FTX, a leading global cryptocurrency exchange, today released a document entitled, FTX’s Key Principles for Market Regulation of Crypto-Trading Platforms. The set of 10 principles details a regulatory environment that, if enacted, will allow policymakers to effectively regulate the digital asset ecosystem while maximizing the potential growth and innovation. These principles will be part of Sam Bankman-Fried’s written commentary to accompany his in-person testimony to the House Committee on Financial Services during its hearing on Wednesday, 2021, entitled: “Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States“.
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FTX CEO & Co-founder Sam Bankman-Fried commented, “We view these principles as a framework for conversation – both in the US and in jurisdictions where regulatory guidance could be more clear. We want to engage in an open dialogue with regulators and help establish a set of rules to level the playing field for everyone in our industry and to allow innovation in our space to continue to flourish. These principles were created with the protection of investors and the public as a top priority. We hope we can work with regulators in the US and ultimately around the world to implement sensible regulatory frameworks.”
FTX’s principles and proposals on market regulation contain several key points. First, in considering a framework for supervising spot and derivatives crypto trading markets, policymakers should take a principles-based approach and leverage existing policy goals that apply to traditional capital and derivatives markets. These goals include: ensuring customer and investor protection, promoting market integrity, preventing financial crimes, and ensuring overall system safety and soundness. If regulations are created that support these goals, they will apply equally to all markets where crypto assets are traded.
Second, FTX and other crypto platforms have brought important innovations to trading, and a sound framework should preserve these innovations. This is because they minimize risk, promote capital efficiency and protect investors, all of which better serve the public. Some of the key innovations include: automated risk-management systems that ensure customer accounts trading multiple different assets do not go net negative across customer positions; 24/7 trading hours, which also reduces risk; permissioning a non-intermediated market structure that gives all investors the same equal access to the market and helps minimize conflicts of interest; and free-market data that aligns the platform operator’s interest with the investor’s.
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Third, a useful framework would allow crypto platforms to offer both spot and derivatives trading on crypto assets under one unified system, with one rule book and one technology platform to manage risks related to all trading activity in customer accounts. In jurisdictions with mature markets such as the U.S., regulatory frameworks were developed in response to fragmented markets for securities, commodities, and derivatives on those assets. FTX has demonstrated that bringing together markets for both the assets and derivatives for those assets delivers key benefits to market participants. Those benefits come from having one rule book that applies to all trading, having one collateral and risk-margin program, and a single technology stack for the front end (the user interface), to the back end (settling and risk managing positions). Public policy should permit this one rule book model due to its risk-reducing and customer-protection attributes. To accomplish this, and where there is more than one market regulator such as in the U.S., regulators should work together cooperatively and use their authorities where applicable to accommodate this model for crypto assets. At the same time, legislators could address any remaining gaps that cannot be appropriately resolved with the existing authority.
One of these gaps is the proper treatment and disclosures for certain types of crypto assets offered for trading, including those whose function and purpose can change over time. While some of these tokens are securities, the classification of others is unclear under existing definitions, and therefore it may be appropriate to establish more definitional refinements as well as a different disclosure framework for certain assets. Fourth, an appropriate policy framework for market regulation of crypto assets should remain market-structure neutral and expressly allow non-intermediated markets. It also could take a functional approach and require disclosed policies and procedures created by the platform operator to address key issues such as custody of assets, key platform features related to the lifecycle of a trade, reporting of market activity to supervisors, provisioning market data to platform users, ensuring adequate financial resources, ensuring stable coins used on platform are subject to adequate standards, and protecting against cyber-attacks and financial crimes.
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