Rostin Behnam, chairman of the Commodity Futures Trading Commission, said the proposed Digital Commodities Consumer Protection Act (DCCPA) would have prevented the collapse of crypto firm FTX by prohibiting conflicts of interest.

The proposed Federal legislation covers the regulation of the trading of cryptocurrencies and related digital assets under the authority of the CFTC.

Benham said in a Senate committee hearing: “Based on what we know so far, a lot of the issues that have arisen are significant conflicts of interest, significant allegations of co-mingling of customer assets and house money, lack of books and records, lack of corporate governance and risk controls. I certainly think that given the events of the recent past we should take a fresh look, but DCCPA does address these issues and would have prohibited those actions from occurring at FTX.”

The conflicts of interest included the balance sheet of Alameda Research, a hedge fund affiliated with FTX, being propped up by a crypto token, FTT, that was created by FTX. Once there were reports that Alameda was in financial trouble FTX, and most of its affiliated companies, collapsed into bankruptcy.

FTX International was based in the Bahamas under the supervision of the Securities Commission of The Bahamas. As a result, Marisa Tashman Coppel, policy counsel at Blockchain Association, disputed that the proposed act would have been effective at regulating an overseas entity.

How would the DCCPA have prevented the collapse of FTX INTERNATIONAL (bolded & underlined)? Chair Behnam can't possibly think Congress could grant his agency jurisdiction over an international entity.

— Marisa Tashman Coppel (@mtcoppel) December 1, 2022

Ron Hammond, director of government relations at the Blockchain Association, added:

This is important when folks ask about the future of DCCPA this year. This bill will reemerge and change in wake of FTX as Chair Benham noted today. Congress and the regulators are still figuring out what happened and then will use their findings to push forward legislation. https://t.co/KaQnfjcwQK

— Ron Hammond (@RonwHammond) December 1, 2022

Benham testified at a hearing “Why Congress Needs to Act: Lessons Learned from the FTX Collapse”, on 1 December in Washington, DC before the US Senate Committee on Agriculture, Nutrition, and Forestry. The hearing was called by U.S. Senators Debbie Stabenow (D-Mich.), chairwoman, and John Boozman (R-Ark.), ranking member  of the committee.

Behnam said in his testimony that the events of the past few weeks embody the perilous state of the digital asset market where a a patchwork of federal and state-based regulation has proved to be ineffective.

“We are here today because the latest events involving FTX lay bare the consequences, and demand accountability,” he added “As I have stated publicly many times before, I strongly believe that we need to move quickly on a thoughtful regulatory approach to establish guardrails in these fast-growing markets of evolving risk, or they will remain an unsafe venture for customers and could present a growing risk to the broader financial system.”

He argued that the CFTC lacks the necessary and direct authority to write rules and oversee cash digital commodity markets, and has limited authority which is only activated once fraud or manipulation has already occurred, which is too late for investors.

“Limited enforcement authority is no substitute for comprehensive regulation in which trading platforms, dealers, custodians, and other critical infrastructure participants are required to be registered and subject to direct oversight by a regulator such as the CFTC,” Behnam added.

Read Chairwoman @SenStabenow’s full opening statement at the #SenateAg hearing on about the FTX collapse and the need for congressional action.https://t.co/Q8GfTrRrNf

— Senate Ag, Nutrition, & Forestry Committee Dems (@SenateAgDems) December 1, 2022

Behnam said there should be shared responsibility between the CFTC, which would apply its rules to commodity tokens, and the Securities and Exchange Commission which could use its existing authority and reporting regime requirements for all security tokens.

More than 130 different FTX entities have filed for bankruptcy but Behnam highlighted that LedgerX, a derivatives exchange and clearinghouse registered with and overseen by the CFTC, is not included in the Chapter 11 filing. CFTC has been in near-daily contact with LedgerX as well as the third-party custodians who hold cash and digital assets according to Behnam, and at this time LedgerX’s customer property remains secure and the entity has the financial resources to continue operating for the foreseeable future.

In his conclusion Behnam said the path forward is grounded in regulation – crypto trading platforms targeting retail market participants must be registered with a federal market regulator with mandated segregation and protection of customer funds, maintenance of sufficient capital to operate efficiently, implementation of internal controls and governance processes, and accurate and honest public disclosures backed by independent, certified accounting.

HAPPENING NOW: Chairman Rostin Behnam is testifying before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry on "Why Congress Needs to Act: Lessons Learned from the FTX Collapse." Read his remarks as written: https://t.co/MsdTrtH4mR

— CFTC (@CFTC) December 1, 2022

“Those platforms must be restrained by conflicts of interest rules and mandatory separation,” he added. “They cannot be allowed to take on conflicting roles such as operating an exchange while also trading against customers on that exchange.”

Behnam said the CFTC and SEC must have direct insight into these platforms with the authority to surveil ongoing trading activity, conduct examinations, and approve material changes to the platform’s business.