CFTC commissioner Christy Goldsmith Romero called for crypto regulations that clearly defined retail investors at a conference in Singapore.
The terms came when retail investors were crying foul from lost investments in crypto companies. 2020 -2022 bad occurrences plague the crypto industry from rug pools and scams to fund mismanagement by the companies.
The Commodity Futures Trading Commission (CFTC) is an independent US agency tasked with protecting the public from fraud and abusive practices related to the sale of commodities and fostering transparency in futures and options markets.
Arguably, the occurrences did not create risks but revealed how much they could affect investors. Regulators globally are calling for laws to protect customers.
Proposed tiered regulations by CFTC commissioner
Christy called for the redefinition of retail investors to provide tailor-made laws for the investors. She noted rising retail interest in cryptocurrencies correlated to their rising market exposure.
She noted that the authorities did not model CFTC for investors making less than $50K a year, so the need to restructure.
I recently proposed that the CFTC redefine who are retail customers. The CFTC’s current definition of retail is far too broad, including regular household customers all the way up to millionaires and hedge funds.
Christy Goldsmith Romero
The tiered definition would separate high-net individuals and hedge funds from everyday household investors. Hedge funds, for instance, have always had an extra layer of protection from the markets and, therefore less exposed than household investors.
When Terra Luna crashed in May, many household investors cited losing their entire savings, with several contemplating suicide. More recently, the FTX contagion has claimed millions of retail investor funds.
Laws to protect investors should be easy to understand and encompass limitations on leverage and priority when a firm files for bankruptcy.
Christy also noted the importance of brokers in finance. While analysts argue that brokers make trading expensive, they at least limit investors’ exposure to the market. Decentralized Finance (DeFi) brought another dynamic that exposed investors to the market.
Regulation of cryptocurrency exchanges
Christy went on to request heightened regulation of cryptocurrency exchanges by the CFTC. These were to include frequent audits, cyber security analysis, and soundness of financial reviews at the least.
Cybersecurity has been a significant threat to cryptocurrency exchanges. According to a report by Chainalysis, hackers stole over $3B from the market. Unlike in 2021, hackers in 2022 had a preference for DeFi protocols which have so far hemorrhaged over $718M of investor funds.
Conflicts of interest took center stage on FTX when the CEO Sam Bank Fried (SBF) allegedly funneled investor funds into its sister company Alameda research. Reports are now emerging that Alameda had special leverage in the firm, which they mismanaged.
Christy noted that despite her calls for reforms, the CFTC was slow to implement the safety measures.
While the commissioner was firm on digital assets regulation, she noted the potential of distributed ledgers for the economy. She expected explosive growth in the technology, citing its applications in agriculture, food safety, finance, and medicine.
The remarks by Christy mirrored those made earlier by Jon Cullife, deputy governor Bank of England, who shared his distrust in DeFi. Jon argued that even though crypto was born in an unregulated space and intended to stay so, it now had far-reaching applications in mainstream financial sectors. He likened DeFi to a decentralized car which is only as good as its rules, programs, and sensors.
A mishap in the crypto industry could have far-reaching consequences in the global financial sector. Therefore, the need to approach the situation with speed while acknowledging the technology’s benefits.
