CFTC Chairman Behnam Testifies on Digital Asset Regulation Finance & Banking

In testimony before the US Senate Committee on Agriculture, Nutrition and Forestry (the “Committee”), CFTC Chairman Rostin Behnam reviewed the agency’s regulatory oversight of digital assets.

Mr. Behnam pointed to “regulatory gaps presented by innovations in financial markets” and said there was no “viable substitute for a functioning regulatory oversight regime for the cash digital asset market.” He described the CFTC’s fraud and enforcement powers to address misconduct in the regulation of cash markets through (i) monitoring and surveillance programs, and (ii) other means, including denunciations or referrals to whistleblowers. He said, however, that no regulator has “enough visibility” in this area to be able to police conflicts of interest and deceptive marketing practices.

Behnam said that while the primary role of the CFTC is to regulate the commodity derivatives market, certain features of the digital commodity spot market set it apart from other commodity spot markets. These features include the following:

• the spot market for digital assets is largely made up of retail investors, who primarily engage in price speculation;




• speculative fervor around digital assets drove investors into debt, leading to price volatility; and




• the complexity of securing and transacting digital assets has resulted in platforms losing funds to hacking.

Mr. Behnam highlighted the need for additional resources to address issues related to digital assets and decentralized financial technologies. He said the CFTC is well placed to exercise oversight in this area because its flexible approach to “ensuring[ing] integrity and dynamism of the market” while “ensuring the protection of individual clients” allows it to evolve with the derivatives markets. In terms of the size of the digital asset market, he pointed out that 13% to 14 % of Americans invest in digital assets, and that “the largest digital asset exchange in the United States reported an increase from 2.1 million to 7.4 million monthly users” in 2021.

Moreover, in a letter At the Committee, Behnam reiterated the difficulties that could arise when regulating the digital asset market, highlighting the differences between digital assets and traditional products and how this could affect future regulation.

Behnam asserted the need for major coordinated federal action, whether working with the SEC or contributing to the President’s Stablecoin Task Force project, to properly regulate the digital asset market. He anticipated that subsequent changes in this area would extend beyond the scope of the Trade in Goods Act.

Remark

The SEC’s approach to utility token regulation is fundamentally flawed in that it effectively prohibits a product that has potentially huge economic value. See Cabinet Commentary: The Treatment of Utility Tokens by Securities Law. While the CFTC doesn’t seem like the obvious regulator of these products (as opposed to the SEC), Congress may decide it’s better to empower a regulator to oversee digital assets than one that seems inclined to ban number of them.

Primary sources

1. CFTC Public Statement: Chairman Rostin Behnam’s Testimony Regarding “Digital Asset Review: Risks, Regulation, and Innovation”




2. CFTC Chairman Rostin Behnam: Letter to the U.S. Senate Committee on Agriculture, Nutrition, and Forestry – “Digital Asset Review: Risks, Regulation, and Innovation”

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