FTX's CFTC proposal sparks fierce debate among Wall Street giants, constructive disruption or neglecting investor protection?

FTX founder SBF proposed to the U.S. CFTC in March to use smart contracts to replace futures commission merchants (FCMs) for automated risk management. Although the proposal was praised by the CFTC Chairman, it seems that traditional Wall Street financial professionals do not see it the same way.

As cryptocurrencies enter the mainstream, the exchange of opinions between representatives of cryptocurrency exchanges and traditional futures exchanges has become a focus at many conferences, including this year's financial conference in Florida. According to Bloomberg, at this conference, FTX founder Sam Bankman-Fried and CME (Chicago Mercantile Exchange) CEO Terry Duffy engaged in heated discussions regarding FTX's CFTC proposal from last month.

According to the CFTC announcement, FTX hopes to use smart contracts to replace futures commission merchants (FCMs) and, in addition, require customers to deposit collateral in their accounts. The system will calculate margin positions on a rolling basis every 30 seconds. If the margin ratio falls too low, FTX will begin to liquidate customer positions within seconds.

The worst-case scenario is to sell the position to a liquidity provider at a "predetermined amount."

This concept has garnered praise from CFTC Chairman Rostin Behnam, who finds FTX's arguments and practices behind the proposal sound and promises to carefully consider the proposal.

However, traditional financial professionals seem to have some concerns about this proposal.

In traditional finance, FCMs are responsible for collecting and margin calls from users. For special clients, FCMs provide "pre-funding services" to ensure that the positions of special clients are not liquidated. Additionally, FCMs need to provide collateral funds provided by clearinghouses to offset significant violations.

Given that each service entails significant profits, Bloomberg points out that many traditional financial professionals are concerned that if the proposal is approved, this risk automatic control model may be applied to other assets.

Considering that FTX's proposal bypasses banks and other intermediaries, this threatens the interests of Wall Street.

Arguments from Both Sides

While both SBF and Terry Duffy have not commented much on the meeting, FTX's proposal has sparked discussions from various parties.

David Weisberger, Co-founder and CEO of CoinRoutes, believes that FTX's proposal is a "constructive disruption" to traditional market structure. David Weisberger has previously built trading systems at Morgan Stanley and Two Sigma.

He stated, "This is the first time in a long time we've seen real constructive disruption of traditional market structure. Change always causes (traditional markets) tension."

Those against the proposal argue that FTX's proposal may undermine investor protection and could result in many brokers losing their jobs. There may be some merit to concerns about investor protection since using algorithms to handle trades, while fast and convenient, may not necessarily replace the responsibilities brokers undertake.

In response to concerns about protecting investors, FTX has previously stated that if buyers and sellers fail to fulfill delivery obligations, FTX has $250 million in funds to compensate for losses, which is in stark contrast to CME's requirement for brokers to inject funds to cover losses.

On the other hand, if FTX's proposal is approved, coupled with the regulatory licenses it has obtained, FTX could expand into a broader market, including oil, gold, and even cryptocurrencies. If this is the case, FTX would impact banks that conduct business as clearing platforms like CME and Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange.

As Julian Hammer, a former CFTC employee and current partner at FisherBroyles, said, "The way the futures industry operates is undergoing seismic changes."

Will the Proposal Be Approved?

While the CFTC reviews the proposal, traditional finance is extending its wrestling match over the issue to Congress.

For a long time, CME and ICE have been consulted by members of Congress when legislating, and members of Congress oversee the CFTC. Democratic House Representative David Scott has warned that FTX's proposal could increase systemic risks in derivative regulation and weaken investor protection.

Of course, FTX's proposal has also garnered support from some in traditional finance, including Tal Cohen, Executive Vice President of Nasdaq, who recently stated, "This is a big step forward."

SBF likened the proposal to electronic trading 30 years ago, believing that although there was resistance at the beginning, eventually everyone will accept it.