In light of the recent demise of the crypto exchange FTX, an official from the US Commodity Futures Trading Commission (CFTC) is urging legislators to grant regulators the power to examine the financial records of any firm seeking to acquire a significant interest in any registered market participant.
During a speech at Duke University on Jan. 21, CFTC Commissioner Kristin Johnson proposed several legislative changes that would give the regulator more authority to conduct due diligence on businesses, including crypto firms, seeking to acquire CFTC-regulated entities.
Closing the gap in crypto spot market oversight
Johnson cited the example of derivatives exchange LedgerX, which became a subsidiary of FTX in August 2021 and is currently entangled in the collapse of the crypto exchange. She stated that the regulator could not conduct due diligence on whichever company acquires the business and is merely a bystander during the exchange’s sale process.
In addition, Johnson proposed granting the CFTC the authority to investigate any business wishing to acquire 10% or more of a CFTC-registered exchange or clearinghouse.
Preventing future crises
The commissioner also advocated for the commodities regulator’s authority to be expanded to improve customer protection, help deter liquidity crises, and reduce conflicts of interest. One of the issues she raised was the co-mingling of customer funds, which was one of the more egregious charges against FTX after its demise. Johnson advocates for legislation that formalizes crypto firms’ obligation to segregate customer funds.
Johnson also discussed risk management procedures and the contagion that has spread following major crypto company failures such as FTX. She suggested that existing “frameworks such as antitrust law and regulation may prove to be too limited in scope” in markets that are becoming increasingly diverse and advocated for “tailored and effective governance and risk management controls.”
Johnson’s comments reflect the mounting frustration among CFTC officials recently as they have pushed for more power.
In December, CFTC Chairman Rostin Behnam told lawmakers that his agency lacked the authority to supervise the Bahamas-based FTX adequately. Behnam and Johnson have used the instance of FTX to demand increased authority for their agency to monitor the crypto industry, arguing that doing so could prevent the next FTX from occurring.