FTX founder SBF proposed to the CFTC in March, hoping to use smart contracts to replace futures brokers (FCMs) and automate risk management. While the proposal was praised by the CFTC chairman, it is clear that traditional financial people on Wall Street think otherwise.
As crypto assets go mainstream, the exchange of views between representatives of crypto exchanges and traditional futures exchanges has become the focus of many conferences, including this year's Florida Finance Conference. According to "Bloomberg" reports, in the meeting, FTX founder Sam Bankman-Fried and CME (CME Group) CEO Terry Duffy had a heated discussion on FTX's CFTC proposal last month.
According to the CFTC's announcement, FTX hopes to use smart contracts to replace futures brokers (FCMs), and in addition to requiring customers to deposit collateral in the account, the system will calculate margin positions on a rolling basis in units of 30 seconds. If the margin ratio drops too low, FTX will start liquidating user positions within seconds.
The worst plan is to sell the position to the liquidity provider for the "agreed amount".
The concept was praised by CFTC Chairman Rostin Behnam, who believed that the arguments and practices behind FTX sounded solid and promised to carefully consider the proposal.
But apparently traditional finance people have some concerns about the proposal.
At present, in traditional finance, FCM is responsible for collecting and recovering user deposits. For special customers, FCM will provide "fund advance service" to ensure that the positions of special customers will not be liquidated. In addition, FCM is also required to provide security funds in the clearing house, these funds are used to offset those major violations.
Since each service contains huge benefits, Bloomberg pointed out that many traditional financial people worry that after the proposal is approved, this automatic risk management model may be applied to other assets.
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Pros and Cons
Although neither SBF nor Terry Duffy commented on the meeting, FTX's proposal still sparked discussions.
David Weisberger, co-founder and CEO of CoinRoutes, believes that FTX's proposal is a "constructive disruption" (Constructive Disruption) to the traditional market structure. David Weisberger has created trading systems at Morgan Stanley and Two Sigma in the past.
"This is the first time we've seen real constructive damage to traditional market structures after such a long time. Any change will create tension (in traditional markets)," he said.
Opponents of the proposal say that FTX's proposal could undermine investor protections and could cost many brokers their jobs. There may be some truth to investor protection. Because the use of algorithms to replace brokers to process transactions is fast and convenient, but it does not necessarily replace the responsibilities of brokers.
In response to concerns about protecting investors, FTX previously stated that if buyers and sellers fail to fulfill their delivery obligations, FTX has US$250 million in funds to compensate for losses, which is in stark contrast to CME requiring brokers to inject funds to compensate for losses.
On the other hand, once the FTX proposal is passed, coupled with the previously obtained regulatory license, FTX can gain a foothold in a broader market, from oil, gold, and even cryptocurrencies. If this is the case, then FTX will affect banks such as CME and ICE, the parent company of the New York Stock Exchange, which are in the clearing platform business.
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Can the proposal pass smoothly?
While the CFTC was reviewing the proposal, traditional finance also extended its wrestling to Congress.
CME and ICE have long been consulted on legislation by members of Congress, who in turn oversee the CFTC. Democratic House of Representatives David Scott once warned that the FTX proposal would make the systemic risks of derivatives regulation greater and investor protection weaker.
Of course, FTX’s proposal has also received some traditional financial support, including Nasdaq’s executive vice president Tal Cohen. "It's a big step forward," he said in a recent interview.
SBF compares the proposal to electronic transactions 30 years ago, and believes that although there are resistance at the beginning, everyone will eventually accept it.
