Crypto, Wall Street battle for influence at Washington agency

Current exchanges are taking advantage of deep ties in Washington to defend themselves.

“Our relationships are deep in many, many layers,” said John Deters, Cboe’s head of corporate strategy, the operator of the largest U.S. stock exchange.

The battle between the two lobby armies is Washington’s latest attack between titans of new and old finance as officials try to figure out how to set rules for the digital currency industry. It is forcing regulators and legislators to choose side. Chair of Home Agriculture David Scott (D-Ga.), Which oversees the CFTC and represents the state where the owner of the NYSE Intercontinental Exchange is based, called the FTX plan a “serious threat” to global derivatives markets in which trillions of dollars are traded. annually.

“We are amazed at the amount of stress, attention, that has been achieved,” Bankman-Fried said in an interview. “Some people may be approaching this from an angle of, you know, what’s important to your business.”

The fight is putting a lot of focus on the CFTC, the smaller sister agency of the Securities and Exchange Commission. The CFTC oversees futures markets and other financial derivatives markets that allow traders to bet on the prices of bitcoins and commodities such as oil. FTX is among the crypto-companies that want the CFTC to play a major role in overseeing the industry, as SEC President Gary Gensler threatens to crack down on digital asset trading. The company has become a top priority, hiring several former agency officials, including former CFTC interim president Mark Wetjen, to forge relationships in Washington.

With FTX spending millions on advertising campaigns and advocacy efforts, CFTC officials are beginning to feel the heat. CFTC Commissioner Caroline Pham, Republican, in an April Twitter post shared a photo of her with Bankman-Fried and Wetjen, congratulating the cryptographic executive’s hair and thanking the couple for meeting her. The tweet has since been removed.

CFTC President Rostin Behnam has urged Congress to have more authority to oversee digital asset markets. While industry leaders and key members of Congress have backed those pleas, the fight over FTX’s trading plan is forcing the agency to balance the interests of financial institutions with history and cryptocurrency newcomers.

The agency is scheduled to hold a roundtable on Wednesday to give players on both sides of the fight a chance to present their case.

“This is a proposal that is fraught with danger,” said CME Group CEO Terry Duffy, who heads one of the world’s largest stock exchange traders, during a hearing in the May House Agriculture Committee. He added that the market model proposed by FTX could alter the trading systems that cover the risks around “every commodity known to man”.

Risk and volatility

In essence, FTX’s proposal would allow retail investors on its platform to bet on derivatives linked to cryptocurrency prices using the margin, thus giving them more opportunities to make larger transactions and potentially get higher returns.

Margin trading refers to when investors borrow money from a broker or an exchange to buy an asset, in this case a cryptocurrency contract. The loan requires the buyer to provide a certain amount of collateral that is adjusted every few hours and at the close of trading to take into account how changes in the market affect the risk of your investment.

But while this strategy may increase returns (traders would buy more with less), it also poses a considerable risk. If markets change and investors are unable to meet their margin requirement, they are forced to sell, transfer more assets to their account, or lose what they posted as collateral. Those losses could cascade quickly given the notorious volatility of cryptography.

In financial derivatives markets, these functions are often managed by CFTC-regulated brokers who are often owned by banks or other financial institutions. While these entities can slow down a transaction – collecting incremental fees in the process – they also absorb some of the damage when markets break down.

The FTX plan would eliminate those intermediaries from the equation and automate margin setting approximately every 30 seconds, automatically liquidating an investor’s position once it falls below a margin threshold. FTX executives have characterized their plan as a game changer, applying the supposed immediacy of cryptography to the plumbing of the 20th century financial market.

Proponents, including investment firms (and FTX sponsors) such as SoftBank and Sequoia Capital, argue that re-establishing the margin thousands of times a day and eliminating brokers from the mix would make derivatives markets more efficient and eliminate market risks. which arise in negotiations during the night or weekend. In addition, FTX has promised to provide $ 250 million to save losses in the event of a 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 the FTX plan, if approved, would “consolidate US leadership in the digital asset market.”

“A paradigm shift”

With prices for digital currencies like bitcoin falling more than 50 percent from their peak last fall, traditional stock exchanges and clearing houses have hit FTX with claims that its margin trading proposal would expose investors and commodity markets to huge new risks.

Cboe President, President and CEO Edward Tilly said in a letter to the CFTC that it would represent “a massive expansion of what has so far been a niche market.” Tilly argued that the agency should consider whether “a paradigm shift of this magnitude would benefit from a rigorous rule-making process” rather than an exception for an individual cryptographic exchange.

Intercontinental Exchange, which owns derivative trading services and the NYSE, warned that FTX lacked the financial resources to adequately cover its potential losses in the event of a slowdown.

Agriculture and commodity trade associations have also raised red flags over the possible disruption of market instruments used to cover crop and physical product losses, arguing that the model implemented by FTX would inevitably be adopted by major institutions. Bankman-Fried said his company has no plans to extend its margin offset model to traditional derivatives markets, such as soybean futures or energy contracts.

FTX is also facing rejection from consumer watchdogs and even other cryptographic industry executives, who are questioning how FTX would reduce operations when investors are unable to meet their margin requirements.

“Just because something is written in code doesn’t mean it’s perfect,” said Raghu Yarlagadda, CEO of the cryptocurrency trading platform FalconX, adding that the model should be tested for sudden declines such as the one that shook the crypto markets during the last years. two weeks.

FTX will need CFTC approval to proceed. Behnam, who has run the agency since January 2021, said he and his staff had worked with FTX on its “innovative proposal,” but that it should undergo a serious overhaul. The CFTC invited public comment in addition to the roundtable held this week.

“I have to tell you, Mr Bankman-Fried, that I am fascinated by this. I think it is a very interesting idea,” she said. Sean Patrick Maloney (DN.Y.), who claims to be “agnostic” on the plan, said in the House hearing on the issue. “I’m sure you’ve moved everyone. And they hate, they hate this idea.”

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