Existing exchanges take advantage of Washington’s deep ties to respond.
“Our relationships go much deeper,” said John Dieters, head of corporate strategy at Cboe, operator of the largest options exchange in the United States.
The battle between the two armies of pressure is the latest flare-up in Washington between the titans of new and old finance as officials try to figure out how to set the rules for the crypto industry. It forces regulators and lawmakers to take sides. home farming chair David Scott (D-Ga.), which oversees the CFTC and represents the state where the New York Stock Exchange owner Intercontinental Exchange is headquartered, has criticized the FTX plan as a “serious threat” to global derivatives markets where trillions of dollars are transacted annually.
“We are amazed at the amount of tension — the attention — that we got,” Bankman-Fried said in an interview. “Some people might come into this from a corner of, you know, what’s important to their business.”
The fight puts a big spotlight on the CFTC, the Securities and Exchange Commission’s smaller sister agency. The CFTC oversees the futures and other derivatives markets that allow traders to place bets on the prices of bitcoin and commodities such as oil. FTX is among the crypto firms that want the CFTC to play a large role in overseeing the industry, as SEC chief Gary Gensler threatens to crack down on digital asset trading. The company has made this a huge priority, hiring several former agency officials, including former acting CFTC Chairman Mark Wittgen, to establish connections around Washington.
With FTX spending millions on ad campaigns and advocacy efforts, CFTC officials are starting to get upset. CFTC Commissioner, Caroline Pham, Republic of, In a post on Twitter in April She shared a photo of her with Bankman-Fried and Wetjen, praising the cryptocurrency CEO’s hair and thanking the pair for meeting them. The tweet has since been deleted.
Commodity Futures Trading Commission Chairman Rustin Behnam urged Congress to have more powers to oversee the digital asset markets. While industry leaders and key members of Congress have been supportive of those pleas, the fight over the FTX trading scheme is forcing the agency to balance the interests of storied financial institutions and crypto startups.
The agency is scheduled to host a roundtable on Wednesday to give players on both sides of the fight a chance to make their case.
“This is a risky proposition,” Terry Duffy, CEO of CME Group, which leads one of the world’s largest derivatives exchange operators, said during a May House Agriculture Committee hearing. He added that FTX’s proposed market model could flip trading systems that hedge risks around “every commodity known to man.”
Risks and Volatility
In essence, FTX’s proposal would allow retail investors on its platform to place bets on derivatives linked to cryptocurrency prices using margin – thus giving them more opportunities to make larger transactions, and potentially generate greater returns.
Margin trading refers to when investors borrow money from a broker or exchange to purchase an asset, in this case a cryptocurrency derivative contract. Borrowing requires the buyer to put up a certain amount of collateral that is adjusted every few hours and at the close of trading to calculate how changes in the market will affect the risk of their investment. With futures contracts, brokers hold traders’ collateral and exchanges set conditions for how much should be kept within reach of traders to hold their positions.
But while this strategy can boost returns – traders will buy more with less – it also carries significant risks. If the markets change and investors cannot cover their margin requirements, they will have to sell, move more assets into their accounts, or lose whatever they have posted as collateral. These losses can cascade quickly due to the infamous volatility of cryptocurrencies.
In the derivatives markets, these functions are usually handled by CFTC regulated brokers which are often owned by banks or other financial institutions. While these entities may slow down the speed of the transaction – charging extra fees in the process – they also absorb some damage when the markets falter.
The FTX plan will remove these brokers from the equation and automate margin determination to approximately 30 seconds, automatically liquidating an investor’s position once it falls below the margin limit. FTX executives described their plan as a game-changer, as they applied the purported immediacy of cryptography to the plumbing of the 20th century financial market.
Proponents – including investment firms (and FTX backers) like SoftBank and Sequoia Capital – argue that resetting margin thousands of times each day and removing brokers from the mix would make derivatives markets more efficient and eliminate any market risk that arises in overnight or weekend trading. . Moreover, FTX promised to pay $250 million to support losses in the event of a market crash.
In a letter to the Commodity Futures Trading Commission (CFTC), Peter Prager, co-CEO of Fortress Investment Group, said the plan would also inject much-needed competition into derivatives markets that “have never been more focused.” He added that the FTX plan, if approved, would “strengthen the US leadership in the digital asset market.”
With the price of digital currencies like bitcoin down more than 50 percent since their peak last fall, traditional derivatives exchanges and clearinghouses have hit FTX with claims that the margin trading proposal will expose investors and commodity markets to massive new risks.
Cboe President, President and CEO Edward Tilly said in a letter to the CFTC that it would represent a “tremendous expansion of what has hitherto been a market niche.” Tilley argued that the agency should instead consider whether a “paradigm shift of this magnitude would benefit from a rigorous rule-making process” rather than an exception for a single cryptocurrency exchange.
Intercontinental Exchange, which owns derivatives trading services and the New York Stock Exchange, has warned that FTX lacks the financial resources to adequately cover its potential losses in the event of an economic downturn.
Agriculture and commodity trade associations have also raised red flags about the potential disruption of market instruments used to hedge crop and physical commodity losses, arguing that the model published by FTX will inevitably be adopted by major institutions. Bankman-Fried said his company has no plans to expand the margin clearing model to traditional derivatives markets such as soybean futures or energy contracts.
FTX is also facing opposition from consumer watchdogs and even other CEOs in the crypto industry, who are raising doubts about how FTX can terminate trades when investors cannot meet their margin requirements.
“Just because something is written in code doesn’t mean it is perfect,” said Raghu Yarlagadda, CEO of crypto exchange FalconX, adding that the model needs to be stress-tested for sudden downturns like the one that has rattled crypto markets for the past two weeks.
FTX will need CFTC approval to proceed. Behnam, who has led the agency since January 2021, said he and his staff worked with FTX on its “innovative proposal,” but that it needed to withstand serious review. The CFTC has called for public comment in addition to its roundtable this week.
“I have to tell you, Mr. Bankman-Fried, I am intrigued by this. I think it’s a really fun idea,” an actor. Sean Patrick Maloney (DN.Y.), who claims to be “neutral” about the plan, said at the House hearing on the issue. “You sure excite everyone. And they hate it — they hate the idea.”