FTX’s Bankman-Fried and CME’s Duffy square off on crypto futures in Capitol Hill hearing

“The risks associated with these products could be catastrophic, not just only for [cryptocurrencies], but for other” commodities that the model could be applied to if approved, CME Group Chairman and Chief Executive Terrence Duffy told members of the House Agriculture Committee, which oversees the CFTC. The CME
CME,
-2.81%
is the world’s largest derivatives exchange.

Also appearing on the panel and opposing the FTX proposal were Christopher Edmonds, chief development officer at Intercontinental Exchange Inc.
ICE,
-0.10%,
parent company of the New York Stock Exchange, and Walt Lukken, president and CEO of the Futures Industry Association and former Acting Chairman of the CFTC.

Christopher Perkins, president of CoinFund Management appeared in support of FTX’s proposal.

Both Democratic and Republican representatives pointed to recent volatility in cryptocurrency markets as reason to be skeptical of the FTX proposal.

Also read: Yellen: cryptocurrency market turbulence is not ‘real threat’ to U.S. financial stability

“I want to be forward thinking. I want to be a modern guy and try to understand crypto, but I’m really struggling with it,” said Republican Rep. Rick Crawford of Arkansas, who argued that Congress and the CFTC should be primarily concerned with protecting farmers and other commercial entities who use derivatives to hedge real-world economic activity.

“You plant wheat, you’re long wheat, there’s an underlying fundamental to that,” he added. “I’m really struggling to understand, in all earnestness, what is the underlying security of bitcoin and other cryptocurrencies.”

CME’s Duffy said that Crawford was right to be concerned about the lack of an intrinsic value to cryptocurrencies. “If corn goes down to a certain price, you have an ear of corn,” he said. “You have nothing when you have a cryptocurrency and it goes to zero.”

Sam Bankman Fried, founder and CEO of FTX, defended his company’s proposal to offer around-the-clock margined crypto futures, arguing that the FTX plan would reduce risk in the system by requiring traders to pre-fund their collateral and enabling exchanges to auto-liquidate positions, a provision he argued would enable U.S. derivatives markets to avoid canceling trades in the way the London Metal Exchange was forced to do in March.

“We believe [this proposal] would bring competition and innovation. It would bring liquidity to the U.S. marketplace and options to U.S. customers,” he said. “It would bring competition to the U.S. futures markets where almost all of the volume is traded by just two exchanges.”

CoinFund’s Perkins argued that the FTX proposal, if adopted, would “empower entrepreneurs to innovate and build” cryptocurrency business within U.S. borders, whereas now much of that innovation is happening overseas.

Dennis Kelleher, president and CEO of Better Markets, a nonpartisan market-reform group said in a comment letter submitted to the CFTC that while it supports reforms that would create greater competition in the commodity-derivatives markets, the FTX application raises concerns about investor protection.

One cause for concern according to Kelleher is that the ability for FTX to auto-liquidate a customer’s bitcoin futures positions if the market turns against them. While such policies could reduce risk for FTX and the broader market, these protections “could come at the direct expense of FTX’s customers.”

The auto-liquidation provision “could result in massive customer losses, not that different from the losses retail customers sustained from risky trading in 2021, including the GameStop
GME,
+7.45%
trading frenzy,” Kelleher wrote, adding that FTX should be required to provide an analysis of how such a system would have affected customers in recent weeks when cryptocurrency prices have been extremely volatile.