CFTC Sees ‘Significant Risks’ From Digital Assets

US Regulator Seeks To Reassess Risk Frameworks To Keep Pace With Evolving Markets

By: Jeremy Nation Loading...

CFTC Sees ‘Significant Risks’ From Digital Assets

The Commodity Futures Trading Commission is seeking public comment to reassess its risk-management rules for banks and brokers, Commissioner Christy Romero said in a statement Thursday.

The main areas of focus are the technology and cyber sectors, customer fund segregation, the safeguarding of counterparty collateral, and climate-rated financial risk.

Many have asked for regulatory clarity on the crypto sector. Now, a series of major institutional collapses and the rising risks associated with distributed networks, stablecoins, and digital assets, may potentially influence that regulation.

“Digital assets carry risks—something that has become all too clear in the past year,” Romero said.

Stablecoins and Asset Segregation

The existing CFTC risk models may not be sufficient to manage an evolving financial sector, according to Romero, who said, “We should not assume that our existing segregation rules and risk management framework comprehensively cover the evolving risks in the markets.”

Once uncontemplated risks associated with safeguarding customer property have come to light with the rise of stablecoins, according to Romero.

“For example, brokers may explore holding customer property in the form of stablecoins or other digital assets that could result in unknown and unique risks,” said Romero, adding that further considerations include cyber attacks, and a potential necessity to update segregation rules to account for future risks.

Collapse and Contagion

The fall of FTX, Silvergate Bank, and Signature Bank, all of which focused significantly on digital asset services, spurred the commission to revisit its regulatory oversight.

In the case of FTX, a lack of affiliate separation raised questions about the risk of contagion in digital asset markets.

Despite that, Sid Powell, CEO and co-founder of Maple Finance, an institutional crypto-capital network, said that the cited risks were triggered by a misuse of assets, as opposed to the use of digital assets.

“The rules and laws that prevent misuse of customer assets by brokers would therefore be better served by providing ways of bringing this into the permitted activities of brokers, instead of just discouraging it,” said Powell.

Powell explained that the on-chain migration of swap dealers is likely to continue “because they need to be able to trade and transact 24/7 with customers, and customers want to see what's happening with their funds.”

Since the fall of FTX wasn’t a fatal blow to the industry, said Powell, consumers are unlikely to “walk back a desire for transparency, instant settlement and 24/7 uptime.”