would scrutinize conflicts of interest related to common ownership of exchanges and trading firms, among other things. Chairman Behnam also noted that the DCCPA and the Lummis-Gillibrand bill could be rewritten to strengthen their conflicts of interest provisions.

While support for crypto regulation was seemingly universal, some on the committee expressly stated that they did not want regulation to be seen as an endorsement of what they referred to as an “out-of-control industry.” Senators noted that the industry still struggles with illicit finance issues and that the FTX collapse illustrates weaknesses in anti-money laundering (AML) and Know Your Customer (KYC) compliance, among other things.

Other concerns included Senator Tuberville’s (R-AL) doubts about the ESG ratings companies that gave high marks to FTX for corporate governance and Senator Gillibrand’s concern about the lack of CFTC authority to receive detailed information about the acquirer of a CFTC registrant. Senators Tina Smith (D-MN) and Dick Durbin (D-IL) articulated various concerns about the digital asset industry, but more importantly, concerns that retirement accounts and pension funds could be exposed to digital assets in the future.

Chairman Behnam committed to working with Chairwoman Stabenow and Ranking Member Boozman to incorporate “lessons learned” from the hearing into DCCPA updates. We would expect that Chairwoman Stabenow and Ranking Member Boozman will continue to work with their colleagues in the Senate and the House to refine the legislation and find a way forward, a process that is usually long and painful.

Looking Forward

The “whole of government” approach would involve consideration of rules affecting the three main pillars of the financial services industry: financial institutions (both bank and non-bank), securities, and commodities. On the one hand, such a comprehensive approach may make for greater certainty for the industry. On the other hand, the more comprehensive the legislation, the harder it may be to pass.

Chairman Behnam advocated for legislation that was not overly prescriptive, to allow for a set of rules that could be modified as the market develops. When pressed for a timeframe in which the CFTC could write rules under any legislation, Behnam remarked that he would aim for a 12  to 18 months.

The House Financial Services Committee will hold its own hearing on the FTX collapse later in December. Chairwoman Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC) have worked on stablecoin legislation throughout the 117th Congress, especially following the collapse of at least one stablecoin. The hearing will likely bring the SEC’s role into the spotlight. Mr. McHenry will become the committee chairman in the next Congress as Republicans take control of the House and therefore the highest-ranking elected Republican with jurisdiction over digital assets.