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We need to talk about the CFTC

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You may have missed it after Sam Bankman-Fried’s Bahamas perp walk and a brace of brutal indictments by the SEC and the US Department of Justice, but the Commodity Futures Trading Commission also piled on late on Tuesday.

Here are the CFTC’s charges of “fraud and material misrepresentations” against SBF, the FTX exchange and his trading firm Alameda.

“Digital commodity asset markets continue to present risks for investors due to the lack of basic protections,” said CFTC Chairman Rostin Behnam. “The CFTC continues to be fully committed to using all available enforcement tools and authorities to protect investors and root out those who seek to profit through fraud and misappropriation.”

We laughed hollowly at this, and not about a few new details in the CFTC charges, or because of the sheer magnitude of the legal shit that has rained on SBF’s head in recent days.

The truth is that the CFTC itself is by a mile the most compromised regulatory agency when it comes to crypto in general, and FTX specifically. That it is now joining the possé to string SBF up shouldn’t obscure the pernicious role that the CFTC has played when it comes to “regulating” “digital” “assets”.

Yes, the CFTC might not have been able to prevent the FTX debacle. Frauds happen. But the agency has consistently acted as a friendly champion of a fraud-riddled dumpster fire it purportedly wants to supervise. As Dennis Kelleher of non-profit investor advocacy group Better Markets put it in a recent report:

. . . Rather than aggressively regulating crypto and skeptically scrutinizing its claims, the CFTC has spent most of its time cheerleading the industry and trying to expand its jurisdiction rather than worrying about investor, customer, and markets protections.

First of all, the very existence of the CFTC is a blight on the entire US regulatory landscape. It is an aberration that was only born because back in the 1970s, the SEC was snooty about regulating pork belly futures. It has since been sustained in perverse life by the pork-filled nature of US politics.

Because of its roots as primarily a regulator of agricultural futures, the CFTC reports to the Senate Agriculture Committee, whose members love the lobbying money that drips upon them. The US is the only major country in the world with such a balkanised financial regulatory system, which has persisted despite the financial crisis showing the danger of regulatory arbitrage. It is an ongoing danger to America’s much-vaunted capital markets, and thus the global financial system.

That crypto should seek to exploit the potential for regulatory arbitrage is understandable. But the willingness of the CFTC to debase itself as a willing accomplice in the process has been eye-catching. Here’s Kelleher of Better Markets again:

The CFTC is the smallest and least funded financial regulator. Crypto believed it would be the easiest to capture, dominate, manipulate, and keep defanged. Confirming that view, the CFTC has been only too happy to join the industry in what is little more than a transparent jurisdiction-expanding power grab. The shamelessness of this reached its apogee when the CFTC’s Chairman not only de facto endorsed pending legislation that could have crippled the SEC’s ability to police the capital markets (the Lummis/Gillibrand bill), but also claimed that Bitcoin would double in price if his agency was its regulator.

The CFTC’s dalliance with crypto started back in 2015, when the agency determined that virtual currencies, such as bitcoin, met the definition of “commodity” – and therefore conveniently fell under the CFTC’s auspices. The relationship blossomed under Christopher Giancarlo, who became a commissioner in 2014 and led the agency in 2017-19.* He championed the crypto industry in DC and blessed the introduction of the first bitcoin futures in 2017, despite the utterly unregulated nature of the actual underlying spot bitcoin market.

This has paid off in lucrative advisory work and directorships in the spendthrift crypto industry. Even today, his website revels in the “CryptoDad” moniker bestowed upon him by crypto bros, which is also the title of his book on the “fight for the future of money”. It’s as if former SEC chair Chris Cox embraced the nickname “CDO daddy” while in office (which, to be clear, didn’t happen).

Oddly enough, Giancarlo makes no mention on his website of having been hired by SBF to engineer an introduction to SEC chair (and his predecessor at the CFTC) Gary Gensler. Here’s what Giancarlo told the Daily Mail about this recently:

‘My role in this was to make the formal introduction, in a formal fashion, through the front door, fully disclosed.’

He added: ‘I cannot comment on the nature of the firm’s relationship with this client other than to say currently FTX is not a client of the firm [Giancarlo is now senior counsel at the law firm Willkie Farr & Gallagher]’

But Giancarlo is far from the only former CFTC official with links to Sam Bankman-Fried and the crypto industry in general.

Former CFTC lawyer and Gensler legal counsel Ryne Miller is currently general counsel at FTX. Former CFTC chair Heath Tarbert, who built on Giancarlo’s crypto work, is now chief legal officer at Citadel Securities, where he has lobbied for the CFTC to be the main crypto regulator. More recently, former CFTC commissioner Brian Quintenz was hired by Andreessen Horowitz to lead its crypto lobbying efforts.

Earlier this autumn, former CFTC commissioner Jill Sommers was appointed to the board of LedgerX, FTX’s US derivatives business. At the time she said:

I am honored to be joining the FTX US Derivatives Board of Directors to advance the mission of reshaping market structure in the United States. The company has been at the forefront of bridging the gap between traditional and digital assets while staying true to its founding principles of transparency and leading the charge toward becoming the most regulated digital asset exchange in the world.

But the most notable in the context of FTX is Mark Wetjen. The former CFTC commissioner (and acting chair) was in November 2021 hired by FTX to be its head of policy and regulatory strategy. We’re surprised he has seemingly flown under the radar even as people fulminate about the SEC’s Gensler, who has actually been one of the tougher regulators on crypto.

Wetjen seems to have played an instrumental role in some of the most retrospectively tragicomic chapters of the FTX saga — the exchange’s quest to get the CFTC to bless its risk management approach for the wider derivatives markets, while also securing the CFTC legislative endorsement as the main crypto regulator.

From the New York Times.

Behind the scenes, Mr. Bankman-Fried also held discussions with other regulators, in particular the C.F.T.C., which regulates derivatives trading. FTX officials had numerous meetings with staff of the commission, mostly to talk about FTX’s application for a C.F.T.C. license. Larger issues, including how cryptocurrencies should be regulated, also came up, three people briefed on the discussions said.

Rostin Behnam, the chairman of the C.F.T.C., and Mr. Bankman-Fried agreed that the C.F.T.C., rather than the S.E.C., should have primary oversight of much of the crypto markets, the people said. That was the broad thrust of a cryptocurrency bill being drafted by Senator Debbie Stabenow, Democrat of Michigan, who was Mr. Behnam’s former employer.

Staff of the C.F.T.C. provided “technical” advice to Ms. Stabenow’s staff working on the bill, called the Digital Commodities Consumer Protection Act, said Steven Adamske, a commission spokesman.

FTX representatives, including Mark Wetjen, its head of government affairs and a former C.F.T.C. commissioner, also gave their input.

Mr. Adamske said that the technical assistance and legal analysis his organization provided to Congress “came solely from the C.F.T.C.”

Matt Williams, a spokesman for Ms. Stabenow, said no single stakeholder, including FTX, had “significant input” into the bill. “In fact, none of the substantial changes FTX requested were included in the legislation.”

Mr. Bankman-Fried gave $20,800 to the Stabenow Victory Fund.

Handing the CFTC supreme crypto power is not the only thing that looks to have united the agency, its current chair Behnam, and SBF.

FTX was also seeking the CFTC’s approval to use its automatic 24-hours a day margining system in regulated bitcoin futures, potentially opening up other corners to the derivatives market to the approach. Here’s a good FT explainer on what FTX wanted to do.

Despite many in the “TradFi” industry rubbishing the idea as dangerous, the CFTC seemed receptive, after Bankman-Fried estimated he spent “tens of thousands of hours talking with the commission about this proposal”, according to the Washington Post:

Some federal regulators have warned that the idea could harm consumers and destabilize markets, but CFTC officials spent months in discussions with FTX as it developed the proposal and, in public comments, Behnam offered positive remarks about the idea.

Behnam repeatedly said that his agency had made no decision, but behind the scenes, according to Terry Duffy, chief executive of the Chicago Mercantile Exchange, agency officials wanted to approve the proposal. They staunchly defended it in conversation with him this spring — so much so that Duffy, an opponent, told them he would sue the agency over it, he said. In his view, all of Washington seemed to be entranced by Bankman-Fried’s promises of innovation.

“I’ve been [going to] Congress for 25 years — I’ve never seen a Washington, D.C., like I saw that time, from the regulators to the members of Congress, singing hymns that I’d never heard before,” Duffy recently recalled of his May visit to Washington on the On the Tape podcast. “No one else was calling BS on these clowns but me.”

… At least through October, Behnam and the CFTC remained publicly undecided on the FTX measure. But in remarks to interested groups, Behnam repeatedly touted the proposal’s potential, saying it could be an important technical innovation akin to the shift in the ’90s from the trading floor to computerized systems.

“This is a unique intersection of the crypto space and traditional finance,” Behnam said at a Georgetown University conference last month, according to news accounts.

In an ideal world, the CFTC would have blessed FTX’s auto liquidation risk management system immediately before the “exchange” collapsed (ie before it could do any actual damage) and then spontaneously combusted with abject humiliation.

This would allow the SEC to pick up all its responsibilities and hopefully bring some sorely-needed coherence to the US financial regulatory architecture, and have meant that the whole FTX debacle might weirdly have had a net positive impact.

Instead, we are left to see CFTC’s Behnam and senators Stabenow and Lummis using FTX’s collapse to argue they were right all along. We just need to give the CFTC more powers to regulate an industry that they have cozied up to for almost a decade! What could go wrong?

Ryne Miller responded to FTAV’s request for comment by arguing that it is actually a benefit of the US financial system that people can drift between private and public jobs, which leads to “more mature market participants”. Heath Tarbert and Jill Sommers declined to comment. Giancarlo, Behnam, and the CFTC didn’t respond to requests for comment. Wetjen couldn’t be reached for comment but we’ll update immediately if we hear anything from him.

It’s appropriate that we give the final word to the crypto clown prince himself, the JPEG Morgan that our era deserves.

As SBF messaged a journalist last month: “Fuck regulators . . . they make everything worse . . . they don’t protect customers at all”. However, the next day he stressed that the were some regulators that had “deeply impressed me with their knowledge and thoughtfulness”.

Such as the CFTC.

*Corrected to say that that the CFTC’s determination that virtual currencies were commodities happened in 2015, when Giancarlo was a commissioner of the agency, rather than chair.

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