Better Markets filed a Comment Letter to the Commodity Futures Trading Commission (CFTC) in response to the agency’s request for comment on FTX’s proposal to offer non-intermediated, margined clearing of Bitcoin futures products:
Why It Matters. FTX has filed an application with the CFTC that, if approved, will likely vastly increase the participation of retail investors in the cryptocurrency futures markets via cellphone apps without intermediaries but with around-the-clock, second-by-second auto-liquidation of their margin accounts. The crypto carnage, volatility, and wealth destruction over the last few days and weeks are red flags as to the threats posed to customer protection and systemic stability by cryptocurrency investments. This is remarkably reminiscent of the “meme stock frenzy” of early 2021, a basket of which are now down more than 60% and resulted in billions if not tens of billions of dollars in customer losses.
What We Said. The CFTC must exercise extreme caution, require FTX to provide more information, and engage in a formal rulemaking before acting on the application. Specifically, the CFTC should require FTX to show how it’s proposed model would have performed second-by-second, hour-by-hour, and day-by-day over the last several weeks during this tumultuous period in the crypto markets. This would be a live stress test of FTX’s representations, estimates, and guesses about how its model will perform and the concrete impact on its customers’ accounts. Given FTX is proposing to eliminate intermediaries, undertake real-time margining, and auto-liquidate customer accounts, this would provide invaluable information on FTX’s proposal to the CFTC and the public.
Bottom Line. The CFTC could propose a rule establishing a comprehensive framework that protects market participants, particularly retail customers, and the financial system from the many risks that FTX’s application represents. We also call upon the CFTC to revisit its earlier decision to allow futures trading on Bitcoins in the first instance. That decision failed to properly follow the applicable legal standards and ignored the primary role of the futures markets as venues for commercial enterprises to hedge and manage risk.
Read our full Comment Letter here or click the button below.