U.S. Commodity Futures Trading Commission (CFTC) chair Rostin Behnam urged lawmakers to let his agency play a leading role in crypto regulation.
Behnam testified before the Senate Agriculture Committee last week and called for more uniform standards around security, data reporting, pre-trade, and post-trade transparency, and settlement.
"Despite historically focusing on the derivatives market, the CFTC is prepared and well-suited to play an increasingly central role in overseeing the cash markets for digital assets," Behnam told the House and Senate Agriculture Committees.
You can read the full letter here, but I've highlighted some exciting quotes and data points below.
"Among CFTC registrants, there are several exchanges that offer trading to U.S. market participants in futures contracts tied to the two largest digital assets by market capitalization, Bitcoin and Ether. In January 2022, the average daily open interest for these futures contracts was approximately $3 billion in notional value with an average daily trading volume of approximately $2.7 billion in notional value. As of February 4, 2022, there was also over $1 billion in over-the-counter derivatives referencing Bitcoin and Ether."
Those numbers are much smaller compared to legacy financial markets. However, with around a $2 Trillion market cap, crypto has a lot of upside left regarding growth, especially in the derivatives market.
"Among exchanges not registered with the CFTC, there is also a fairly sizeable global market for trading digital asset-based derivative contracts on exchanges purportedly operating outside of the CFTC's jurisdiction. For example, according to industry estimates, in January 2022, the average daily open interest in Bitcoin and Ether-based derivatives on these exchanges was $22 billion in notional value, with average daily trading volume of $74 billion in notional value."
Here's a chart from the CFTC letter showing crypto futures compared to established financial markets.
"Recent surveys identified that approximately 13% to 14% of Americans invested in digital assets as of 2021. To provide some perspective, a separate analysis suggests that less than 1% of the global population has invested in digital assets."
Despite such parabolic growth, crypto is still tiny, and only 1% of the global population has invested in digital assets. We're still in the early innings of nothing less than a financial revolution.
However, regulators run the risk of "overregulating" in a way that stifles innovation and steers the market towards an offshoot of the legacy financial system.
CFTC chair Rostin Behnam understands the upside. So he's positioning himself in a central role as the police office of crypto regulation to ensure he gets to steer the ship.
There's no denying that crypto market infrastructure is underdeveloped, but an underdeveloped and inefficient market = opportunity.
"Several metrics demonstrate that retail investors are a significant portion of participants in the digital asset market. A recent study finds that a notable number of retail investors are diverting funds from stocks to digital assets, and the largest digital asset exchange in the U.S. reported an increase from 2.1 million to 7.4 million monthly users in the year prior to Q3 2021"
The top digital asset exchange increased its user base by 252%! That's very telling as to what the demand is for investing and trading in digital assets.
"Recent CFTC studies find that nonreportable trading makes up approximately 25% of long open interest in the Bitcoin futures market, which is significantly higher than is generally observed in other futures markets, such as corn, soybean, wheat, WTI crude, gold, and S&P E-mini futures, where non-reportable long open interest ranges from 5% to 11%.11 These studies suggest the amount of retail participation in the digital asset futures market is more than double that in other futures markets."
Retail still makes up most of the crypto trading. To me, that says that institutions have dipped their toe in and would like to go at least waist-deep into the water. However, without clear regulatory oversight, they will stay on the sidelines.
When you're hyper-wealthy, the goal is to preserve your wealth, not grow it. This is a foreign concept to retail, most of whom want to become millionaires. However, if you have $10 million 0 $100 million or more, that's already generational wealth. So the utility of happiness from $50 million to $100 million isn't that different, and the strategies are similar.
Unregulated crypto has a very high upside, but at the same time, it creates an opportunity to lose a significant portion of your wealth. Remember, there have been multiple 70% - 80% drawdowns in crypto.
"The most notable difference between the digital asset market and other commodity markets is the level of retail participation. Most commodity derivative markets, such as the agriculture and energy markets, are dominated by wholesalers, end-users, and institutional investors engaging in hedging and other risk management transactions. However, the digital asset market is characterized by a high level of retail participants engaged in price speculation, often with high levels of leverage."
We have all heard about overleveraged traders on Twitter. Well, regulators know about that as well. An overleveraged market is more susceptible to major drawdowns and high volatility than one that is regulated that has higher standards of who can use leverage.
Anyways, that is a super interesting letter. Expect more hearings this year with letters like this from regulators. The data points are most interesting because they put everything into perspective.
People say we're still early, but it's hard to see that unless you take a step back and take a look at the data. With about 1% of the global population invested in crypto, there is a lot more room to grow!