Note: This is the full text of Congressional testimony prepared by FTX co-founder and CEO Samuel Bankman Fried (SBF), including the appendix, a total of more than 22,000 words (in Chinese), and the workload is very large. It could have been briefly summarized, and a lot of the full text is about the introduction of FTX itself, but we feel that a complete full text is easier to understand the narrative logic in the Western context, and express in detail that SBF pays particular attention to the regulatory issues of Stablecoin. In similar interviews, SBF has also repeatedly mentioned liquidity and the importance of Stablecoin to this industry. All the prosperity of this industry is based on liquidity. Therefore, in the appendix, it specifically made a statement on the regulation of Stablecoin. The full text is too long, so you can selectively browse the part you are interested in.?
Finally, an easter egg: the muscle memory of experienced LOL players.
The following is the full text of the testimony:?
Chairman Waters, Chief Member McHenry, committee members and distinguished guests, thank you for inviting me to testify before this committee. As a member of this committee, I am honored to be able to share some information and insights about the digital asset industry. This chamber and the Congress have discussed various key issues together. I am very happy to work with my colleagues and teammates to provide you with as much information as possible to ensure that we can have a strong debate on “whether and how this committee handles some of the key issues.”?
As a trading platform or market for crypto asset trading, FTX Group of Companies was established in 2019. In the United States, the company is a federally regulated trading platform operator with licenses from the Department of the Treasury and the US Commodity Futures Trading Commission (CFTC). FTX was founded by three Americans, Samuel Bankman Fried, Gary Wong and Nishad Singh, and has been operating since May 2019. The purpose of establishing FTX is to establish a digital asset trading and exchange platform, and is committed to developing into an innovative product with a better user experience and sufficient protection for customers. FTX established the FTX.com trading platform to develop a platform that is powerful enough for professional trading companies and simple enough for new users.?
Given that the core founding team has experience in large-scale engineering systems on Google and Facebook, and trading experience on Wall Street, they have unique experience in building a trading platform from 0 to 1, and understand how the platform can be free from legacy technologies or markets. The impact of structure. FTX aims to combine the best practices of the traditional financial system with the digital asset ecosystem.?
Early success. Since its launch, the FTX.com trading platform has been very successful. This year, the daily transaction volume of the platform is about 15 billion U.S. dollars, and it currently accounts for about 10% of the global crypto transaction volume. The FTX team has more than 200 people worldwide, most of whom are responsible for compliance and customer support. The main international headquarters and operating base of the FTX Group are located in the Bahamas. According to the Digital Assets and Registered Transactions Act of 2020, the company is registered as a digital asset business in the Bahamas.?
In addition to providing competitive products, FTX is also known for its high-performance and reliable trading platform. During the period of high volatility in the entire digital asset market, the FTX.com trading platform experienced relatively short-term downtime and technical performance issues compared with its main competitors. The focus on customer and product reliability is the key reason why the FTX trading platform has been able to compete with other trading platforms since January 2020 to ensure the fastest growth in trading volume.
The core products include the FTX.com website (this website provides a way for encrypted assets to enter the market. Platform users can also enter the market through the mobile FTX application.), a vertically integrated single technology stack (supports an order matching engine.), a Application programming interfaces or APIs, custodial services and wallets for customers, and a settlement, clearing and risk engine system. In daily transactions, only buyers, sellers and trading platforms are involved.?
The FTX Group has operations and licenses in dozens of jurisdictions around the world, including the United States. At the time of writing, the FTX platform has millions of registered users and the FTX US platform has approximately one million users. For FTX.com, approximately 45% of users and customers are from Asia, 25% are from the European Union (EU), and the rest are from regions other than the United States (excluding personnel from sanctioned countries). Almost all FTX.us users are from the United States.?
American business. FTX provides services to American customers through the FTX US platform, which also includes FTX US Derivatives. FTX US is an independent corporate entity with a management structure and capital structure similar to the entire corporate family, with its own website FTX.US and mobile applications. Like FTX.COM, the core product of FTX US is a digital asset spot trading platform. Like other encrypted platforms in the United States, the trading platform is activated after having a compliance license. FTX US is headquartered in Chicago and has offices in other cities in the United States.
FTX US Derivatives was established by acquiring and reshaping the LedgerX brand. It is now a business unit that provides digital commodity futures and option contracts and other derivatives to the United States and non-Americans. FTX US Derivatives has four business licenses issued by the US Commodity Futures Trading Commission (CFTC): Designated Contract Market (DCM) License, Swap Enforcement Facility (SEF) License, Designated Clearing Organization (DCO) License and Chief Process Officer (CPO) License. Before the acquisition, the business was the first crypto-native platform to obtain a designated clearing organization (DCO) license issued by the US Commodity Futures Trading Commission (CFTC) in 2017. This is a milestone for the entire organization and the cryptocurrency industry. The license was later revised in 2019 to allow the liquidation of futures contracts.
Commitment to a diverse workforce. FTX has a proud team of employees and believes that a team culture of mutual respect and cooperation is one of our main advantages. This team culture comes from the diversity of the team and requires empathy, understanding and humility. These characteristics are conducive to business development. It is also the main reason why FTX can successfully understand customer needs and provide customers with suitable products. FTX’s employees come from all over the world and have different ethnic backgrounds. 60% of the team’s women serve as executives.?
Commitment to mitigating climate impacts. FTX attaches great importance to environmental issues and has always been committed to reducing the impact of our lives and work on the global environment. As a company, FTX has taken several important steps to ensure this. Here, I would like to explain to you one by one why FTX has the smallest impact on the environment, and explain the additional measures FTX has taken to further reduce the impact on the environment.??
1. FTX has no factories or physical products, so it does not use the global transportation network-the global transportation network is an important source of energy consumption. FTX has a small number of employees and not many actual office locations. It only rents a few small offices around the world and operates online. Therefore, FTX’s corporate operations will not have a direct impact on global climate change.?
2. The deposit and withdrawal of digital assets on the FTX platform does consume energy because a public chain is required to facilitate and record these transactions. However, more than 80% of deposits and withdrawals on the FTX platform use a low-cost, carbon-compliant Proof of Stake (PoS) public chain. The public chains of these PoS mechanisms are in contrast to the public chains of the proof-of-work (PoW) mechanism. PoW requires a lot of energy to maintain the network (the Bitcoin blockchain is an example). By using the public chain of the PoS mechanism for most FTX deposits and withdrawals, FTX has greatly reduced the impact of blockchain on the climate. In order to reduce the energy consumption caused by the remaining approximately 20% of deposits and withdrawals, FTX subsidized the blockchain network fees to share the cost of paying for the energy consumption. FTX separates deposits and withdrawals. The transactions and transfers within the trading platform (that is, the operation activities of most users) do not require public chain activities, only the amount of energy required to run a network-based trading venue.?
3. At the same time, FTX is still trying to bear the part of our mining environment costs related to the public chain, and has purchased carbon offsets to neutralize these costs. Due to the decentralized nature of mining activities, it is not easy to find out the source and proportion of energy consumption, so it is extremely difficult to speculate on the cost of energy consumption and carbon output related to blockchain mining. Despite this, FTX still estimates its cost to be US$1 million and has purchased a total of 100,000 tons of carbon offsets through two suppliers at a price of US$1.016 million. In addition, FTX, through its affiliate FTX Climate, has created a comprehensive plan that focuses on solutions that have the greatest possible impact on climate change. In addition to achieving carbon neutrality, our initial plan also funds research that we believe can have a huge impact, and supports other special projects and carbon removal solutions. FTX plans to invest at least US$1 million annually through FTX Climate.
4. FTX believes that the energy consumption and impact of PoW networks should be evaluated in an appropriate context. We believe that evaluation activities should include considering their benefits, understanding the differences between them and PoS mechanism networks, and how each type of network is used and Development and comparison with other energy consumption activities and even industries. For example, from the perspective of obtaining financial products, transferring assets, and creating wealth, Bitcoin has already brought benefits to many people, and these benefits should be weighed against the cost of network energy.??
In addition, although the energy consumption of the PoW network has attracted attention, the transaction activity on the PoS network is increasing significantly because they have the excellent performance of processing more transactions in a shorter time and at a lower cost. FTX believes that these PoS networks will become more and more important over time. Over time, the PoS network will continue to minimize the impact of the entire blockchain on the climate. Finally, compared with other industries, the energy consumption of the PoW blockchain is relatively small, especially the Bitcoin network, which is often compared. Among those assets for futures trading in CFTC regulated venues, Bitcoin actually ranks very low in terms of environmental impact compared to traditional, physically mined commodities, oil, livestock and other assets that have an impact on the environment.
Commitment to returns. FTX is not only committed to improving the lives of customers through excellent products, but also committed to improving the lives of wider communities around the world. To this end, FTX created the FTX Foundation, the purpose of which is to donate to the most effective charity in the world. FTX has made a commitment to donate 1% of the net fee income to the foundation. To date, FTX and its affiliates and employees have donated more than 10 million U.S. dollars to help save lives, prevent suffering, and ensure a better future for mankind.?
I will discuss the following topics in this article:
(1) Summarize the products provided by FTX and their role in the digital asset economy;
(2) Stablecoin and how to solve the risks associated with these tools;
(3) The current regulatory situation and the principles guiding policy makers to achieve good policy results.
When discussing these issues, I will distinguish FTX’s non-US business from the US business, using FTX International and FTX US to represent the two respectively.???
My statement includes several key topics, because the full text covers a variety of topics.
1. FTX empowers individual investors and consumers. The products we provide are easy to obtain and inexpensive, so investors and consumers can achieve their economic goals by making simplified choices. They can easily obtain financial products anywhere (many people use their mobile phones to do this), FTX does not have those gatekeepers who assess rents, and it will not bring risks to investors in the process-the digital asset ecosystem is just like this Affect the real daily life of relevant personnel and help them achieve economic security in the process. This easily accessible financial tool provides a supportive and inclusive policy environment (balanced with other policy goals), which is bound to further enhance the capabilities of individual investors.?
2. FTX has designed and provided a market structure platform with reduced risk. To be sure, there are some irresponsible actors in the digital asset industry who have made headlines. But FTX is not such a person. In fact, FTX has established a flexible low-risk platform, which is also a competitive advantage. Therefore, as long as policy makers are willing to deal with it flexibly, allowing the existence of a risk-reducing, 24/7, direct-to-investor market structure, and exempting it from the structural requirements of the traditional intermediary market, the FTX model should be able to adapt to the highest global risk standard. Any regulatory framework. However, this regulatory structure is not always the most suitable for individual investors.?
3. FTX has been supervised by the highest federal standards in the United States, including the United States Commodity Futures Trading Commission (CFTC) and the United States Department of the Treasury, as well as the strict supervision of other global and state regulatory agencies. As discussed below, FTX supports and hopes to operate under a unified federal regulatory system. In any case, FTX treats the regulators of the official sector as stakeholders and partners, and believes that it is necessary for FTX to have a continuous and active dialogue with them. This view also applies to the U.S. Congress. We at FTX are always welcome, and we are eager to share our insights on the digital asset industry and how it can continue to improve people’s daily lives.?
Of course, the future is difficult to predict, but FTX believes that digital assets and more general blockchain technology are likely to continue and continue to provide exciting opportunities for consumers, investors, and entrepreneurs. FTX believes that the United States should continue to lead the emergence of such opportunities at home. FTX fully supports the regulatory framework for digital asset trading to protect investors and achieve the sign of an orderly market. In order to maintain the leading position of the United States, policy makers will need to continue to use the best features of existing policies, but also to adapt to the best features of the digital asset industry. We believe that it is an empowerment for consumers, also at the market level. A measure to reduce risk.
1. FTX products and their role in the digital asset economy?
Core product: digital asset trading platform. As mentioned above, FTX’s core products are its digital asset trading platforms, FTX.com and FTX.us. On these two platforms, users can conduct digital asset spot transactions with other users in exchange for cash, Stablecoin and other digital assets. Users can set various order types on the Central Limit Order Book (CLOB) of the spot trading platform. Users can provide orders at a specific price (limit order), or trade on the Central Limit Order Book (CLOB) at the best price shown. There is a powerful matching engine in the system that can connect the orders of buyers and sellers and display the best available prices.?
Regardless of whether there is leverage, futures and volatility contracts related to digital assets will be listed on the platform. The leverage limit on the FTX.com platform is 20 times. So far, users of FTX.us cannot use leverage (although it has provided other forms of credit facilities for qualified contract participants-see below). These platforms have listed quarterly settlements (and perpetual futures contracts only on FTX.com) cash settlements. In addition, FTX.com also provides MOVE volatility contracts. MOVE volatility contracts are similar to futures, but they do not expire according to the price of the digital asset, but according to the dollar amount that the bitcoin price moves in a day, a week, or a quarter. FTX.com also lists Bitcoin options for trading. Finally, FTX US Derivatives provides Bitcoin and Ethereum (ETH) options, futures and swaps (swaps) to US users.?
In order to pay the initial margin and maintenance margin, users of derivatives and leveraged products post collateral on their accounts in the form of cash, Stablecoin or other digital assets. The trading platform also integrates risk management and back-office systems for clearing and settlement of transactions, including updating the ownership records (clearing) of digital assets or digital asset futures and options contracts traded, and transferring value between user accounts (Settlement), using the delivery-to-payment or delivery-to-delivery method. Market events last week showed that FTX core products have effective risk reduction properties. On the evening of December 3, 2021, a variety of digital assets fell in value within a short period of time, and the trading volume of these assets on the FTX platform increased significantly.
This was particularly evident when the FTX risk engine was activated and began to liquidate related customer positions on the platform. The market decline started very late, and it appeared a long time after the end of trading hours in the US market. However, since the trading hours of digital assets are 24/7, the FTX risk engine is able to immediately react to the fall in asset prices and immediately begin liquidating positions before any customer accounts become net negative. If this happens in a traditional trading market, the risk management system will not respond immediately, but will wait until the market reopens more than two days before responding. During this time, the client’s position may drop sharply, and then there will be opportunities to prevent the loss of the client’s account. Importantly, FTX’s risk model avoids the systematic storage of such risks during weekends or other market closures, and its approach is to immediately process risky positions and accounts in real time.??
An off-site portal for arranging and matching user orders. FTX.com also provides an off-site portal so that users can establish contact with other large users, request quotations for spot digital assets and directly trade. The portal will forward quotation requests to large users, return quotations, and allow users to place orders. It has a similar effect to other facilities in the traditional market-in the traditional market, the central limit order book will not be used for matching transactions.?
Margin lending. FTX platform users can lend their digital assets to those who need digital assets for spot transactions. If users want to obtain digital assets that they do not have (including qualified users on FTX.us), they can post cash, Stablecoin, or provide collateral in the form of other digital assets held in their account to lend digital assets. The user of the asset borrows money. The FTX platform has a built-in loan book system, which has the function of matching both borrowers and lenders.?
NFT market. FTX operates a market where users can use it to mint, buy and sell unforgeable Tokens (NFTs). NFTs are Tokens that cannot be exchanged with any other Tokens. They have many forms of use, for example, redeeming physical objects or experiences (such as movies or phone calls), or connecting with digital images, and so on. FTX’s NFT market is conducted through an auction system. In addition, users can also buy directly at the current selling price set by the seller. Users can choose to display their NFT collections on the FTX NFT market portal, or continue to buy or sell on the NFT market, or do both. The NFT market is open to users of FTX.com and FTX.us.?
FTX Pay (FTX payment). FTX Pay is a service for merchants to accept digital assets or legal currency payments. Users can choose to use ACH or credit card to recharge their FTX account, and then use the FTX account to pay the registered merchants. For digital asset payments, the FTX account of the relevant user will be deducted from the amount of the selected digital asset, which is equivalent to the amount payable to the merchant. FTX provides convenience for users to pay merchants by providing payment infrastructure.??
mortgage. FTX.com provides users with the function of “mortgaging” certain supported digital assets on the platform. Users can obtain mortgage rewards by staking these digital assets; in addition, users can use certain tokens on the FTX platform to obtain and unlock some benefits, such as lower transaction fees, withdrawal fees, and other rewards. Generally speaking, users can “unsecure” their digital assets at any time, but they need to wait until a cancellation period or release period has elapsed. As for digital assets with certain characteristics, FTX may allow users to immediately release them by paying a release fee.
Types of digital assets on the FTX platform. FTX has developed listing standards and frameworks to determine which digital assets can be listed on the FTX platform. Some of the listing standards and framework require the assessment of assets to ensure safety, compliance risks, legal risks, technical risks and other factors. On FTX.com (which is also not available to US users), FTX has listed about 100 stablecoins and other digital assets on its spot trading platform. Digital assets include Tokens, such as Bitcoin ( BTC ), Ethereum (ETH), Uniswap Protocol Token (UNI), Chainlink Token (LINK), Solana (SOL) and Aave (AAVE). Stablecoin includes tokens such as USDT (USD Tether) and DAI .??
On FTX.us, FTX has adopted what we consider to be a conservative approach to listing digital assets and conducting transactions. Due to the stricter listing standards of FTX.us, much less tokens are listed and traded on FTX.us. The FTX.us platform has taken measures to avoid listing assets that are characteristic of US securities. Its listed assets and tokens are more similar to Bitcoin and Ethereum (these two tokens have been clearly identified by the CFTC as commodities under its jurisdiction).??
All in all, after a quick review of these products, we came to the following conclusion: The current digital asset economy and products on the FTX platform are very similar to those in the traditional financial sector. This reflects the maturity of the industry, as more and more mature investors enter the field and require products and solutions that they are familiar with in the traditional financial field.??
Similarly, a decisive feature of these products different from traditional finance is that investors can obtain all products on one platform without having to go through multiple intermediaries. In addition, all market data is open and free, and all users can fully understand orders and transactions. The easy access to financial products and solutions on an easy-to-use platform is a powerful feature that empowers investors, consumers and entrepreneurs. By simplifying the use of these tools, users can focus more on their daily financial goals and core needs. This is ultimately why FTX believes that it can promote financial openness and economic security for more people.?
2. The benefits of Stablecoin and its risk response?
FTX believes that Stablecoin is one of the most important payment innovations in the digital asset industry. Users on our platform rely to a large extent on using Stablecoin for payment and settlement transactions. FTX recognized the important work of the President’s Financial Markets Working Group, and we read the recently released “Report on Stablecoin” with interest. FTX has already shared advice on how to best ensure the safety and robustness of Stablecoin. I will list it here as a piece of evidence for this statement. Click on the https://www.ftxpolicy.com/stablecoins link to read it. .?
In addition to our recommendations on the regulation of Stablecoin, FTX believes that there are two key points worth mentioning to this committee, which are listed here for readers’ reference.
First, the committee should understand that FTX believes that there is currently no bank-type federal supervision of Stablecoin issuers. FTX allows the use of Stablecoin on our platform and does use them for our own corporate fund transfers because we believe in them. Can reduce the risk. In fact, FTX has chosen to use Stablecoin to transmit very large fund transfers, including our mergers and acquisitions, rather than through the traditional banking system of payment channels.???
Although in some people’s opinion, the use of Stablecoin is considered to be less risky than the strictly regulated payment method in the banking system-because Stablecoin transfers are settled almost instantly, and both parties of the transaction check the deposits in the wallet on the public chain. The settlement can be easily confirmed, which is significantly different from the typical wire transfer process. There are multiple intermediaries between the transferor and the transferee in the wire transfer process, each of which carries the risk of the counterparty; it takes a few days to complete and settle; and compared with the stablecoin transfer, its cost is very high. high. Other payment systems (such as ACH or credit card networks) also have scale limitations and cost issues, but they hide these issues from users.
Therefore, FTX is skeptical of the view that “bank-like regulation of all Stablecoin issuers is the best solution for consumers.” We are worried that in any case, bank-like supervision may inadvertently introduce risks that Stablecoin currently avoids. However, we recognize that both the issuer and the Stablecoin issued by it should meet certain minimum standards of core requirements. These core requirements include:?
1) Daily proof of which assets (cash, bonds, etc.) are supporting Stablecoin.
2) Regular audits to confirm whether the asset support meets the requirements.
3) Impairment of assets with moderate risk.
4) Provide an open line for law enforcement agencies to blacklist addresses and persons related to financial crimes.
These core requirements can be met in a variety of regulatory contexts, including regulatory agencies other than federal bank regulators, such as the CFTC or the Securities and Exchange Commission (SEC). In fact, members of Parliament have already proposed legislation against these regulatory agencies.?
The second point is that FTX believes that the continued use of Stablecoin with appropriate standardized safeguards will protect the hegemony of the U.S. dollar as the world’s reserve currency without posing a threat to it. Again, this view may seem counterintuitive, but the most widely used Stablecoin today is pegged to the U.S. dollar, so in the end these Stablecoins are also settled in U.S. dollars. Such a system will only promote the continued dependence of the world on the U.S. dollar and will not threaten it. In fact, FTX is concerned that overly cumbersome supervision of Stablecoin will bring risks to the U.S. dollar’s ??reserve currency status, because Stablecoin issuers may be forced to move to other jurisdictions and focus on statutory regulations other than the U.S. dollar. On the currency-linked Stablecoin.??
To be sure, a certain level of competition between payment service providers will benefit consumers the most, and US policymakers have previously permitted or promoted such competition. FTX believes that for policy makers, new innovations (including Stablecoin in the payment field) are often implemented outside the defined regulatory scope, which usually means that service providers within the same scope do not provide the services required by the market. , Usually for various reasons. However, in order for innovation to continue and healthy competition to continue, policymakers should pay attention to maintaining an appropriate balance and not insist on moving all innovators to the same regulatory scope. FTX praised the committee’s hearing and its prior understanding of the benefits of new innovations such as Stablecoin before taking action on the recommendations of the PWG report.??
3. Market supervision of U.S. encryption platforms and the challenges they face in their operations
The committee has in the past asked thoughtful questions about the best way to monitor cryptocurrency platforms that provide transactions, and some members of the committee did propose legislation on this subject. Other members questioned the need for federal legislation. We are grateful for this.?
Last week, FTX released the “Main Principles for Market Supervision of FTX’s Cryptocurrency Trading Platform.” I list it here as a piece of evidence for the statement, and readers can click https://ftxpolicy.com to view it. The document was designed and released to help the committee and other policymakers consider how to best protect investors and serve the public through reasonable market supervision of cryptocurrency platforms.?
The FTX key principles document contains some details, but I want to highlight a few points here for consideration by the committee.??
1. When considering a framework for overseeing the spot and derivative cryptocurrency trading markets, policy makers should adopt a principle-based approach, using existing policy objectives that apply to traditional capital and derivatives markets. These existing policy objectives are basically common to all markets, including: ensuring the protection of customers and investors, promoting market integrity, preventing financial crimes, and ensuring the safety and integrity of the overall system. FTX believes that any new policies related to cryptocurrency platforms should also serve these goals, which inevitably means what is reflected in the Commodity Exchange Act (CEA), the Securities Act of 1933 and the Securities Exchange Act of 1934 Many principles are related to our industry. FTX believes that it makes sense to make appropriate use of these goals and the experience and expertise of the CFTC and SEC.?
2. FTX and other cryptocurrency platforms have brought important innovations to transactions. A sound policy framework should retain these innovations as much as possible, because these innovations can help minimize risks, promote capital efficiency and protect investors , In order to better serve the public. As mentioned in this statement, some of the key innovations include:
(1) An automatic risk management system, which ensures that customer accounts that trade a variety of different assets will not have a negative net value of customer positions;
(2) All-weather trading hours, which reduce risks by allowing the market and its systems to manage risks without interruption and excessive market time intervals;
(3) Allowing a non-intermediary market structure so that all investors have the same equal opportunity to enter the market, which helps minimize conflicts of interest;
(4) All platform users have free access to market data, which aligns the interests of platform operators with the interests of investors.???
3. A successful policy framework should allow cryptocurrency platforms to provide spot and derivative transactions of cryptocurrency assets under a unified system, and use a set of rule books and a technical platform to manage risks related to all trading activities in customer accounts . In jurisdictions with mature markets, such as the United States, the regulatory framework is formulated for the fragmentation of securities, commodities, and derivatives markets for these assets. FTX has proven that the integration of assets and derivatives markets for these assets brings important benefits to market participants. These benefits stem from having a set of rule books that apply to all transactions, having a collateral and risk margin plan, and a single technology stack from the front end (user interface) to the back end (settlement and risk management positions). Due to its attributes of reducing risks and protecting customers, public policy should allow this single rule book model to continue to exist.?
In order to achieve this goal, in places where there are multiple market regulatory agencies such as the United States, various regulatory agencies should cooperate and can use their powers to adapt to this model of encrypted assets where applicable. Our key principles document proposes a proposal that crypto platform operators can choose to join the CFTC and SEC’s joint supervision plan, using one of the two market regulators as the main regulator and the other as the auxiliary regulator. This model is familiar to global market regulators, and it requires joint responsibility and cooperation between regulators. A feature of this model is the need for a major regulator, which may be necessary to ensure that a set of rule books, a matching engine, and a risk engine supported by a technology stack are accommodated. It is these characteristics that once again reduce the risk.
FTX believes that this model can basically be created under the existing CFTC and SEC agencies, but there may be some other policy gaps, including the proper handling and disclosure of certain types of encrypted assets-these assets are not entirely Securities, or its function and purpose can change over time, but it meets the CEA definition of commodities under any circumstances. Although some of these tokens are considered securities, according to the existing definition, the classification of other tokens is not clear. Therefore, policy makers may need to establish more detailed definitions and different disclosure frameworks for certain assets. In any case, the key principle of FTX is to once again imagine that all Tokens and derivatives based on them can be traded on the same platform and under the same set of rules, and there is a unified system to manage all transaction activities in customer accounts Related risks.?
Fourth, an appropriate regulatory policy framework for the encrypted asset market should maintain a neutral market structure and clearly allow the existence of non-intermediary markets. Although FTX believes that the US market regulator has the power to accommodate this type of market structure, this is not the market structure generally considered by the CFTC and SEC systems. As the owner and operator of a registered futures market and clearing house, FTX is quite familiar with the CFTC system and believes that the CFTC’s method of supervising these functions on the basis of principles is very meaningful. This system requires platform operators to formulate open and approved policies and procedures to solve key issues, such as asset custody, key features related to the transaction life cycle, reporting market activities to regulators, providing market data to platform users, and ensuring adequate Financial resources, as well as preventing cyber attacks and financial crimes. Given the continuous emergence of digital asset classes, this type of approach is particularly meaningful. It provides CFTC and platform operators with the flexibility to respond to new market developments by rapidly changing the rules, policies, and procedures of the platform.?
FTX thanks the committee for giving us the opportunity to share information about the digital asset ecosystem and propose ways to continue to reap the benefits of the industry and fulfill our promises in a responsible manner.?
FTX believes that although in some cases, regulators will make some prudent modifications or productive explanations, most or many of the products and tools it provides on the platform can continue to be provided to the United States within the current regulatory paradigm customer. We believe that new policies affecting the digital asset industry and FTX business should be based on the best existing policies, and our recommendations for Stablecoin and market supervision are also based on this consideration. In this way, FTX believes that by combining the best aspects of traditional finance and digital assets, consumers will continue to use this authorization tool to seek economic security, all of which are concentrated in one place and come from a single low risk platform.
Note: As global regulators continue to consider whether and how to regulate the various components of the digital asset ecosystem, we believe that sharing our views on practical, responsible and thoughtful regulatory approaches is essential. This article is not a comment on the current regulations surrounding Stablecoin, it is not a legal interpretation of them, nor is it a recommendation on the applicability of trading or owning a particular Stablecoin. This article is an exploration of a hypothetical new regulatory framework for Stablecoin, which aims to address key regulatory priorities and retain key usability characteristics.
About the background of Stablecoin regulation?
As the cryptocurrency industry matures, it is important to establish a strong regulatory system and grow with it. In this way, the cryptocurrency industry will earnestly fulfill its duties of protecting consumers, ensuring transparency, and preventing illegal activities, while still allowing innovation and growth.
Stablecoin plays a vital role in the cryptocurrency ecosystem; most crypto transactions are settled through Stablecoin, and they are one of the most promising payment tools in the wider financial field. As of now, it is not clear what kind of regulatory system Stablecoin will ultimately be placed in.
What is Stablecoin?
Let’s start with the core question: What is Stablecoin, anyway?
Various Stablecoin designs are used in the cryptocurrency ecosystem. For the sake of illustration, we assume that the US dollar is Stablecoin in this article, although there are indeed parallel assets in the euro, the British pound, and other currencies. We assume that its exchange ratio is 1:1; that is, 1 Token represents 1 US dollar. We also assume that the stock code of the Token is STBC.
In this concept, the hypothetical Stablecoin-STBC is a blockchain-based asset that can be exchanged for U.S. dollars. This can usually be achieved through the following mechanisms and arrangements:
Reserves: Usually, a Stablecoin is backed by one or more U.S. dollar accounts or other similar assets. These assets are usually held by banks in the name of the Stablecoin originator, issuer or other similar institution. The dollar value of these assets should be at least the supply of Stablecoin.
Token: STBC is a blockchain-based Token, and one Token represents 1 USD (supported by the creation/redemption process, as described below). These Tokens can be issued by private companies, central banks, or decentralized agreements.
Creation/Redemption: In order to create 1 STBC Token, eligible users must deposit 1 USD in the reserve account. In return, the agreement will mint a new STBC Token and return it to the user.
Similarly, eligible users can send 1 STBC Token back to the agreement to redeem 1 USD. The agreement will destroy the Token and return $1 to the user.
What are the benefits of Stablecoin?
We believe that Stablecoin is one of the most important innovations in the cryptocurrency industry.
Suppose you want to transfer $20 to a friend. What are your options?
a) You may want you and your friends to both use the same peer-to-peer money transfer application (such as Venmo), and then everyone figure out how to send money to/from the application.
b) You can send a wire transfer of $20 to your friend. This may take a day and cost more than $5; if it is an international remittance, it may take a week and the cost is much higher.
c) If you and your friend both use U.S. dollar bank accounts, you can remit $20 through ACH. Then, the transfer will not be fully settled within a few months, and both parties of the remittance face “refund risk”.
d) You can go to the ATM to withdraw 23 dollars, pay the fee of 3 dollars, and give the 20 dollars to your friend, and then he must find a way to use the paper US dollar bills.
e) You can send 20 STBCs to your friend’s cryptocurrency wallet; if you use an efficient blockchain (or both parties use the same trading platform), the remittance will arrive within one minute, and the transaction fee is only one cent of one cent. Small part.
Option (e) gives a convincing example to prove that Stablecoin is an efficient way to send money.
Let’s take our real-world use case one step further, suppose a user wants to build a blockchain-based application. How should users of the app store and withdraw assets?
At this time, users are faced with the same potential choices and cost structure as before; Stablecoin has once again become the cheapest, safest, and fastest way for users to use the application.
What are the risks of Stablecoin?
There are three main risks associated with Stablecoin:
Reserve fluctuation risk
If Stablecoin is backed by funds other than the U.S. dollar in the bank account, then the asset may depreciate against the U.S. dollar. For example, if you use the 1,000,000 USD SPY (S&P500) ETF issued 1,000, 000 tokens to support Stablecoin, and the stock market price drops by 5%, then you only have 950,000 USD to support 1,000 2,000 Stablecoins, which means that the “stable” Token has actually depreciated, at least in terms of its claimed redeemable reserve!
Unlike investment products where customers benefit from the asset appreciation of supporting products, the value of Stablecoin is usually impossible to exceed $1, because customers can always create more for each $1. This means that the core idea behind the assets supporting Stablecoin should be to focus on assets with very low volatility, which are very similar to the U.S. dollar. US Treasury bonds may be a suitable asset to stabilize currency reserves; if Bitcoin is used, it must be over-collateralized to reduce the risk of loss for Stablecoin holders. The risk of using 101 USD of BTC to support 100 Stablecoins is unbearable: a drop of only 2% in the Bitcoin market will result in insufficient support for Stablecoin, which can no longer be fully exchanged for 1 USD. On the other hand, supporting 100 Stablecoin stocks with 400 USD of BTC is more defensive, because the 75% volatility risk is small before the foreign exchange reserves have a chance to reduce the risk. Any Stablecoin issuer or designer must have a transparent and robust risk model to reduce the volatility of its reserves and determine which assets are suitable for reserves.
There are also related concerns: a user may have 1,000 STBC, go to the card issuer to redeem their STBC, and then be rejected.
This will happen if reserves have in fact run out of dollars. So there is nothing to redeem STBC; this may mean that foreign exchange reserves are not U.S. dollars and are depreciated.
Or, this may happen if the issuer arbitrarily decides to prevent your redemption, perhaps to preserve more impressive metrics for STBC.
In either case, the lack of redemption capabilities (or lack of transparency in the redemption process and requirements) will bring risks to users.
The final risk of Stablecoins is that they may be used for financial crimes or to fund illegal activities.
Any issuer or designer of Stablecoin must include creation, redemption, and use mechanisms that are coordinated with regulations to solve and avoid this use case.
What is a reasonable Stablecoin regulatory framework??
As mentioned above, we believe that Stablecoin presents an important positive use case to the world and has the potential to transform the payment and remittance industry. Stablecoin will completely change the payment industry in the future, greatly reduce friction and transaction costs, and bring reliable and usable value transmission channels to people all over the world. Therefore, we believe that the focus is to ensure continuous regulatory discussions around the Stablecoin framework method, and to be based on a practical structure so that the structure can also solve the problems of availability, reliability, transparency, consumer protection, and the identification and prevention of financial crimes. problem.
We look forward to communicating with regulators on what such a framework might look like. There are many different methods, and we are very happy to receive feedback from regulators and other participants in the cryptocurrency industry, and we welcome their active participation.
As mentioned above, Stablecoin has real risks, and efforts should be made to build a framework to mitigate these risks.
Therefore, while we look forward to continuing discussions on the details, we will support the proposal regarding Stablecoin’s transparency-based reporting and registration system.
The proposed framework might look like this:
a) Stablecoin must be issued to U.S. users under the supervision of one or more U.S. regulatory agencies, and must be registered on the official list of “Regulated Stablecoin”.
b) The registration itself will be based on notification and filing, focusing on transparency and reporting, while clarifying the obligations of record keeping, reporting and regular inspections. The regulatory authority that authorizes the program will have the right to cancel the certification of registered Stablecoin.
c) Registration will include the issuance of a daily reserve list, detailing the total net value of Stablecoin reserves, and subdividing them into exact quantities for specific categories (for example: “XYZ Bank US$100; US Treasury bills US$95; US company-level commercial US$50 for bills; US$30 for commercial papers above the level of European companies; [Other appropriate assets permitted by regulations and Stablecoin registration documents] US$10”)
d) The issuer is required to maintain “sufficient” reserves. This can be defined by discounting various types of reserves. For example, in an FDIC-insured bank account, the discount rate for U.S. dollars may be 0.10%; U.S. short-term Treasury bills are reduced by 1%; commercial papers above the first level are reduced by 10%; commercial papers are discounted by 15%; against the euro , British pound, Japanese yen, Swiss franc, Canadian dollar, Australian dollar, Singapore dollar, Hong Kong dollar, etc. will be discounted by 20%; and Bitcoin will be discounted by 50%.
e) In order to confirm the representativeness of the reserve, the accounting firm is required to conduct an audit every six months.
f) Stablecoin is required to have clear and transparent redemption requirements (for example, based on knowing your customer documents). If the redemption is rejected, a clear customer complaint process is required.
g) In order to solve financial crimes, all registered Stablecoins must be on the public ledger, and the creation and redemption process must be fully structured to ensure that Stablecoins are related to illegal activities (through on-chain monitoring and analysis tools) , Observed through a set of standard blockchain monitoring software) cannot be redeemed.?
As mentioned above, this is a basic framework to illustrate the key components of a potential Stablecoin registration program. Each of these points is designed to protect the usability of Stablecoin while also addressing the regulatory issues that need to be resolved. If designed correctly, this framework can enhance the ultimate usability of Stablecoin. We look forward to communicating with policymakers, regulators and market participants on these concepts.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/sbf-how-to-look-at-the-development-of-stablecoin-and-industry-supervision-issues/
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