WASHINGTON -- U.S. Sen. John Boozman says the need for federal oversight of cryptocurrencies and similar commodities is evident following this month's collapse of exchange FTX.
Boozman, R-Ark., and other senators shared concerns about the collapse's impact Thursday during a Senate Agriculture, Nutrition and Forestry hearing. FTX was the world's third-largest cryptocurrency exchange before it and more than 130 affiliated companies filed for Chapter 11 bankruptcy on Nov. 11. The filing came with billions of dollars in debt and an unclear fate regarding FTX's assets.
Boozman, of Rogers, serves as the top Republican on the Senate Agriculture Committee, which handles matters related to commodity markets, including crypto and other digital commodities.
"If there are exchanges where commodities are traded -- be it wheat, oil or Bitcoin -- then they must be regulated. It's simply that simple," Boozman said in his opening remarks. "The choice not to regulate leaves consumers at the mercy of those who prey upon them."
The U.S. Commodity Futures Trading Commission has limited authority to regulate crypto. The Securities and Exchange Commission can investigate platforms and take action regarding poor cybersecurity.
CFTC Chairman Rostin Behnam told committee members his commission can act with a referral or whistleblower and in situations involving fraud. He stressed the "patchwork of federal and state-based regulations" is not enough to protect consumers.
"Limited enforcement authority is no substitute for comprehensive regulation in which trading platforms, dealers, custodians and other critical infrastructure participants are required to be registered and subject to direct oversight by a regulator such as the CFTC," Behnam stated. "By the time the CFTC is able to exercise its fraud and manipulation authority, it's already too late for defrauded customers."
Boozman said the lack of regulatory authority leads to exchanges registering outside the United States.
"When these offshore entities fail, U.S. consumers still get hurt, but U.S. regulators can only watch from afar," he said.
Lawmakers mentioned one FTX-related exchange -- LedgerX -- as an exception among the affiliates. LedgerX is registered with the CFTC and is not a debtor in Chapter 11 cases. FTX CEO John Ray said it and similarly regulated subsidiaries have "solvent balance sheets, responsible management and valuable franchises."
Behnam told legislators that the CFTC has been working with LedgerX and its custodians to identify assets.
"Imagine that scenario with FTX U.S.," he said. "If we had a daily lens into the location of customer money and customer property, you can imagine -- given what we've learned about what's happened with FTX -- we could have certainly prohibited many of the actions that we're hearing about."
Boozman and Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., introduced a bill in August granting the CFTC with regulatory authority over crypto and other commodities.
The Digital Commodities Consumer Protection Act would require all platforms to register with the commission. Brokers, dealers and trading facilities would have to disclose conflicts of interest and maintain financial resources. The legislation additionally prohibits abusive trading practices and insufficient cybersecurity efforts.
According to Boozman, his office participated in "at least" 240 meetings with financial and other stakeholders to discuss the legislation.
"The bill is a good-faith effort to establish a constructive regulatory framework that provides the CFTC with the resources and authority necessary to protect consumers and retail investors while promoting industry innovation in digital commodity spot or cash markets," he said Thursday.
Stabenow said FTX's collapse shows the need for government regulations. She noted that the bill would not make the CFTC the primary regulatory authority as crypto assets "can be used in many different ways."
"The risks of trading crypto have come into sharp focus in the past few weeks, but we have known about them for years," the Michigan Democrat added.
Benham recognized the legislation could have prevented the actions preceding FTX's collapse. He said senators should consider strengthening language regarding financial information disclosures and conflicts of interest.
"Certainly, given the circumstances of the past few weeks, I think we should take a pause and look at the bill and make sure there are no gaps or no holes," he told the committee. "We're going to learn more information about FTX in the coming weeks, and we will certainly take that information and share it with the committee."
Congress is expected to hold multiple hearings on FTX's collapse as bankruptcy proceedings continue. The House of Representatives Financial Services Committee will review the matter on Dec. 13. Rep. French Hill, R-Little Rock, serves on the committee's Republican leadership team.