The hearing was always going to be bloody.
In opening statements, chairman David Scott called FTX’s new proposed clearing model an “emerging and worrisome threat.”
The proposed model would allow the removal of future commission merchants from its derivatives trading. FCMs are a critical but costly link in the current chain of risk mitigation in futures trading.
FTX’s proposal is, fundamentally, bringing that risk in-house by real-time settling and liquidation as well as an internal insurance fund.
It’s a big potential change — and one that has drawn a great deal of scrutiny.
When Scott called the House Agriculture Committee to hold today’s hearing at the end of March, it was already clear that FTX’s proposal was going to face a fight. This is despite how unusual it is for a single proposal before a regulator like the Commodity Futures Trading Commission to face its own congressional hearing.
The crypto spot markets have also been facing significant turbulence in the past few days, much of which is tied to the collapse of the two primary tokens of the Terra ecosystem: TerraUSD (UST) and Luna.
“We all know that cryptocurrency is a volatile market. We’ve witnessed what’s been happening to them over the past few days,” Scott asked the witnesses. “How is this proposal not making an already risky market much riskier for the customer?”
CME Group CEO Terence Duffy lambasted what he called FTX’s “false claims of innovation that are little more than cost-cutting regimes.”
“The FTX proposal is not innovation,” Duffy concluded.
FTX’s primary mission during the hearing seemed to be to keep cool and defer to the CFTC. In advance of his testimony, FTX CEO Sam Bankman-Fried told The Block that his main goal was “to respect the CFTC and its process and be helpful however we can.”
This hearing “will give us the opportunity to explain first of all why we think the opportunities will be an important advancement,” FTX.US’s CEO Brett Harrison told The Block. “But also to explain the applications of the proposal that are not novel.”
Among the committee members, Scott was an outlier in the strength of his opposition to FTX’s proposal, but overall, members appeared to express concern.
Of particular note was whether the current proposal could open up disintermediation to more traditional markets. Scott said:
“While the proposed clearing model by FTX is limited in a select few cryptocurrency contracts, we must consider the potential for this model to expand into other derivatives markets.”
“We do not have any plans to launch non-digital asset contracts any time soon,” Bankman-Fried said.
Rep. Austin Scott (R-GA) said that his constituents did not depend on stability in the price of digital assets, but they do depend on stable energy markets. He asked, “Does this disrupt markets as a whole?”
“I completely acknowledge that this product would require further analysis to launch trading in other products,” answered Bankman-Fried.
Part of the dynamic on display was competitive in nature. Indeed, the most vocal critics of FTX’s proposal are heavily vested in the continued role of FCMs, which the proposal does away with — CME is among the biggest derivatives exchanges in the world.
Binance.US counsel Norman Reed wrote commentary opposed to FTX’s proposal, saying: “We do not believe FTX has adequately supported its claims or demonstrated that it can provide customers direct access to its margined products on a disintermediated basis without compromising customer protection and adding systemic risk.”
The CFTC, for its part, has been quietly moving the proposal forward, as it has been more broadly pushing for greater authority over crypto as well as a much-expanded budget to account for its work in this arena.
Disclaimer: The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.
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