During a hearing before the House Agriculture Committee on Thursday, U.S. lawmakers took a curious and sometimes skeptical view of a proposed automated collateral system to be used for crypto and other digital assets on futures markets.

The proposal made by cryptocurrency exchange FTX would require clients to post collateral and have enough funds to cover margin requirements that would be calculated automatically. If the margin fell too low, an automatic sale process of the investment would begin.

FTX CEO Sam Bankman-Fried said the proposal would promote healthy markets and fair and equitable access to platforms, while trying to address the mismatch in the speed of crypto derivatives compared to the current model of clearing house.

“It would bring competition and innovation,” Bankman-Fried said. “It would bring liquidity to the US market and options to US consumers. This would bring competition to the futures market where all the volume is created by just two exchanges and would bring competition to the United States versus the rest of the world.

UNITED STATES – MAY 12: Sam Bankman-Fried, CEO of FTX US Derivatives, testifies at the House Agriculture Committee hearing entitled Changing Market Roles: The FTX Proposal and Trends in New Clearinghouse Models, at Longworth Building on Thursday, May 12 2022. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

Bankman-Fried argues that FTX’s model, which would require directly holding collateral in clearinghouses under the direct oversight of the Commodity Futures Trading Commission (CFTC), would provide additional asset security and would be more appropriate given the how cryptos trade.

“Rather than choosing between liquidating a position too soon for fear of what might happen over the next two days or exposing yourself to systemic risk, there can be real-time and more accurate judgment on the health of position,” Bankman said Fried.

Bankman-Fried said he believes FTX’s request is consistent with existing CFTC rules and that if the CFTC finds the proposal appropriate, it would not require rule changes.

But CME Group CEO Terry Duffy, another witness on the panel, rejected the proposal. Duffy called the idea of ​​the automated clearing house a false claim of innovation that is little more than cost-cutting measures and warned of the impact on markets. He said the FTX model would come at the expense of proven risk mitigation practices, market integrity and ultimately financial stability.

The FTX logo displayed on a phone screen and representation of the cryptocurrency are seen in this illustrative photo taken in Krakow, Poland on February 16, 2022. (Photo Illustration by Jakub Porzycki/NurPhoto via Getty Images)

The FTX logo displayed on a phone screen and representation of the cryptocurrency are seen in this illustrative photo taken in Krakow, Poland on February 16, 2022. (Photo Illustration by Jakub Porzycki/NurPhoto via Getty Images)

According to Duffy, the FTX proposal would potentially remove up to $170 billion in loss-absorbing capital from the derivatives clearing market.

“Automatic liquidation could exacerbate volatility and create dramatic price movements during turbulent times, with the potential to rack up losses on top of losses and destabilize markets for all participants,” Duffy said.

The CFTC is reviewing FTX’s proposal and is expected to host a roundtable on May 25 on the proposal. A comment period ended on May 11. CFTC Chairman Rostin Behnam declined to back it, but said the proposal could lead to more efficient trade execution and less risk in the system.

Many on Capitol Hill, the CFTC and Wall Street are also looking at this model and others to determine if it could be a potential new model for future markets where the middleman is removed and the deposit process collateral for margin calls on crypto derivatives is automatic.

This hearing comes as crypto markets continue to crash and the race for the stablecoin, TerraUSD, once the 10th largest cryptocurrency, ripples through crypto markets, causing another stablecoin, Tether, to drop. temporarily fall below its dollar peg.

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FJ More

Jennifer Schonberger covers cryptocurrencies and Yahoo Finance politics. Follow her on @Jenniferisms.

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