Key players in the commodity futures industry appeared before Congress on Thursday to protest a proposal by cryptocurrency exchange FTX to allow customers to buy leveraged crypto derivatives 24/7, with the head of CME Group arguing that allowing such a move would be “disastrous “ could be the US economy and small investors.
The FTX proposal requires the Commodity Futures Trading Commission to change its registry so it can lend its clients money to trade Bitcoin BTCUSD, -0.12% and Ether ETHUSD, -6.05% futures 24 hours a day, 365 days to buy a year.
“The risks associated with these products could be catastrophic, not just for [cryptocurrencies], but for other commodities to which the model could be applied if approved, CME Group chairman and chief executive Terrence Duffy told members of the House Agriculture Committee, which oversees the CFTC. The CME CME, -3.09%, is the world’s largest futures exchange.
Also on the panel and opposing the FTX proposal was Christopher Edmonds, Chief Development Officer at Intercontinental Exchange Inc. ICE, -0.85%,
parent company of the New York Stock Exchange, and Walt Lukken, President and CEO of the Futures Industry Association and past Acting Chairman of the CFTC.
Christopher Perkins, President of CoinFund Management, appeared in support of FTX’s proposal.
Both Democratic and Republican officials pointed to recent volatility in cryptocurrency markets as a reason for skepticism about the FTX proposal.
Also read: Yellen: The turmoil in the cryptocurrency market is not a “real threat” to US financial stability
“I want to think ahead. I want to be a modern guy and try to understand crypto, but I’m really struggling with it,” said Republican Rep. Rick Crawford of Arkansas, who argued that Congress and the CFTC are primarily concerned with protecting farmers and other commercial users Entities should use the derivatives to hedge real economic activities.
“You plant wheat, you are dull wheat, there’s a fundamental basis to that,” he added. “I’m really struggling to understand seriously what the underlying security of bitcoin and other cryptocurrencies is.”
CME’s Duffy said Crawford was right to be concerned about the lack of intrinsic value in cryptocurrencies. “If corn goes down to a certain price, you have an ear of corn,” he said. “You have nothing if you have cryptocurrency and it goes to zero.”
Sam Bankman Fried, FTX founder and CEO, defended his company’s proposal to offer 24/7 margined crypto futures, arguing that the FTX plan would reduce risk in the system by requiring traders to sell their to pre-fund collateral and allow exchanges to automatically trade-liquidate positions, a provision he said would allow US derivatives markets to avoid trade cancellations, as the London Metal Exchange was forced to do in March.
“We believe [this proposal] would bring competition and innovation. It would bring liquidity to the US market and options for US customers,” he said. “It would bring competition to the US futures markets, where almost all volume is traded by just two exchanges.”
CoinFund’s Perkins argued that if accepted, the FTX proposal would “enable entrepreneurs to innovate and build cryptocurrency businesses within U.S. borders,” while now much of that innovation is happening overseas.
Dennis Kelleher, president and CEO of Better Markets, a nonpartisan market reform group, said in a comment letter submitted to the CFTC that while the FTX motion supports reforms that would create greater competition in commodity derivatives markets, the FTX motion raises concerns with regard to investor protection.
One cause for concern, Kelleher said, is FTX’s ability to automatically liquidate a client’s bitcoin futures positions if the market turns against them. While such policies could reduce risk to FTX and the broader market, these protections could “directly weigh on FTX’s customers.”
The automatic liquidation provision “could result in massive customer losses not significantly different from the losses suffered by retail customers on risky trades in 2021, including the GameStop GME, +7.79% trading frenzy,” Kelleher wrote, adding that FTX should be required to provide an analysis of how such a system would have impacted customers over the past few weeks, when cryptocurrency prices have been extremely volatile.
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