CFTC's Regulatory Role in 'Crypto' Is More Lapdog Than Watchdog
Published: Friday, December 2, 2022
The following is from Alan Guebert, a freelance agricultural journalist from Illinois.
If you don't understand the allure, gyrating value and many crack-ups of cryptocurrency, a few words from New York University's Nouriel Roubini, the economist who predicted the 2007-08 housing collapse, might help.
Speaking at the Abu Dhabi Finance conference in mid-November, Roubini, reported CNBC, "... described crypto and some of its major players as an 'ecosystem that is totally corrupt.'"
Roubini went on to explain what he meant by listing his "seven Cs of crypto: concealed, corrupt, crooks, criminals, con men, carnival barkers" and "CZ," the initials of a Chinese crypto bigshot.
Roubini isn't the only economist who sees crypto as a crock. Nobel Laureate Paul Krugman, both a professor and New York Times columnist, began warning readers about crypto's sorcery in 2013. This past July he slammed it again in a column that (again) highlighted out-to-lunch U.S. regulators, including the Commodity Futures Trading Commission (CFTC), the boosterish futures and derivatives watchdog.
Krugman foresaw big trouble because of the lack of regulation in the then-$3 trillion market. All the looking away, he noted in quoting a Federal Reserve official, "has created an environment subject to bank runs, not to mention 'theft, hacks, and ransom attacks' plus 'money laundering and financing of terrorism.'"
"Other than that," he cheekily added, "it's all good."
Krugman's dislike of crypto is legendary. Recently he labeled Bitcoin, the best known of almost 21,000—yes, 21,000—crypto "coins" in existence, as "useless, wasteful, niche and only valuable to hype and speculation."
He's been proven mostly correct. In early November, one of the big crypto exchanges, FTX, collapsed in a matter of days. Its founder, Sam Bankman-Fried—a well-known crypto "bro" who often testified before Congress on crypto's virtues—watched as 90% of his $26 billion crypto wealth evaporated.
Other crypto exchanges and coins were teetering before FTX immolated. The value of one bitcoin fell from about $60,000 in January 2022 to below $17,000 by Thanksgiving. According to one analyst, an estimated 70% of all 2022 bitcoin buyers lost money investing in it. In fact, the once $3-trillion-crypto market now has an estimated value of $1 trillion.
Where were U.S. regulators in crypto's long run-up and, now, in its swift, steep decline?
The two biggest players, the relatively benign CFTC and the far more feared Security and Exchange Commission (SEC), have been fighting a turf battle over who has jurisdiction in the broad, fluid and ill-defined crypto market.
The fight isn't as straightforward as it seems. If crypto is seen more like an investment—say, shares in a company or corporate bonds—then the SEC could claim the regulatory role. If, however, crypto is defined more as a spot market for "tokens," like crypto coins, then the CFTC might become the regulator.
Even more complicating is Congress. Competing House and Senate committees are vying to write crypto's rules. Whichever committee seizes power—Banking oversees the SEC, Agriculture the CFTC—will see their clout increase both on Capitol Hill and in the campaign cash game.
Meanwhile, trillions are riding on the answers. Most analysts view the SEC as a rule-rich, tough regulator. Just ask Wall Street. On the other hand, high risk/high reward market players—like futures market speculators—love, love, love the smaller, myopic CFTC.
Before crypto's unhappy pre-Thanksgiving clobbering, the weaker approach looked like the stronger bet. "The momentum in Congress is on track to elevate the CFTC as the key front-line regulator," reported coindesk.com, a crypto newsite.
Here's another tell: The Senate CFTC/crypto bill is backed by Senate Ag Committee Chair Debbie Stabenow, the Michigan Dem whose former staff expert on crypto is Rostin Behnam, the now-serving (wait for it) CFTC chairman.
That leaves Stabenow's 2023 Senate Ag basket overflowing—a new farm bill to steer through a divided Congress, a complicated crypto regulatory bill that puts guardrails on that Wild West show, and a push to reauthorize the CFTC.
That's right; the CFTC, the agency crypto wants as its regulator, is operating on an expired charter. Little wonder Big Crypto wants the CFTC as its lapdog, er, watchdog.
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