On June 13, the Senate Appropriations Financial Services and General Government Subcommittee held a hearing entitled “A Review of the President’s Fiscal Year 2025 Budget Requests for the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.” The witnesses in the hearing were:
- Gary Gensler, Chairman, Securities and Exchange Commission (SEC)
- Rostin Behnam, Chairman, Commodity Futures Trading Commission (CFTC)
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- The hearing covered the budget requests for the CFTC and SEC, the security of data stored on the Consolidated Audit Trail (CAT), digital assets, artificial intelligence within financial markets, and the SEC’s climate change disclosure rules.
- Chairman Gensler was pressed on the SEC’s treatment of digital assets and its trend of regulation by enforcement, but he maintained that digital asset markets are rife with fraud and an unwillingness to comply with existing securities laws. Chairman Behnam again called for Congress to pass legislation that would extend CFTC jurisdiction over digital asset commodity spot markets but emphasized the need for more resources to handle these new responsibilities.
- Chairman Behnam reiterated concerns with election event contracts, saying they posed election integrity concerns and that the CFTC should not be a cop for verifying elections.
- Senate Ag Committee Ranking Member John Boozman (R-AR) pressed Gensler on security concerns associated with the CAT. He said that there are serious concerns that this data is not being adequately protected by the government.
SUMMARY
Opening Statement and Testimony
Gary Gensler, Chairman, SEC
We are losing pace with an ever-increasing scale and technology associated with our capital markets. Transaction volume in the equities market doubled in the last five years and tripled in the last seven. Without additional resources, I think that our market oversight capabilities are at risk.
Rostin Behnam, Chairman, CFTC
For over a century, derivatives markets have played a key role in the U.S. economy, promoting economic growth and contributing to financial stability. I have witnessed the massive expansion of the CFTC’s jurisdiction though Title 7 of the Dodd Frank Act, also organic growth in our historic markets, the introduction of new products, including the digital asset commodity class, and the significant expansion of market participants, both institutional and retail. As Chairman, I have focused on identifying and addressing regulatory gaps and market uncertainty, strengthening the agency organizationally so we are operationally effective, diverse, and a competitively attractive employer, better understanding and incorporating the digital asset ecosystem, artificial intelligence and cybersecurity into our decision making, and addressing the needs for guidance for emergent product structures, such as voluntary carbon credit derivative contracts and vertical integration.
Discussion
Van Hollen (D-MD): I am looking at our House counterparts that include significant cuts to the enforcement budget and a provision that would prohibit the SEC from utilizing the Consolidated Audit Trail (CAT) as a part of enforcement efforts. Could you describe the impact of these actions would be if they were implemented? The House also introduced language that would prevent the SEC from bringing certain enforcement actions in the digital asset space. How would that impact the SEC’s oversight? Gensler: I think it would significantly impinge on our ability to be that “cop on the beat”, but also to answer questions to Congress. In terms of the CAT, this is a really important source of information for the SROs and the agency to look for market manipulation. Reducing the SEC’s ability to bring enforcement cases in the digital asset space would seriously handicap our ability to protect market participants. While all crypto tokens are not securities, those that are have an obligation to make public disclosures. It would also hamper our ability to ensure intermediaries are registered with the SEC.
Van Hollen (D-MD): Chairman Benham, what measures should we use to ensure digital assets are not used for illicit purposes? Benham: From the CFTC perspective, it is a legal authority issue, and we have anti-fraud and anti-manipulation authority for digital commodity assets, and we have been quite successful in the past ten years of bringing enforcement cases in this space. The main issue is that the CFTC currently only has enforcement authority, and, if Congress were to extend our oversight authority over digital asset commodity spot markets, we could use existing laws to ensure that AML, KYC, and other types of oversight are in place for these markets.
Van Hollen (D-MD): What are the potential harms of legalized election gambling, such as political event contracts? Benham: The CFTC has proposed a rule that would ban prediction contracts on election markets. Our authority over non-traditional assets or assets we do not have direct oversight over is limited to fraud and manipulation. The CFTC cannot become a cop for election integrity.
Van Hollen (D-MD): How is artificial intelligence manipulating markets? Benham: We put out a request for information on AI. The question is now whether our existing regulations appropriately manage the new uses of AI. It is going to create blurry lines about how we oversee markets. We will continue to solicit feedback on how AI is impacting our markets and how the CFTC can use AI to carry out its responsibilities of market oversight.
Hagerty (R-TN): The SEC is devoting its resources to partisan goals such as the private funds rule and the climate rule, but it refuses to create practical rules of the road for the digital asset industry. This industry is being increasingly pushed offshore, and that is not the result we want. Chairman Benham, is ether a commodity? Chairman Gensler, is ether a commodity? Benham: Yes; Gensler: As an agency, we are in the process of considering ether ETFs.
Hagerty (R-TN): What are you doing to protect information on the CAT? Gensler: Only a limited number of people have access to CAT Data.
Durbin (D-IL): What makes you think an agency as small as the CFTC can regulate the bad actors in the crypto space? Behnam: Currently, there is a gap in regulation over digital asset commodity spot market. Over the past ten years, we have brought 135 crypto cases, we have brought in billions of dollars, and we have successfully policed a market where we do not have direct oversight authority. We are adequately equipped to oversee the markets that we are mandated to oversee, but if we were to be given authority over crypto market, I would certainly expect there to be an increase in the budget.
Boozman (R-AR): How often do SEC employees use CAT data, and how may enforcement cases have been brought about as a result of the CAT data? Gensler: There is a limitation on people using the data, even at the SEC.
Boozman (R-AR): Will you commit to allowing U.S. customers the ability to hedge their global interest rate risk to ensure a level playing field? Behnam: We certainly commit to working with other jurisdictions and other institutions that want to register with us fully or fall within exempt classification. I feel very strongly that we have to apply the same protections on non-U.S. entities as we do on domestic entities.