CFTC Chair Behnam Testifies On Regulation Of Digital Assets

 In testimony before the U.S. Senate Committee on Agriculture, Nutrition and Forestry (the "Committee"), CFTC Chair Rostin Behnam reviewed the agency's regulatory oversight of digital assets.

Mr. Behnam pointed to "regulatory gaps presented by innovations in the financial markets" and said there is not a "viable substitute for a functional regulatory oversight regime for the cash digital asset market." He described the CFTC's fraud and enforcement authority powers for addressing misconduct in the regulation of cash markets through (i) oversight and surveillance programs, and (ii) other means, including whistleblower tips or referrals. He stated, however, that no one regulator has "sufficient visibility" in this area to be able to police conflicts of interest and deceptive trading practices.

Mr. Behnam said that while the CFTC's main role is to regulate the commodity derivatives market, there are some characteristics of the digital asset commodity cash market that distinguish it from other cash commodity markets. These characteristics include the following:

• the digital asset cash market is largely composed of retail investors, who are mainly engaged in price speculation;
• speculative fervor around digital assets has led investors to take on a lot of leverage, leading to price volatility; and
• complexities around securing and transacting in digital assets have resulted in platforms losing funds to hacks.

Mr. Behnam emphasized the need for additional resources to address issues surrounding digital assets and decentralized financial technologies. He stated that the CFTC is properly positioned to conduct oversight in this area, as its flexible approach to "ensur[ing] market integrity and vibrancy" while also "ensuring individual customer protections" allows it to evolve along with the derivatives markets. With respect to the size of the digital asset market, he highlighted that 13% to 14% of Americans are invested in digital assets, and that "the largest U.S. digital asset exchange reported an increase from 2.1 million to 7.4 million monthly users" in 2021.

Additionally, in a letter to the Committee, Mr. Behnam reiterated the difficulties that could arise while regulating the digital asset market, stressing the differences between digital assets and traditional commodities and how that could affect future regulation.

Mr. Behnam asserted the necessity of taking large coordinated federal measures, whether that includes working with the SEC or contributing to the President's Working Group Project on stablecoins, to properly regulate the digital asset commodity market. He anticipated that subsequent changes in this area will extend beyond the scope of the Commodity Exchange Act.

Commentary

The SEC's approach to the regulation of utility tokens is fundamentally flawed in that it effectively disallows a product that has potentially very significant economic value. See  Cabinet Commentary: The Securities Law Treatment of Utility Tokens. While the CFTC does not seem the obvious regulator of these products (as opposed to the SEC), perhaps Congress will decide that it is better to empower a regulator to oversee digital assets rather than one that seems inclined to outlaw many of them.

Primary Sources

1. CFTC Public Statement: Testimony of Chair Rostin Behnam regarding "Examining Digital Assets: Risks, Regulation, and Innovation"
2. CFTC Chair Rostin Behnam: Letter to the U.S. Senate Committee on Agriculture, Nutrition, and Forestry - "Examining Digital Assets: Risks, Regulation, and Innovation"

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