On October 26, Christy Goldsmith Romero, commissioner of the Commodity Futures Trading Commission (CFTC), in a recent speech, cited various risk factors involved with the use of cryptocurrencies.
Referring to the recent example of the collapse of mega names that existed in the industry and its flow-on effect on the entire system, Romero suggested that the contagion risks within the crypto markets are very similar to the ones that were experienced by traditional financial (TradFi) systems during the 2008 global financial crisis (GFC).
The 2008 GFC occurred as banks had started to give out loans carelessly without securing appropriate collaterals or other means to pay mortgages fully. The subprime mortgages were all compiled and sold as safe investment products before the defaults started a ripple effect and spread globally.
She also said that the digital assets sector is comparatively tiny and secured from the various risks within the system that might come with greater scale or interconnections with the traditional financial system. However, that might be different from the scenario in the coming times, given the consistent growth of interest in traditional finance.
Romero raised her concerns while highlighting the additional potential risk to financial stability by crypto with the increase in links between crypto markets and TradeFi. She also said that, in her opinion, retirement and pension funds should be kept at a distance from crypto and gave the example of the current scenario in the U.K., where the issues of pension funds called for intervention from the Bank of England.
The commissioner urged Congress to give the commission additional authority and address the financial stability risk; however, she agreed and warned that the regulations must not be hurried to ensure efficiency. She also stated her advocacy for the same risk, same regulatory outcome approach considering the increasing level of risk that the crypto sector brings.
In fields of crypto regulation, CFTC is considered to be more friendly compared to SEC. Still, considering the recent instigation of 18 enforcement actions in the 2022 fiscal year, it seems to be changing the impression slightly. Recently, it also levied heavy sanctions on a DAO for its practices which were criticized by the crypto community globally.