CFTC Commissioner Addresses Declining Trust in Crypto Markets
Commentary by Steven Lofchie
CFTC Commissioner Christy Goldsmith Romero offered recommendations to the crypto industry on ways to rebuild public trust following the collapse of several crypto exchanges, particularly FTX.
In an address at the Wharton School and the University of Pennsylvania Carey Law School, Ms. Goldsmith Romero said that FTX earned public trust by using celebrity endorsements to advertise itself as a safe custodian for crypto-assets, which is why its collapse came as a surprise to many. Ms. Goldsmith Romero said that FTX lacked effective top-down corporate governance, and industry gatekeepers failed to step in.
To help rebuild trust, Ms. Goldsmith Romero recommended that crypto firms:
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adopt strong corporate governance policies, specifically books and records, cash management systems and internal risk management controls;
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establish board oversight as an independent check on management, and audit financial statements using a third-party firm;
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ensure industry gatekeepers have adequate resources to effectively monitor risk and compliance;
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prohibit the comingling of customer and firm assets;
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establish separate legal entities for dual-hatting firms and report all transactions involving insiders or affiliates;
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provide customers with better disclosure; and
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improve the cybersecurity framework to address the rise in crypto-related theft.
Ms. Goldsmith Romero encouraged Congress to ensure that any crypto-related legislation would adequately protect customers and market integrity. She said that the current CFTC regime limits its oversight over crypto markets and urged Congress to provide the CFTC the authority to (i) stop digital asset products from listing on an exchange, (ii) require crypto exchanges and other new registrants to establish an independent SRO, and (iii) provide the CFTC with access to information about unregulated affiliates of a crypto registrant where necessary for the CFTC to fulfill its supervisory responsibilities.
Commentary
Commissioner Goldsmith Romero is on the right track, but implementing her recommendations requires a set of practical rules and an enforcement authority. It is not sufficient to say that there must be better disclosure if the CFTC has no rules or authority, or if the SEC - which purports to have rules and authority - has rules that are not workable.
Any suggestion that there be an SRO for crypto-assets is well-intended, but premature. An SRO is only workable if its members are similarly situated, have a set of common interests and a means to enforce compliance, and each benefits from the others' compliance. That simply is not a description of the digital asset industry at this point.