CFTC’s Johnson urges Congress to expand commission’s crypto oversight powers

Commodity Futures Trading Commission Kristin Johnson wants to protect customers in a way that reduces the risk of future crises.

Commodity Futures Trading Commission (CFTC) Commissioner Kristin Johnson has urged Congress to adopt legislation that “closes the current gap in the oversight of crypto spot markets.”

During a speech at a digital assets conference at Duke University on Jan. 21, Johnson proposed a number of amendments that would enable the CFTC to conduct “effective due diligence” on businesses, including crypto firms, that want to acquire CFTC-regulated entities.

The commissioner also wants expanded powers for the commodities regulator to enhance customer protection, prevent liquidity crises and mitigate conflicts of interest.

One of these potential changes would be to give the commodities regulator new powers to investigate any business that wants to purchase 10% or more of a CFTC-registered exchange or clearinghouse.

Johnson highlighted the example of derivatives exchange LedgerX, which became a subsidiary of FTX on Aug. 31, 2021 and is now wrapped up in the crypto exchange’s collapse.

The commissioner notes that the regulator currently has no ability to conduct due diligence on whichever firm buys the business and is merely a passenger as the exchange goes through the sales process.

Johnson also addressed co-mingling of customer funds, which was one of the more egregious accusations levied at FTX following its collapse — calling for regulation that formalizes the obligation of crypto firms to segregate customer funds.

Related: FTX VCs liable to ‘serious questions’ around due diligence — CFTC Commissioner

Another gap pointed out by Johnson was in risk management procedures, pointing to the contagion that has continued to spread after major crypto company collapses, such as FTX: 

“Interconnectedness among crypto-firms amplified by fragile or non-existent risk management, corporate governance failures, and conflicts of interests at individual firms fuels the likelihood of crises.”

The commissioner suggested that current “frameworks such as anti-trust law and regulation may prove too limited in scope” in increasingly diverse markets and is advocating for “tailored and effective governance, and risk management controls.”