New CFTC Rule for Customer Money Protection Inspired by FTX

• US Regulators Propose Measures to Protect Cryptocurrency Investors
• Revised Rules for Derivative Firms
• Reflections from the CFTC Chair
• Implications of the Proposed Rule
• Critiques of the Proposal
• Considerations for Future Regulations

US Regulators Propose Measures to Protect Cryptocurrency Investors

In a significant move towards consumer protection, the U.S. Commodity Futures Trading Commission (CFTC) is considering a proposal that mandates derivatives clearing organizations to separate their customer funds from proprietary funds. The initiative comes in the wake of the FTX$3.28 -5.38% debacle last year where billions of customer dollars were misappropriated, highlighting the need for stringent regulation.

Revised Rules for Derivative Firms

The CFTC commissioners, in a recent public meeting, voted in favor of publishing this proposal for a broader audience feedback. This measure is a crucial milestone in establishing a policy that would extend to all companies under commodity regulation. As per the proposed scheme, in case a clearing organization hits a liquidity snag, such as a high volume of withdrawal requests, customer funds are ensured protection.

Reflections from the CFTC Chair

Chairman Rostin Behnam supported the proposal, stating its importance in the light of emerging market participants with innovative ideas on market functionality. He noted that such initiatives are especially relevant in the expanding crypto space.

Implications of the Proposed Rule

The proposed regulation would permit DCOs to amalgamate proprietary funds from various clearing members. However, it would strictly prohibit the pooling of proprietary funds, customer funds, or the DCO's funds. Commissioner Kristin Johnson, who voted strongly for the proposal, said the failure of FTX served as a potent reminder of the potential customer losses in the absence of stringent regulations.

Critiques of the Proposal

Despite the overall support, Commissioner Summer Mersinger voiced her dissent, calling for more time to evaluate the proposal's potential issues. She urged for a discussion comparing the proposal's requirements with the existing DCOs, and for a cost-benefit analysis. Commissioner Caroline Pham, who concurred with the proposal, warned about altering current regulatory frameworks without due diligence.

Considerations for Future Regulations

Commissioner Christy Goldsmith Romero, who opposed the proposal, raised concerns about the typical customers of crypto platforms. As per the proposed regulations, such customers would be the clearing organization's members instead of customers as per CFTC norms. She questioned whether retail investors are aware of this change and the resultant decrease in their customer protection rights.

Edited by Jonathan Stoker