- The growth of the crypto markets has not gone unnoticed by regulators.
- Regulators believe the nascent market poses significant risks.
- The CFTC may consider including crypto as it seeks to revamp its risk management rules.
The larger the crypto markets grow, the more they become intertwined with the traditional finance sector. This trend sparked contagion fears amongst regulators in light of the significantly greater volatility of the crypto markets and industry blowouts last year.
With these fears in mind, the United States Commodities Futures Trading Commission looks set to consider the crypto markets as it works to revamp its risk management program.
‘Evolving Technologies Carry Significant Risk’
In a press release on Thursday, June 1, the CFTC disclosed its intentions to amend its risk management program, requesting comments from the public. CFTC Commissioner Christy Goldsmith Romero also released a statement on the same day suggesting that the new rules safeguard banks and brokers from developing technology risks, namely crypto, artificial intelligence, and cloud services.
"These technological advancements, with their accompanying risks, necessitate the commission revisiting our regulatory oversight, including our risk management requirements," Goldsmith Romero asserted.
While the effects of these risks are yet to materialize significantly, Commissioner Goldsmith Romero contends that developments like digital assets pose “significant risk” nonetheless. Romero tipped the Silvergate Bank collapse as evidence of this risk, citing statements from Federal Deposit Insurance Corporation Chair Martin J. Gruenberg. In remarks to the Senate Banking Committee on March 28, Gruenberg suggested that the FTX collapse sparked the run on Silvergate Bank deposits.
Goldsmith Romero also posited that brokers interested in the crypto markets face counterparty risks highlighted by the Terra Luna and FTX collapses.
Goldsmith Romero’s statements closely resemble warnings the European Systemic Risk Board released on May 25. The ESRB posited that crypto markets could pose a financial stability risk if allowed to grow unchecked, calling for greater oversight over conduits linking digital assets with the traditional finance sector.
The CFTC’s proposed rule change will be open for public comments for 60 days before a formal vote is conducted.
The risk management program refers to rules and tools that the CFTC employs to establish safety and fairness in commodities, currency, and options markets. These tools set trading limits, rules for clearing, and disclosures.
On the Flipside
- CFTC Chair Rostin Behnam has suggested that decentralized finance (DeFi) applications must comply with financial regulations.
- The CFTC and the Securities and Exchange Commission are vying for jurisdiction over the crypto markets.
Why This Matters
Commissioner Goldsmith Romero’s statements highlight regulators’ reservations toward the interaction between the crypto and traditional financial markets.
Read this to learn more about the CFTC Chair’s stance on DeFi:
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