The recent events surrounding the two of the greatest cryptocurrency exchanges have re-opened some of the long-standing questions about the prevention of such occurrences and mitigating their effect on the wider crypto market, as well as the potential role of regulatory agencies in this area.
With this in mind, the U.S. Commodity Futures Trading Commission (CFTC)’s Commissioner, Kristin Johnson, stressed the need for a regulatory framework that would provide better visibility into crypto markets and cover all the elements involved in crises such as the one concerning FTX and Binance, as she told Bloomberg Technology in an interview published on November 9.
Mitigation of consequences
Specifically, the Commissioner noted that “the events of this week are not isolated,” observing “a continuous stream of events characterized by liquidity crisis, acquisition, and consolidation,” which makes it plain that:
“If regulations were adopted today, we could do a better job mitigating some of these concerns in advance.”
The Commissioner also noted the existence of other “pieces to the puzzle” to consider, including “correlations among markets, (…) a mild contagion, and competition,” that show that “even market participants who are not immediately experiencing liquidity or insolvency crises are being affected by [these] events.”
According to Johnson, the CFTC has been working with the lawmakers on bipartisan bills that would help “develop a regulatory framework that gives the CFTC the authority over the spot market,” because:
“Access to spot markets would enable us to require the registration of exchanges and platforms that are facilitating crypto lending and cryptocurrency transaction.”
In her view, “regulation would help to bring all of that under an umbrella where we could carefully review balance sheets and ensure liquidity requirements are met by platforms facilitating trade.”
Johnson concluded that there was a need for “greater visibility into this market” and “the regulatory gap (…) makes it very difficult for us to surveil and police markets in the way that we would traditionally do.” As she added:
“We have core principles at the CFTC, mirrored by regulation at the SEC, that would also insure against any anti-competitive mergers that might lead to consolidation in the market that is not in the public’s best interest, or consumers’ and investors’ best interest.”
Origins of a crisis
FTX’s predicament began when Binance liquidated all of its FTX Token (FTT) holdings in response to the revelation that the balance sheet of Sam Bankman-Fried’s trading firm Alameda Research mainly listed FTT holdings, showing an immediate link between the two parts of his business.
This led to a liquidity crisis at FTX and Binance’s offer to buy out the trading platform, potentially increasing its role in the crypto market. However, Binance’s CEO, Changpeng Zhao, has since withdrawn the offer, due to financial and legal concerns.
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