A new crypto clash

Dec 14, 2023

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QUICK FIX

The crypto industry is at war with Washington in many ways. But it just scored a big victory that’s dividing officials at a key agency.

The Commodity Futures Trading Commission on Wednesday signed off on a plan by the digital asset exchange Bitnomial to expand in a fashion that echoes the failed aspirations of FTX, which before its implosion wanted to be a vertically integrated, one-stop shop for crypto trading services. The CFTC decision is a rare recent example of federal regulators blessing a novel crypto business model, and it underscores how the industry is pushing the boundaries of traditional financial regulation.

Bitnomial runs an exchange, a broker and its own market-making trading firm. The CFTC Wednesday approved its plan to also operate a clearinghouse, which will sit in the middle of buyers and sellers of crypto derivatives contracts. The company said it sought the approval to expand access to digital assets.

The CFTC's move split the agency’s Democratic majority and appeared to make at least one Republican uneasy.

CFTC Commissioner Christy Goldsmith Romero, who previously served as the federal watchdog for TARP and has balked at other recent agency policies, was the lone official to oppose the move. She said it was precedential because it would be the CFTC’s first vote to approve a vertically integrated market structure. She cited a host of potential worries that have been raised about such arrangements, including conflicts of interest, consumer protection risks and financial stability threats. She said the CFTC should address existing risk in Bitnomial’s business "before doubling down.”

“We should learn the lesson from our consideration of FTX’s application that also sought to change the traditional market structure,” she said. (Republican CFTC Commissioner Summer Mersinger also had reservations but concurred with the approval.)

CFTC Chair Rostin Behnam signaled the agency will act next year to address broader policy concerns as requests like Bitnomial's become a trend. But he took the stance that the company followed the rules with its application and that the CFTC was legally obligated to act. It was a striking contrast with the leader of the CFTC’s sister agency, SEC Chair Gary Gensler, whose efforts to police the digital asset industry have triggered lawsuits and enshrined him as Washington’s chief crypto antagonist.

“We have deadlines,” Behnam said Wednesday. “We have responsibilities. And we have a responsibility above all else to apply the law and regulations fairly and equitably across stakeholders and registrants.”

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Driving the day

Sen. Jack Reed and Treasury Under Secretary for Domestic Finance Nellie Liang speak at a Brookings event on financial data ... The Financial Stability Oversight Council has a public meeting to discuss its annual report at 4:15 p.m. ... Treasury Secretary Janet Yellen will talk about the U.S.-China economic relationship at a U.S.-China Business Council dinner at 7:45 p.m.

The Fed pivots — Markets rallied after Fed officials signaled they're done raising rates and see the potential for three rate cuts next year, per our Victoria Guida. The Dow hit a record closing high.

As Bloomberg puts it: "After clashing in recent years, Wall Street traders and the Federal Reserve are — for once — broadly in sync: The great monetary pivot is near as central bankers engineer a once-unthinkable soft landing in the world’s largest economy."

The WSJ reports that Fed Chair Jerome Powell's comments about turning to rate cuts were surprising. Just two weeks ago he said it was too soon to speculate about when lower rates might be appropriate.

“There’s a general expectation that this will be a topic for us, looking ahead," Powell said after Wednesday's FOMC decision. "That’s really what happened in today’s meeting."

The C-suite view — The Business Roundtable said executives expect the “stable but cooling” economy to grow by 1.9 percent next year, Sam Sutton reports.

Regulatory corner

SEC approves Treasury trading revamp — Per Declan Harty, Wall Street will need to begin moving more U.S. Treasury trading through clearinghouses under a rule the SEC finalized Wednesday. It's part of a push to shore up the $26 trillion market that serves as the bedrock of finance. Regulators have grown increasingly anxious about trading conditions in recent years amid volatility and structural shifts.

More on the CFTC's crypto move — Bitnomial CEO Luke Hoersten told Declan that the CFTC's approval of the firm's clearinghouse business is "probably the future of what the industry is going to look like."

"We're at the tip of the spear for this," he said.

Another source plugged into CFTC dynamics described it as "an arms race" and said that Bitnomial's application “could fundamentally change the CFTC’s market structure.”

CFPB urged to take more time on Big Tech payments rule — Eight finance and tech groups are asking the CFPB for another 30 days to comment on a proposal that would impose new regulations on Apple Pay, Google Pay, Cash App and other payment app operators. The groups include the Financial Technology Association, the American Fintech Council and the Chamber of Progress.

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On the Hill

Senate action on stablecoins — Per Eleanor Mueller, Senate Banking Chair Sherrod Brown said his staff is in talks with the staff of Sens. Kirsten Gillibrand and Cynthia Lummis on an attempt by the pair to draft a new stablecoin bill.

Brown said in an interview that he was not read in on the specifics of the legislation. But he was skeptical that House Financial Services Chair Patrick McHenry would pivot from his own stablecoin bill.

Gillibrand said in an interview that her goal with Lummis is to draft a consensus bill that will be "well-received" by the leaders of Senate Banking and House Financial Services. The tension at Financial Services, and with the Biden administration, has been how to balance powers of the Federal Reserve and state regulators.

First in MM: Barr bill targets CFPB — Rep. Andy Barr will introduce a bill today that would restrict how the CFPB brings enforcement actions under authority targeting unfair, deceptive or abusive practices, Eleanor Mueller reports.

The Kentucky Republican's legislation would require the agency to write rules around how it levies civil monetary penalties and how it defines UDAAP.

Fly Around

ESG advocacy — Americans for Financial Reform Education Fund and Take On Wall Street are launching esgexplainer.org. They say it's an attempt at "educating Americans about responsible investing" and "dispelling myths" about ESG.

Citi tries to speed up cuts — Bloomberg: "Citigroup Inc. is offering to pay some staffers a portion of their bonuses early if they agree to depart as executives continue with their restructuring of the Wall Street giant."

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