A Proposal to Strengthen Customer Protections in Crypto Trading
A year after the collapse of the FTX crypto exchange, the Commodity Futures Trading Commission (CFTC) has voted to propose a new rule that aims to enhance customer protections for trades made through derivatives clearing organizations (DCOs).
Segregating Customer Funds from House Funds
The proposed rule, titled “Protection of clearing member funds held by derivatives clearing organizations,” would require registered DCOs that clear trades to separate customer funds, including those from retail investors, from their own house funds.
CFTC Commissioners’ Votes and Motivation
CFTC Commissioners Summer Mersinger and Christy Goldsmith Romero voted against the proposal, while Commissioner Kristin Johnson and CFTC Chair Rostin Behnam voted in favor. Commissioner Caroline Pham concurred. The proposal will now be open for public comment.
“One significant motivation, in my humble opinion, for taking the steps that we’re taking today would be the illustration of the bankruptcy and significant risk management corporate governance failures at FTX,” said CFTC Commissioner Johnson during the meeting. “They illustrate the magnitude of losses that customers may experience in the absence of regulation that prohibits commingling of customer funds or member property.”
The Case of FTX and Lack of Protection
FTX was not registered with the CFTC. Last year, the agency stated that the exchange mixed customer funds and its CEO, Sam Bankman-Fried, was found guilty of misappropriating billions in customer funds.
CFTC Chair Behnam highlighted that while there are protections for customers of a futures commissions merchant, there is no such protection for clearing members of a DCO.
“The proposed rule would ensure that clearing member funds and assets receive proper treatment if a DCO enters bankruptcy by requiring segregation of clearing member funds from the DCO’s own funds and that the funds be held in a depository that acknowledges in writing that the funds belong to clearing members, not the DCO,” Behnam explained.
Bitnomial Becomes First Crypto-Native Exchange to Receive Licensing
The CFTC also granted Bitnomial, a crypto derivatives exchange, a license to operate as a DCO, allowing it to clear futures and options trades. According to Bitnomial, it is the “first and only crypto-native exchange with a full set of U.S. derivatives exchange, clearinghouse, and broker licenses.”
“Our aim is to introduce a global derivative trading platform, regulated in the U.S., that marks a pivotal shift from traditional USD and Treasury margin collateral to incorporating digital assets as collateral as well. This change is intended not just for crypto trading but also for a broad spectrum of physical and digital commodities,” said Luke Hoersten, CEO of Bitnomial.
Commissioners Pham, Johnson, and Chair Behnam voted in favor of granting Bitnomial the license. Mersinger concurred, while Romero voted against.
Hot Take: Strengthening Customer Protections in Crypto Trading
The proposed rule by the CFTC to bolster customer protections in crypto trading through derivatives clearing organizations (DCOs) is an important step towards enhancing the safety and security of customer funds. The collapse of FTX and subsequent misappropriation of customer funds highlighted the need for stricter regulations and segregation of customer funds from house funds. By requiring registered DCOs to separate out customer funds and holding them in depositories that acknowledge their ownership by clearing members, this rule aims to prevent future losses experienced by customers. Additionally, granting Bitnomial a license as a DCO signifies the growth and legitimacy of the crypto industry. Overall, these developments contribute to building trust and confidence in the crypto market.
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