Nov. 28, 2022 Updated Mon., Nov. 28, 2022 at 9:50 a.m.
Before his undoing this month, crypto mogul Sam Bankman-Fried aggressively pursued powerful allies in Washington. None was more important than Rostin Behnam.
The chief of the federal agency that oversees commodities markets, Behnam holds a strategic perch among the nation’s financial regulators.
And the 44-year-old Washington bureaucrat was indispensable in the boyish billionaire’s ambitious plans to reshape U.S. crypto regulation.
Since last year, the two have worked in parallel on critical initiatives which, if not for the sudden demise of Bankman-Fried’s FTX empire, might have radically altered the nation’s attempts to govern the freewheeling market for digital currencies.
Now that FTX has collapsed amid allegations of fraud, those initiatives may be doomed.
But as the financial world examines why major firms threw hundreds of millions of dollars at the 30-year-old Bankman-Fried, the capital is looking anew at his courtship of Washington and why he sought to build ties with Behnam and the agency he leads, the Commodity Futures Trading Commission.
The most ambitious of the two initiatives entwining the two men is a bill in Congress – one outlined by Behnam’s agency and then loudly backed by Bankman-Fried, who commanded a phalanx of lobbyists and public relations people.
The bill would put the CFTC largely in charge of crypto exchanges like FTX.
As the overall value of digital currencies swelled in recent years to as much as $3 trillion, some members of Congress and consumer advocates have clamored for clearer rules and stronger oversight of crypto trading.
But many of the same advocates calling for regulation oppose the regulatory bill favored by Behnam and Bankman-Fried because, they say, the CFTC is too small, too lenient and less prepared than the Securities and Exchange Commission to undertake oversight of the burgeoning realm of digital currencies.
Bankman-Fried, though, was a big fan: “It’s a well-done bill,” he said in an interview last month with The Washington Post. “And it’s well-positioned.”
Behnam pushed for the legislation, too. The measure – co-sponsored by Sen. Debbie Stabenow (D-Mich.), whom Behnam previously served as a senior aide – would considerably expand his agency’s reach and budget.
While drumming up support, he predicted that regulation by his agency might even profit crypto businesses: “Bitcoin might double in price if there’s a CFTC-regulated market,” he said this fall at a conference at Georgetown University.
The second initiative to join the two was Bankman-Fried’s novel proposal to the CFTC last year.
The proposal forced regulators to rethink how risk is handled in all commodities trading – not just crypto exchanges – and could have had profound economic implications, supporters and detractors agreed.
For FTX, the proposal would have allowed customers to make sophisticated cryptocurrency bets with borrowed money directly through its exchange website FTX.US, rather than making such trades through brokers.
Some federal regulators have warned that the idea could harm consumers and destabilize markets, but CFTC officials spent months in discussions with FTX as it developed the proposal and, in public comments, Behnam offered positive remarks about the idea.
Behnam repeatedly said that his agency had made no decision, but behind the scenes, according to Terry Duffy, chief executive of the Chicago Mercantile Exchange, agency officials wanted to approve the proposal.
They staunchly defended it in conversation with him this spring – so much so that Duffy, an opponent, told them he would sue the agency over it, he said.
In his view, all of Washington seemed to be entranced by Bankman-Fried’s promises of innovation.
“I’ve been [going to] Congress for 25 years – I’ve never seen a Washington, D.C., like I saw that time, from the regulators to the members of Congress, singing hymns that I’d never heard before,” Duffy recently recalled of his May visit to Washington on the On the Tape podcast. “No one else was calling BS on these clowns but me.”
“You cannot try to make round holes and square pegs fit just because someone walks into town and sprinkles the infield with other people’s money,” he said.
Bankman-Fried had given enough in political currency – donations – to expect to get an audience.
The crypto mogul gave $40 million to politicians and political action committees before this month’s midterms, mostly to Democrats and liberal-leaning groups, according to the Center for Responsive Politics, a nonpartisan group that tracks campaign donations.
Another senior FTX official, Ryan Salame, gave large sums to Republicans.
Behnam declined to comment for this story.
At a recent industry conference, though, he said the FTX debacle underscored his previous call to plug gaps in U.S. crypto regulation.
“This really only elevates the urgency for Congress to pass legislation to address these issues, many of which we are seeing in real time with the FTX implosion,” Behnam said at the conference held earlier this month.
A CFTC official said that under existing law, the agency had no authority to probe FTX or most of its affiliates.
Aside from two smaller FTX-owned firms that the CFTC already regulates – LedgerX and LedgerPrime – “any suggestion that we could have regulated, examined, surveilled, reviewed, intervened or prevented the issues at the unregulated FTX or any company owned, operated or affiliated with FTX is patently false,” the official said, speaking on the condition of anonymity to discuss a company the agency regulates.
As for Behnam’s push for crypto oversight, CFTC spokesman Steve Adamske said the chair’s “years-long advocacy for expanded authority for the CFTC is driven solely by the fact that digital commodity asset investors and customers remain vulnerable to fraud and manipulation because these markets are unregulated.”
Now some are calling for more scrutiny of interactions between FTX and the agency.
Dennis Kelleher, president of Better Markets, which advocates for stricter financial regulation, is calling for an investigation into “how FTX ended up having so much influence at the CFTC.”
He said the agency missed red flags at FTX, as Behnam demonstrated “a willingness to subordinate the public interest to the profit-maximizing interest of FTX.”
All along, as Bankman-Fried and other FTX officials lobbied to make the CFTC their regulator, they professed their admiration for the federal agency.
The CFTC is “a very thorough regulator who understands this space very deeply,” Bankman-Fried testified to Congress in May.
“We are encouraged that the CFTC has taken such a deep, thoughtful, rigorous approach,” the company echoed on its blog.
For a moment after FTX’s implosion earlier this month, though, it seemed that the respect between the billionaire and the CFTC had frayed.
Bankman-Fried took out some of his wrath on regulators, saying in an interview with Vox, “f—-Regulators … they make everything worse.”
By the next day, he wanted to make clear he didn’t mean all regulators.
He tweeted that “there are regulators who have deeply impressed me with their knowledge and thoughtfulness. The CFTC has … But most are overwhelmed.”
The CFTC traces its history back to 1922, when the federal government began regulating grain futures.
In 1975, it spun off from the Agriculture Department as an independent agency, and in the decades since, it has expanded its oversight from futures for staples such as wheat, metals and oil to more complex financial products.
Its authority took a leap forward in the aftermath of the 2009 global financial crisis, when it began policing the multitrillion-dollar swaps market, where traders exchange financial instruments to hedge bets on loans or prices of fuel and other commodities.
In 2014, the agency also became the first federal regulator to nose into crypto.
At the prompting of then-Commissioner Mark Wetjen, who had been nominated by President Barack Obama in 2011, the CFTC allowed a company called TeraExchange to facilitate trades based on the future price of bitcoin, a similar sort of maneuver to the financial derivatives the agency already oversaw.
The agency later found that the traders on either side of the first such deal completed an offsetting transaction six minutes later in an illegally prearranged scheme.
The exchange got away with a slap on the wrist, as TeraExchange simply agreed to cease and desist from any future violations. But the regulator had planted its flag over the nascent industry.
Wetjen stepped down from the CFTC a year later and quickly found work in crypto, joining the board of LedgerX, a crypto derivatives exchange.
The company went on to secure three CFTC licenses that allowed it to facilitate commodities derivatives trades, making it an attractive target for Bankman-Fried as he eyed a future in the U.S. from his Bahamas headquarters.
FTX bought LedgerX last year, bringing Wetjen into Bankman-Fried’s expanding constellation of crypto businesses.
The crypto executive soon tapped Wetjen to serve as the architect of his aggressive Washington agenda.
And Bankman-Fried continued adding former CFTC officials to his roster as he sought to build his Washington muscle.
In August 2021, he brought on as general counsel of FTX’s U.S. affiliate Ryne Miller, an adviser to then-CFTC Chairman Gary Gensler, who now runs the SEC.
He added Jill Sommers, another former CFTC commissioner, to the U.S. company’s board this September.
Behnam, for his part, has seen his profile rise alongside the CFTC’s over the last decade.
The New Jersey native went to law school at Syracuse University, cut his teeth working for his home state’s financial regulator and then practiced law in New York. But he landed on Capitol Hill in 2011, with a job advising Stabenow on the Senate Agriculture Committee, which oversees the CFTC.
The committee and the agency were busy implementing the Dodd-Frank financial reform law that expanded the CFTC’s scope to include the swaps market.
Behnam jumped into that effort and spent the next six years on the committee’s staff, focusing in part on its work with the CFTC.
Senate Democrats tapped him to join the commission itself in 2017, and President Biden nominated him as chairman last year.
Appearing before the committee that October for a confirmation hearing, Behnam signaled he would be looking to strengthen the CFTC’s crypto powers, telling senators he wanted to work with them to “reexamine – and if appropriate, expand” the agency’s authority over digital assets.
Once FTX hired several former agency officials, its first major move in Washington was a proposal, filed in December 2021, to allow people to make cryptocurrency bets using borrowed money directly through the company’s website, putting up collateral directly with FTX rather than with a broker.
For months before it was submitted, the CFTC held informal discussions with FTX about the proposal, and the company made alterations in response, company officials have said.
By May 2022, according to Bankman-Fried, his firm had “spent tens of thousands of hours talking with the commission about this proposal.”
Little noticed by the public, the proposal provoked strong opinions in the financial world.
In May, the CFTC invited industry players, supporters and detractors alike, to a special roundtable meeting.
The participants included representatives of BlackRock, JP Morgan, Citi, Citadel, Goldman Sachs and CME.
The meeting was titled “Staff Roundtable Discussion on Non-intermediation,” but it was clear to participants that the meeting was about the FTX proposal.
Bankman-Fried was there – and the young billionaire, often portrayed as a benevolent tech genius, showed that he could be imperious, too.
Proponents at the meeting praised the idea of using technology to enhance market efficiency.
It would make the market more democratic, too, they said, by giving more people the ability to bet on the prices of cryptocurrencies.
But the proposal also required regulators to reconsider long-standing protocols for how markets should work – removing brokers who could protect consumers and stabilize markets and replacing them in part with computer algorithms.
Four hours into the meeting, a consumer advocate and former FDIC attorney, Todd Phillips, hit a nerve, saying the proposal would allow large aggressive trading firms to prey on unsophisticated crypto traders.
Bankman-Fried then took aim at his Washington critics, declaring that when it comes to understanding financial risks, his customers knew better.
“I think I feel pretty compelled to say this,” Bankman-Fried began, glaring at some on the panel, a video of the meeting shows. “I’m going to be pretty blunt.
“Most of the traders on our platform know a lot more about these contracts than many of the people in this room, including many of the people in this room who are condescendingly talking to them about what they do and don’t know. There is some irony in, you know, some of the statements made by people attempting to protect those who know massively more than they do about the topic.”
At least through October, Behnam and the CFTC remained publicly undecided on the FTX measure.
But in remarks to interested groups, Behnam repeatedly touted the proposal’s potential, saying it could be an important technical innovation akin to the shift in the ‘90s from the trading floor to computerized systems.
“This is a unique intersection of the crypto space and traditional finance,” Behnam said at a Georgetown University conference last month, according to news accounts.
He added that crypto innovators offered lessons for those in traditional markets.
“They come into the traditional market space, and they’re just a bit puzzled,” Behnam said. “They’re like, ‘Why do you do it this way?
“We have a way that’s more efficient, where we can have trading execution that’s quicker with better pricing, and we can have settlement and custody in a much better manner.’ That’s where I think we have to learn from each other collectively.”
Behnam refused to say which way the CFTC was leaning on the FTX proposal, but Duffy, the chief executive of the Chicago Mercantile Exchange, believed that the agency aimed to approve it.
Angry and skeptical about a move he thought would be disastrous for market stability, he went to the CFTC this spring where, he said, the staff rejected his complaints.
“They wanted to approve it,” Duffy recalled in the Friday interview with the On the Tape podcast. “I said that would be lovely except that would be an arbitrary decision to approve a regulatory change for one asset class. They argued with me. They said, ‘No, it’s not. We have the ability to do it.’ “
On Nov. 11, the day Bankman-Fried resigned as chief executive of FTX, the company withdrew its proposal.
An agency official, speaking on the condition of anonymity to discuss a company it regulates, disputed Duffy’s claim that the CFTC had been poised to approve the application.
“CFTC staff were nowhere near completing the work that would advance any recommendation to the commission,” the official said. “In fact, in the more than 11 months of review and working openly and transparently that allowed for plenty of public comment, the application did not hold up to our scrutiny.”
While the CFTC mulled Bankman-Fried’s application, the executive launched himself on a mission to help the agency expand its jurisdiction to include crypto.
A legislative proposal as complicated and fraught as one dividing regulatory authority over a new, booming industry might take years to advance; Bankman-Fried, moving with characteristic speed, tried to get it done in months.
There was good reason for the crypto mogul’s urgency. He argued that the legislation from Sens.
Stabenow and John Boozman (R-Ark.), the leaders of the Senate Agriculture Committee, would unlock a wave of institutional investment into firms such as his by giving big-money players in traditional finance the legal clarity they needed to jump into the sector.
The senators introduced their bill in early August, and Bankman-Fried was intent on pushing it into law by the end of the year, a goal he confirmed in an interview with The Post last month.
The mission pitted him against a shrinking legislative calendar and detractors who criticized the bill from two sides.
Consumer protection advocates said it was too lax on industry and threatened to undermine the power of the SEC, while an increasingly vocal segment of crypto die-hards argued that the bill would enshrine centralized crypto platforms like FTX and snuff out their decentralized competition.
Bankman-Fried, however, had a well of political capital to draw from thanks to his prodigious campaign giving.
He also had a key ally in Behnam, who would see his power grow if he became the first federal cop on the crypto beat.
The agency head’s support for the bill extended beyond supplying Hill staff with its outline.
Before the legislation was introduced on Aug. 3, Behnam’s office attempted to get all four of the other commissioners at the agency to sign on to a unanimous statement expressing a positive view of the measure, CFTC officials said, speaking on the condition of anonymity to discuss internal agency deliberations.
The effort fell short, and Behnam was left to put out his own statement, declaring that the bill arrived at a “critical inflection point where new legislative authority is needed to clarify ambiguities.”
Behnam then made the rounds in favor of the bill. He called it a “huge step forward” in a September appearance before the Senate Agriculture Committee.
Two weeks later, in what was billed as a fireside chat at NYU School of Law, he dangled the possibility that crypto investors would see a handsome return if the CFTC secured jurisdiction over the market.
“Growth might occur if we have a well-regulated space,” he said, adding that bitcoin’s price could double.
Now that FTX is in ruins, the measure has encountered new resistance on the Hill and beyond. Gensler, who had refrained from commenting on it until now, noted the bill was backed by FTX.
“And you sort of wonder why,” he said at the Healthy Markets Conference earlier this month. “Because it was too light-touch.”
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