Raphael Warnock Calls For Crypto Market Regulations Citing FTX Collapse And Industry Consolidation

5 months ago

During a Senate Agriculture Committee hearing in July, Sen. Raphael Warnock (D-GA) spoke about regulation among cryptocurrency brokerages and exchanges.

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00:00Senator Warnock. Thank you, Chair Bozeman. Last Congress, Mr. Benham, last Congress when we were

00:06considering legislation that would provide the CFTC with the authority to regulate the spot

00:12market for digital commodities, you testified before this committee that the CFTC would need

00:17$120 million to properly staff up and prepare to supervise and regulate an entirely new industry.

00:24Do you still agree with your previous testimony, yes or no? Yes. The president's nominee to replace

00:29you, Mr. Brian Kenton's, could not confirm that number, but he did indicate in his testimony

00:34before this committee that more funds would be needed to implement the new authorities for the

00:39CFTC. Chair Benham, to your knowledge, has the Trump administration requested additional funding

00:45or additional staffing at our financial regulators to properly support additional regulatory

00:51responsibilities? No, it has not. So in six months, we have seen hiring freezes. We've seen staff

00:58reductions at the SEC, at the FDIC, at the OCC, all while refusing to nominate Democratic commissioners

01:09for historically bipartisan boards like the CFTC. Chair Benham, last year you were consistent that new

01:16funding would be needed for new staff, staff training and technological upgrades. So let's say a new

01:22crypto market structure bill that gives the CFTC new regulatory responsibilities is signed into the law.

01:29Could you share what are the risks associated with Congress failing to provide the CFTC

01:34with sufficient resources to properly supervise the digital asset industry?

01:39Thanks, Senator. In short, the answer is without the tools which become the resources behind the

01:47authorization for the program, the program becomes essentially useless. There's obviously a lot of talented

01:54staff at the CFTC, and I know they will work hard to implement the program, but we absolutely need resources

01:59at the agency to properly implement the program. Absolutely. I agree with that. And clearly, investors of all sizes,

02:06if we're going to make create a situation where capital markets can thrive, investors of all sizes, we need to have

02:13confidence that regulators are upholding the law, protecting consumers, that they have the capacity

02:18to do so. And so I look forward to working with my Republican colleagues to ensure that the CFTC is properly

02:27resourced. Regulatory certainty for the digital asset industry limits unnecessary risk, and it can help

02:36prevent the collapse of another cryptocurrency exchange firm. One thinks of FTX a few years ago. But I'm

02:44concerned that today, a handful of centralized firms have come to control multiple stages of the trading

02:53process. And all of that concentrates the risk, creates conflicts of interest in my mind. Mr. Massett, good to see you

03:05again. Is it routine for centralized exchanges to also serve as the custodian of customer funds and be

03:15responsible for listing, trading, clearing, and settling trades? Is this typically what we see?

03:23Yes, it is. And they even have more vertical integration than that. And of course, most trading is through those

03:31intermediaries, not on-chain. And what sorts of risks and inefficiencies or conflicts of interest

03:37may exist when exchanges are vertically integrated like this? There's all sorts of conflicts that can

03:44arise. For example, today, these trading platforms can do their own proprietary trading, so they can

03:50front-run customer orders or misuse customer information. They can have interest in the tokens that

03:56they list. That's not prohibited either. They can have other business ventures. And with respect to

04:01custody, they can be charging separate fees and may not, you know, adhere to good custody rules. And even

04:09the Clarity Act doesn't even require these platforms to hold the Bitcoin that they say their customers own.

04:18It doesn't require that.

04:19So this vertical integration creating additional unnecessary risks for customers, we saw this with

04:28FTX, with customers being unable to access their money months after the collapse of FTX. And I'm

04:37especially concerned that customers may not be getting the best prices on trades, that they may be paying

04:42higher fees and more consolidation will lead to less competition in the market and create more systemic

04:49risk like we saw in the case of FTX. Mr. Massett, what provisions do you see in a Senate bill to limit the

04:58risk that large centralized firms may have on the digital asset market? Sure. We need a comprehensive

05:06regulatory framework that prohibits these kinds of conflicts of interest. So no proprietary trading,

05:12no interest in the tokens they list, no other business ventures that can pose conflicts. We need

05:18to impose best execution requirements on brokers. We need to impose strict custody rules and, you know,

05:25either consider separate custodians or at least have rules that ensure that they really are holding the

05:32Bitcoin that they claim or the other assets that they claim their customers own and they're segregating

05:37it properly and they're not charging fees for that. Thank you so very much for your testimony.

05:44I look forward to working with my Republican colleagues to create a Senate bill that contains strong

05:53conflict of interest language so we can safeguard the financial system

05:58and protect consumers. Thank you very much, Mr. Chairman.

Raphael Warnock Calls For Crypto Market Regulations Citing FTX Collapse And Industry Consolidation

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