As the crypto industry continues to grow and mature, regulators are continuously taking steps to ensure that the industry is subject to appropriate oversight and regulation.  The Commodity Futures Trading Commission (CFTC) has published an advanced notice of proposed rulemaking (ANPRM) seeking public comment on potential amendments to the Risk Management Program (RMP) requirements in CFTC Regulations.

These regulations are applicable to swap dealers and futures commission merchants and aim to ensure sound risk management in the derivatives markets.

The ANPRM seeks feedback on several areas of the RMP regulations, including governance and structure, the enumerated risks RMPs must monitor and manage, and the specific risk considerations RMPs must take into account. It also seeks comments on how the risk exposure report required under the RMP regulations could be improved or modified.

In a recent public statement, CFTC Commissioner Christy Goldsmith Romero emphasized the need for regulatory oversight to address the risks associated with certain crypto investments. Romero cited the recent failure of Silvergate Bank as an example of the potential risks that these investments can pose.

Furthermore, the CFTC has highlighted “significant risks” associated with crypto assets. Silvergate Bank, which provided services to crypto firms, experienced an outflow of deposits from digital asset customers in the fourth quarter of 2022, resulting in a 68 percent loss in deposits from $11.9 billion to $3.8 billion. This rapid loss of deposits caused the bank to sell debt securities to cover deposit withdrawals, resulting in a net earnings loss of $1 billion.

For the US regulator, the collapse of Silvergate Bank demonstrates risks associated with crypto and has stated the need for effective risk management in the derivatives markets. The CFTC further claimed that as the crypto market continues to gain popularity and mainstream adoption, it is important for regulators to ensure that the risks associated with these assets are properly identified and managed.

The Commission intends to use the information and comments received to inform potential future agency action, such as rulemaking, with respect to the RMP Regulations. The recent bank failures have highlighted the importance of effective risk management, and the ANPRM seeks to ensure that the RMP regulations keep pace with evolving markets and emerging risks.

CFTC Commissioner Romero spoke at a financial services conference in London in April and emphasized the need for improved identification capabilities in the crypto industry to combat illicit finance risks. However, she also highlighted the importance of financial privacy for customers and suggested that it is possible for crypto companies to provide this privacy without relying on anonymity-enhancing technology.

According to Romero, financial privacy can be ensured by verifying the customer’s identity through know-your-customer (KYC), anti-money laundering (AML), and countering the financing of terrorism (CFT) measures, without relying on anonymity-enhancing technology. This approach is commonly used in traditional finance (TradFi) and can be applied to the crypto industry as well.

The integration of traditional finance systems into decentralized systems is crucial to address this issue. By incorporating effective AML/KYC measures, crypto companies can uphold financial privacy while also complying with regulatory requirements and mitigating illicit finance risks.

Overall, the CFTC’s reassessment of its risk management frameworks highlights the importance of effective risk management in the derivatives markets. The impact of the CFTC’s reassessment on the crypto industry remains to be seen.

Featured image from iStock, chart from TradingView.com 

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