But, our legal authority in the spot market for digital commodity tokens is necessarily limited to acting only after the fraud has occurred. The CFTC has been aggressive and proactive in policing these markets, bringing over 85 cases resulting in over $4 billion in penalties and restitution. In the absence of federal market regulation, the digital asset market has been plagued by fraud and manipulation. Any legislation in this area should recognize this dynamic and require additional work and study to better understand how these populations interact with this market and ensure they are adequately protected. We also know that these markets are often promoted as a form of financial inclusion to populations that may be most vulnerable to the inherent risks in these assets as well as to predatory financial schemes. Congress should ensure that the CFTC is fully empowered to require registered entities to make necessary disclosures regarding a variety of matters, such as investment risk, cybersecurity risks, mining, settlement practices and other related activities ensure customers are receiving the best available prices and segregate and safeguard assets in a way that protects customers in the event of a failure by the platform. I would like to highlight those areas that I think are particularly important for Congress to address in any legislation on this issue.įor retail market participants entering a new and technically complex digital asset market, robust customer protections are paramount. Most notably, where securities laws apply, the Securities and Exchange Commission should use its robust authorities to protect customers and address information gaps between securities issuers and investors in the market. That said, it is critically important that any new legislation considered by the Congress does not undermine existing laws. I am encouraged by the continued interest of both parties in Congress and the Administration to address the regulatory gap over digital commodities and generally support legislative efforts by this Committee to provide the CFTC with additional authority to do just that. Key Provisions for Regulating the Digital Commodity Market I believe the broader digital commodity market should be subject to similar time-tested regulations focused on protection of customer assets, surveillance of trading activity, prohibitions on conflicts of interest, and imposition of stringent cybersecurity standards. That is, the entity was able to protect customer funds while continuing to operate. Indeed, one of the only FTX entities that avoided the broader FTX bankruptcy proceedings did so because of CFTC regulation that mandated any registered entities maintain segregation of customer funds, sufficient financial resources, and proper governance. They have served as tried and true rules of the road for the derivatives markets. These tools are necessary to prevent future crises. Following the 2008 financial crisis, this Committee-working on a bipartisan basis-responded with reforms to the previously unregulated swaps market that were anchored in core principles of sound market regulation: transparency, reporting, and registration, to name just a few. But, recent history can teach us many lessons. Leaving billions of dollars of customer funds and investments in largely unregulated entities is a recipe for disaster. Cybersecurity vulnerabilities continue to be exploited in weekly hacks, resulting in billions of dollars in lost funds. Multiple large market participants allegedly engaged in manipulative and abusive trading activity, including through opaque arrangements with affiliated trading platforms, undermining confidence in these nascent markets. The bankruptcy of several large digital asset platforms erased billions of dollars in customer funds. ![]() ![]() The events over the past year bring added urgency to these recommendations. One of the core recommendations called on Congress to enact legislation to fill the clear regulatory gap over the spot market for digital assets that are not securities. Last year, the Financial Stability Oversight Council unanimously issued a landmark report on the financial stability risks presented by the digital asset market. I have been clear in testimony before Congress as well as in other public statements that bringing this volatile market out of the shadows and into the regulatory fold would protect customers, ensure market resilience and stability, and prevent contagion to the traditional financial system. Since my Senate confirmation hearing almost two years ago, I have consistently highlighted the need for Congressional action to address the lack of federal regulation over the digital commodity market. ![]() The Need for Legislation to Fill the Regulatory Gap
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