We need to talk about the CFTC

You may have missed it after Sam Bankman-Fried's Bahamas perp walk and a series of brutal indictments from the SEC and US Department of Justice, but the Commodity Futures Trading Commission also gained late Tuesday.

Here are the CFTC's charges of "fraud and material misrepresentations" against SBF, the FTX exchange and its trading firm Alameda.

“Digital commodity asset markets continue to pose risks to investors due to the lack of fundamental protections,” said CFTC Chairman Rostin Behnam. “The CFTC remains fully committed to using all available enforcement tools and authorities to protect investors and root out those who seek to profit through fraud and embezzlement.”

We laughed hollowly at that, and not at a few new details in the CFTC charges or at the sheer magnitude of the legal crap that has rained down on SBF in the last few days.

The truth is that the CFTC itself is by far the most compromised regulator when it comes to crypto in general and FTX in particular. Joining the posse to take SBF to task should not obscure the damaging role the CFTC has played in “regulating” “digital” “assets.”

Yes, the CFTC might not have been able to prevent the FTX debacle. Fraud happens. But the agency has consistently acted as a friendly advocate for a fraudulent dumpster fire it claims to be monitoring. As Dennis Kelleher of the nonprofit investor advocacy group Better Markets put it in a recent report:

. . . Instead of aggressively regulating crypto and skeptically examining its claims, the CFTC has spent most of its time cheering on the industry and trying to expand its jurisdiction rather than worrying about protecting investors, customers and markets.

First of all, the very existence of the CFTC is a disgrace to the entire US regulatory landscape. It's an aberration that was only born because the SEC was snooty about regulating pork belly futures in the 1970s. It has been perpetuated into a perverse life ever since by the pork-filled nature of US politics.

Because of its roots as the primary regulator of agricultural futures, the CFTC reports to the Senate Agriculture Committee, whose members love the lobbying money that trickles down to them. The United States is the only major country in the world with such a balkanized financial regulatory system, which persists despite the financial crisis that highlighted the danger of regulatory arbitrage. It is a continuing threat to America's vaunted capital markets and therefore to the global financial system.

That crypto should seek to exploit the potential for regulatory arbitrage is understandable. But the CFTC's willingness to debase itself as a willing accomplice in the process was striking. Here's Kelleher from Better Markets again:

The CFTC is the smallest and least funded financial regulator. Crypto believed that the easiest way would be to capture it, dominate it, manipulate it and keep it detoxified. The CFTC confirms this view and has been only too happy to join the industry in what amounts to little more than a transparent, jurisdiction-expanding power grab. The shamelessness reached its peak when the chairman of the CFTC not only de facto approved pending legislation that could have crippled the SEC's ability to oversee capital markets (the Lummis/Gillibrand law), but also claimed that Bitcoin would double in price if his agency was its regulator.

The CFTC's collaboration with crypto first blossomed under Christopher Giancarlo, who led the agency from 2014 to 2019. He championed the crypto industry in DC, declaring crypto a commodity and thus conveniently under the auspices of the CFTC, and blessing the launch of the first Bitcoin futures, despite the completely unregulated nature of the actual underlying spot Bitcoin market.

This has paid off in lucrative consulting work and board positions in the lavish crypto industry. Today, his website still revels in the nickname given to him by Crypto Bros, “CryptoDad,” which is also the title of his book about the “Fight for the Future of Money.” It's as if former SEC Chairman Chris Cox adopted the nickname "CDO Daddy" while he was in office (which, to be clear, didn't happen).

Curiously, Giancarlo does not mention on his website that he was hired by SBF to develop an introduction to SEC Chairman (and his predecessor at the CFTC) Gary Gensler. Here's what Giancarlo recently told the Daily Mail about it:

“My role in this was to fully disclose the formal introduction through the front door in a formal manner.”

He added: "I cannot comment on the nature of the firm's relationship with this client, other than to say that FTX is not currently a client of the firm [Giancarlo is now senior counsel at the law firm Willkie Farr & Gallagher]."

But Giancarlo is far from the only former CFTC official with ties to Sam Bankman-Fried and the crypto industry in general.

Former CFTC attorney and Gensler counsel Ryne Miller is currently general counsel at FTX. Former CFTC Chairman Heath Tarbert, who built on Giancarlo's crypto work, is now chief legal officer at Citadel Securities, where he pushed for the CFTC to become the primary crypto regulator. Recently, former CFTC Commissioner Brian Quintenz was hired by Andreessen Horowitz to lead his crypto lobbying efforts.

Earlier this fall, former CFTC Commissioner Jill Sommers was appointed to the board of LedgerX, FTX's US derivatives business. At that time she said:

I am honored to join the FTX US Derivatives Board of Directors to further the mission of transforming the market structure in the United States. The company has been a leader in bridging the gap between traditional and digital assets while remaining true to its founding principles of transparency and leading the way to becoming the most regulated digital asset exchange in the world.

But the most notable one related to FTX is Mark Wetjen. The former CFTC commissioner (and vice chair) was hired by FTX in November 2021 as head of policy and regulatory strategy. We're surprised that he seems to have flown under the radar even though people are railing against the SEC's Gensler, who was actually one of the toughest crypto regulators.

Wetjen appears to have played an instrumental role in some of the most retrospectively tragicomic chapters of the FTX saga - the exchange's quest to get the CFTC to bless its risk management approach to the broader derivatives markets, while simultaneously securing the CFTC's legislative support as its main crypto regulator.

From The New York Times.

Behind the scenes, Mr. Bankman-Fried also held discussions with other regulators, particularly the CFTC, which regulates derivatives trading. FTX officials have had numerous meetings with Commission staff, primarily to discuss FTX's application for a CFTC license. Bigger questions, including how cryptocurrencies should be regulated, also came up, three people briefed on the discussions said.

CFTC Chairman Rostin Behnam and Mr. Bankman-Fried agreed that the CFTC, not the SEC, should have primary oversight of much of the crypto markets, the people said. That was the general thrust of a cryptocurrency bill drafted by Senator Debbie Stabenow, Democrat of Michigan, Mr. Behnam's former employer.

CFTC staff provided “technical” advice to Ms. Stabenow’s staff working on the bill, called the Digital Commodities Consumer Protection Act, said Steven Adamske, a commission spokesman.

FTX representatives, including Mark Wetjen, their head of government affairs and former CFTC commissioner, also weighed in.

Mr. Adamske said that the technical assistance and legal analysis his organization provided to Congress “came exclusively from the CFTC.”

Matt Williams, a spokesman for Ms. Stabenow, said no single stakeholder, including FTX, had “significant influence” on the bill. “In fact, none of the significant changes requested by FTX have been incorporated into the legislation.”

Mr. Bankman-Fried donated $20,800 to the Stabenow Victory Fund.

Handing top crypto power to the CFTC isn't the only thing that appears to have united the agency, its current chairman Behnam, and SBF.

FTX also sought approval from the CFTC to use its automatic 24-hour margining system in regulated Bitcoin futures, which would potentially open up further corners of the derivatives market for the approach. Here is a good FT explanation of what FTX wanted to do.

Although many in the "TradFi" industry called the idea dangerous, the CFTC seemed receptive after Bankman-Fried estimated that he "spent tens of thousands of hours talking to the commission about this proposal," according to the Washington Post:

Some federal regulators have warned that the idea could harm consumers and destabilize markets, but CFTC officials spent months in discussions with FTX as they developed the proposal, and in public comments, Behnam spoke positively about the idea.

Behnam repeatedly said his agency had not made a decision, but behind the scenes, agency officials wanted to approve the proposal, according to Terry Duffy, chief executive of the Chicago Mercantile Exchange. They staunchly defended it in conversations with him this spring — so much so that Duffy, an opponent, told them he would sue the agency over it, he said. In his view, all of Washington seemed enchanted by Bankman-Fried's promise of innovation.

"I've been [going to] Congress for 25 years - I've never seen a Washington, DC like I saw back then, from the regulators to the members of Congress singing anthems I'd never heard before," Duffy recently recalled of his May visit to Washington on the On the Tape podcast. “No one called these clowns but me.”

… At least until October, Behnam and the CFTC remained publicly undecided on the FTX measure. But in remarks to interested groups, Behnam repeatedly pointed to the proposal's potential, saying it could be a major technological innovation, similar to the shift in the 1990s from trading floors to computerized systems.

“This is a unique intersection of the crypto space and traditional finance,” Behnam said at a Georgetown University conference last month, according to news reports.

In an ideal world, the CFTC would have blessed FTX's automatic liquidation risk management system right before the "exchange" collapsed (i.e. before it could actually do any damage) and then spontaneously burned it with abject humiliation.

This would allow the SEC to assume all of its responsibilities and hopefully bring some much-needed coherence to the US financial regulatory architecture, and would have meant that the whole FTX debacle may, strangely, have had a net positive effect.

Instead, we need to see CFTC's Behnam and Senators Stabenow and Lummis use FTX's collapse to argue that they were right all along. We just need to give the CFTC more power to regulate an industry they have been used to for almost a decade! What could go wrong?

Ryne Miller responded to FTAV's request for comment by arguing that it is actually a benefit of the U.S. financial system that people can move back and forth between private and public jobs, leading to "more mature market participants." Heath Tarbert and Jill Sommers declined to comment. Giancarlo, Behnam and the CFTC did not respond to requests for comment. Wetjen could not be reached for comment, but we will update immediately if we hear from him.

It is fitting that we give the final say to the crypto clown prince himself, the JPEG Morgan our era deserves.

As SBF wrote to a journalist last month: "Fuck regulators . . . they make everything worse . . . they don't protect customers at all." But the next day he emphasized that those weresomethingSupervisory authorities who “deeply impressed me with their knowledge and prudence”.

Like the CFTC.