FTX US head of policy: CFTC has ‘high levels of interest’ in crypto proposal

FTX US Head of Policy and Regulatory Strategy Mark Wetjen joins Yahoo Finance Live to discuss FTX’s proposal for an automatic collateral system, crypto regulation, and the outlook for investors.

Video transcript

BRIAN CHEUNG: Welcome back to Yahoo Finance. A potential shakeup in the crypto space and sites, as the US commodities regulator-- that's the CFTC-- weighs a proposal submitted by FTX, the crypto exchange, proposing to offer direct access to trade Bitcoin and Ethereum on margin without intermediaries.

Joining us now for more on this is FTX US head of policy and regulatory strategy, Mark Wetjen, as well as Yahoo Finance's Jennifer Schonberger. Great to have you on the program, Mark. I just wanted to ask you, kind of, first of all, to give us a baseline of exactly what you're proposing here, what you would like to see from the CFTC, and why what you're trying to do here is a little bit different than how stock exchanges operate today.

MARK WETJEN: Well, thanks for having me. It's great to be with you guys. So what we have before the CFTC, in some ways, is novel, but in other ways, is not so novel. And by that, I mean our proposal sort of packaged several different things together that the CFTC is already somewhat familiar with. And the two main things we've packaged together are a real-time risk management system and a direct access market structure, as you alluded to in your question, Brian.

And that direct access market structure is something that several platforms under the CFTC's jurisdiction operate with today. But we're combining that, again, with a new and different type of a real-time risk management system that we think is very, very exciting, not only for our customers in the United States, but also we think it's exciting for the US derivatives markets more generally.

JENNIFER SCHONBERGER: Mark, Jennifer Schonberger here. It's great to have you on the program. Just to follow on that, what sort of feedback are you getting from the CFTC on your proposal? I know the comment period has ended. Or do you have any indication yet that this could be approved as soon as the summer?

MARK WETJEN: Yeah, it's hard to know about the precise timing. But I think one of the things that we observed and maybe other viewers who tuned in to that roundtable might have observed it, too, we had Sam Bankman-Fried, our CEO, participating in that roundtable. And there's a lot of interest in it. But one of the things that was interesting for us to see during that roundtable, it's almost as though the consensus shifted a little bit as the roundtable discussion went on.

And I would say at first, there might have been some amount of skepticism. But by the end of the roundtable discussion, there seemed to be a considerable amount of openness to what we're trying to do. So I think there's generally high levels of interest and intrigue in our proposal by the CFTC. We believe that they have a view that the proposal actually addresses a lot of interesting different issues that the CFTC, the agency, has dealt with for some amount of time.

I mentioned, again, real-time risk management. Typically, traditional exchanges under the CFTC's purview, there isn't the same type of almost moment by moment assessments of risks at the exchange level. And so bringing that to the exchange and having new and interesting products to go along with it, I think it's just a really exciting opportunity. Not just for us, but we think a lot of folks at the agency see it the same way.

JENNIFER SCHONBERGER: I understand that you're trying to solve for the mismatch in speed for crypto versus the current clearinghouse model. But given that your system would automatically start selling investment positions if margins fell too low, what kind of feedback did you get from regulators specifically on that? I wonder because we're in a bear market right now, and we're already seeing moves magnified to the downside. Is there a fear that this could put further selling pressure, downward pressure, on the crypto space and add to the risk of runs?

MARK WETJEN: Well, that's a very, very thoughtful question. And it's an important question. A couple of things that I think are important for the viewers to understand. The first is, we do have that feature in the model. And by the way, this was a model that we use on ftx.com. And so what we have before the CFTC is a model that's very, very similar to what we use on ftx.com. But it's actually a more conservative model. And it's more conservative insofar as the model would actually ask for more initial margin from participants before they can trade.

But to get to your question, because it's a very important one, the auto de-risking feature of the risk model, in fact, it's not used very often. And so I think that's been one of the important parts of the education process, as we've been having these discussions about our application. A lot of people assume that you put on a position in the middle of the night, you might unwittingly or unknowingly have your position taken away from you by this automated feature on the exchange or on the clearinghouse.

In reality, what we've seen on ftx.com is that that automated de-risking feature doesn't get triggered all that often. And when it does, it only addresses a small slice of the customer's position. And so we've looked at a comparison between the transactional activity on the platform that comes from that automated de-risking feature, and we compare that to the overall transactional activity on the market. And what we see is that it's less than 1% of the overall transactional activity on our platform that actually is coming from that automated de-risking feature.

So, again, it just illustrates, this doesn't happen very often on the platform that that feature gets activated. But more importantly, it's a risk reducing feature. And this is one-- again, one of the reasons why we think the agency is, and, at least, should be, excited about this, because our model requires all the customer collateral to be on the platform at all times. And we don't rely on any margin calls where we seek additional collateral, additional resources to be placed onto our platform by customers. We insist that it's there before anyone enters into a trade.

And then if the market moves in a way where the collateral becomes inadequate, that's when that feature gets activated. But it's only going to get activated if, number one, there's a massive market move, and number two, if the initial margin collected in the first place is somehow insufficient or becomes insufficient, given the market movement. So it's rare.

AKIKO FUJITA: Mark, in recent weeks, we have seen Sam Bankman-Fried emerge as a key lender to many of these struggling crypto companies. There's a report out now from "The Wall Street Journal" that suggests that FTX is looking to take a stake in BlockFi. We know they've already supplied a $250 million credit line. To the extent that you can discuss that, what are the discussions that you're aware of that are happening between FTX and BlockFi? And how significant a risk is FTX willing to take on?

MARK WETJEN: Well, look, I think-- I'm not directly involved in those discussions, but I'm generally familiar with some of those discussions between the two organizations. And here's what I would say. I think that what this partnership between the two companies really speaks to, more than anything else, is the long-term viability of this industry and this asset class. And I think it speaks a lot about the risk management practices and the management at BlockFi.

And I think because of those beliefs on the part of Sam and the company, that this asset class is here to stay, and that we have a very, very solid management team there at BlockFi. A partnership with them makes a lot of sense. And it ties back to what we were talking about earlier in this segment. We at FTX believe that in some amount of time-- and it could happen sooner than a lot of people expect-- there's going to be more and more federal oversight over the industry.

And that's very, very important because as soon as that happens, there's going to be much more clarity for the investor. There's going to be more clarity for the institutional investor. The institutional investor is going to become more and more comfortable stepping into the space. All of that is going to lead to a significant maturing process for the industry. And it's also going to probably start to tamp down some of that volatility that we've seen in markets in crypto over the last number of months now.

AKIKO FUJITA: FTX US head of policy and regulatory strategy, Mark Wetjen, it's good to talk to you today. Really appreciate the time.