Fuel for Thought: Backing new role in digital asset oversight, CFTC chair also embraces limits

As Congress weighs what additional authorities are needed to better regulate digital assets such as cryptocurrencies, the chairman of the US Commodity Futures Trading Commission said Feb. 9 he supported limits on expanding his agency's regulatory powers in spot agriculture and energy commodity markets as part of that effort.

The comments came as US lawmakers and the Biden administration have espoused a need to better police digital asset markets in light of increased retail consumer investments in burgeoning digital currencies subject to substantial swings in value.

Senators on both sides of the aisle were open to improving regulatory oversight of the sector during a Senate Agriculture, Nutrition & Forestry Committee hearing Feb. 9.

"Currently, digital asset spot or cash markets are subject to a patchwork of regulations at the state and federal level," said Senator John Boozman of Arkansas, the panel's top Republican. "As of now there's a gap in the oversight," posing a danger to American consumers and potentially threatening financial market resiliency if left unchecked, he said.

But Boozman asked CFTC Chairman Rostin Behnam how he would respond to concern that giving the CFTC an expanded role in regulating digital asset spot markets might "open the door to future mission creep" into traditional commodity spot markets. Boozman said he believed such an expansion would be inappropriate.

Behnam, in response, said he "unequivocally" agreed.

"I don't mean to suggest at all that this should be the start of the CFTC's role in a larger pool of cash commodity markets," he said. "As we think about this going forward, there is a way to legislatively limit the expansion of authority for the CFTC and make very clear that the direction you're giving us is very limited, surgically limited to just digital commodity assets and no further commodities."

Embedding core principles

Behnam told lawmakers the CFTC needs authorization and a regulatory structure over cash digital assets resembling the current structures for overseeing the markets it currently regulates.

"We need to embed core principles like pre-trade transparency, centralized and concentrated order books, post-trade transparency and clear and consistent rules around custody, settlement, clearing and other elements of the trading process," he said.

Committee Chairwoman Debbie Stabenow, Democrat of Michigan, said Congress must work with the Biden administration and regulators, including the CFTC, to design a framework that protects consumers and the environment and "keeps our markets fair, transparent and competitive."

She emphasized a need to address climate impacts associated with digital technologies.

"Astonishing amounts of energy are currently being used to mine certain digital assets," she said.

On that topic, Behnam said he has directed the CFTC's climate risk unit and financial technology divisions to examine the climate implications of digital assets, and he mentioned disclosures as a tool that has worked well in derivatives, securities and other financial markets.

To address the carbon footprint, Sandra Ro, CEO of the Global Blockchain Business Council, told lawmakers it would be important to encourage crypto mining firms to set up in locations with proper oversight and visibility.

Policies also could encourage certain private sector trends such as a turn toward renewables or crypto miners agreeing with states on caps in which they shut down during periods of peak load, she said.

Phil Lookadoo, a partner at Haynes and Boone, said in an email Feb. 8 that debate about future regulation of digital assets has raised many questions such as whether the expansion of the CFTC's jurisdiction would be limited to physical forward sales for digital assets, or might expand to nonfinancial commodities such as energy commodities.

There are some efforts underway to develop a decentralized financial protocol for use in trading energy commodities, with goals such as increasing efficiency by removing intermediaries and cutting down risk of manipulation and fraud, he noted.

In a separate matter Feb. 9, the CFTC continued to hear calls to investigate a late-January price spike for the February 2022 NYMEX futures contract. The American Public Power Association asked the regulator to closely examine activity for manipulation or other lawful contact, joining a prior request by the Industrial Energy Consumers of America.