Incumbent exchanges are leveraging deep ties to Washington to fight back.
“Our relationship goes much, much deeper,” said John Deters, head of corporate strategy at Cboe, operator of the largest options exchange in the United States.
The battle between the two lobbying armies is Washington’s latest flare-up between the titans of new and old finance as officials try to figure out how to set rules for the digital currency industry. This forces regulators and legislators to choose sides. house agriculture chair David Scott (D-Ga.), who oversees the CFTC and represents the state where NYSE owner Intercontinental Exchange is based, called the FTX plan a “serious threat” to global derivatives markets where billions of dollars are exchanged each year.
“We’re surprised by the amount of tension — attention — he’s gotten,” Bankman-Fried said in an interview. “Some people may approach this from the angle of, you know, what’s important to their business.”
The fight puts the spotlight on the CFTC, the Securities and Exchange Commission’s smaller sister agency. The CFTC oversees the markets for futures and other financial derivatives that allow traders to bet on the prices of bitcoin and commodities like oil. FTX is among crypto firms that want the CFTC to play a strong role in overseeing the industry, as SEC Chairman Gary Gensler threatens to crack down on digital asset trading. The company has made it a high priority, hiring several former agency officials, including former CFTC acting chairman Mark Wetjen, to build relationships around Washington.
As FTX spends millions on ad campaigns and advocacy efforts, CFTC officials are starting to feel the heat. CFTC Commissioner Caroline Pham, Republican, in an April Twitter post shared a photo of herself with Bankman-Fried and Wetjen, complimenting the crypto executive’s hair and thanking the pair for meeting her. The tweet has since been deleted.
CFTC Chairman Rostin Behnam has pushed for Congress to get more authority to oversee digital asset markets. While industry executives and key members of Congress have backed these pleas, the fight against FTX’s business plan forces the agency to balance the interests of legendary financial institutions and crypto upstarts.
The agency is expected to host a roundtable on Wednesday to give players on both sides of the fight an opportunity to make their point.
“This is a proposal fraught with dangers,” CME Group CEO Terry Duffy, who heads one of the world’s largest derivatives exchanges, told a committee hearing. of May House Farming. He added that the market model proposed by FTX could disrupt trading systems that hedge risk around “every commodity known to man.”
Risk and Volatility
At its core, FTX’s proposal would allow retail investors on its platform to place bets on derivatives linked to crypto prices using margin, giving them more opportunities to make larger trades. and, potentially, to obtain higher yields.
Margin trading refers to when investors borrow money from a broker or exchange to buy an asset, in this case a crypto derivative contract. The loan requires the buyer to provide a certain amount of collateral which is adjusted every few hours and at the close of trading to reflect how changes in the market affect the risk of their investment.
But while this strategy can increase returns – traders would buy more with less – it also carries considerable risk. If the markets change and investors cannot cover their margin requirement, they are forced to sell, transfer more assets to their account, or lose whatever they have deposited as collateral. These losses could chain together quickly given the notorious volatility of crypto.
In financial derivatives markets, these functions are typically performed by CFTC-regulated brokers who are often owned by banks or other financial institutions. While these entities can slow down the speed of a transaction – collecting additional fees in the process – they also absorb some of the damage when the markets go haywire.
FTX’s plan would eliminate these middlemen from the equation and automate margin adjustment at about every 30 seconds, automatically liquidating an investor’s position once it falls below a margin threshold. FTX executives called their plan a game-changer, applying crypto’s supposed immediacy to the plumbing of the 20th century financial market.
Proponents — including investment firms (and FTX backers) like SoftBank and Sequoia Capital — say resetting margin thousands of times a day and removing brokers from the mix would make derivatives markets more efficient and would remove all the market risks that arise in overnight or weekend trading. Additionally, FTX promised to pay $250 million to cover losses in the event of a stock market crash.
Fortress Investment Group co-CEO Peter Briger said in a letter to the CFTC that the plan would also inject much-needed competition into derivatives markets that “have never been more concentrated.” He added that FTX’s plan, if approved, would “consolidate US leadership in the digital asset market.”
“A Paradigm Shift”
With the prices of digital currencies such as bitcoin down more than 50% since their peak last fall, derivatives exchanges and traditional clearinghouses have hammered FTX claiming that its margin trading proposal would expose investors and commodity markets to huge new risks.
Cboe Chairman, President and CEO Edward Tilly said in a letter to the CFTC that it would represent “a massive expansion of what has until now been a niche market.” Tilly 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 an individual crypto exchange.
Intercontinental Exchange, which owns derivatives trading services and the NYSE, warned that FTX lacked the financial resources to adequately cover its potential losses in the event of a downturn.
Agricultural and commodity trade associations have also flagged the potential disruption of market instruments used to hedge against crop and physical commodity losses, arguing that the model deployed by FTX would inevitably be adopted by mainstream institutions. . Bankman-Fried said his company has no plans to extend its margin netting model to traditional derivative markets such as soybean futures or energy contracts.
FTX is also facing backlash from consumer watchdogs and even other crypto industry executives, who are casting doubts on how FTX would terminate trades when investors cannot. meet their margin requirements.
“Just because something is written in code doesn’t mean it’s perfect,” said Raghu Yarlagadda, CEO of crypto trading platform FalconX, adding that the model needs to be stress tested for sudden downturns like the one that has rocked crypto markets for the past few years. two weeks.
FTX will need CFTC approval to move forward. Behnam, who has run the agency since January 2021, said he and his staff had worked with FTX on its “innovative proposal” but it had to stand up to serious scrutiny. The CFTC has invited public comment in addition to the roundtable it is hosting this week.
“I have to tell you, Mr. Bankman-Fried, that fascinates me. I think it’s a really interesting idea,” said Rep. Sean Patrick Maloney (DN.Y.), who claims to be “agnostic” on the plan, said during the House hearing on the matter. “You certainly stirred everyone. And they hate that – they hate that idea.