CFTC Commissioner Compares Risk of Crypto Contagion to 2008 Financial Crisis

by Arthur · October 27, 2022

Commodity Futures Trading Commission (CFTC) Christy Goldsmith Romero has pointed to the collapse of the Terra ecosystem and its spillover effects as an example of how contagion risks in crypto markets are similar to those experienced by the traditional financial (TradFi) system during the 2008 Global Financial Crisis (GFC) .

Speaking at the International Swaps and Derivatives Associations (ISDA) Crypto Forum on October 26, Romero suggested that increased linkages between crypto markets and TradFi increase the risk crypto poses to overall financial stability, noting:

“The digital asset market is still relatively small and limited from the level of systemic risk that would come with greater scale or interconnections with the traditional financial system. But this may not be the case in the near future, especially given growing interest in traditional finance.”

One area of TradFi that the commissioner prefers to stay away from crypto is pensions and pension funds, an opinion likely to have been influenced by recent events in the UK where pension fund issues required intervention from the Bank of England.

I have significant concerns about the ability of pensions and pension funds to invest in #Cryptocurrency

— Commissioner Christy Goldsmith Romero (@CFTCcgr) 27 October 2022

While Romero warns the US not to rush regulations, she supports a “same risk, same regulatory outcome” approach as the level of risk from the crypto industry increases, suggesting:

“Like post-crisis reforms, Congress can address financial stability risks by providing additional authority to the CFTC.”

The GFC came about after banks started lending recklessly to people without the means to repay their mortgages in full. These “subprime” loans were pooled and sold as safe investment products before defaults started a ripple effect that spread around the world.

Related: ‘Secretly Circulating’ Draft Crypto Bill May Be a ‘Blessing’ for DeFi

While the CFTC is often seen as the more crypto-friendly regulator compared to the Securities and Exchange Commission (SEC), it appears to be trying to change that image as part of its bid to gain more regulatory oversight after revealing that it implemented 18 enforcement actions on the sector throughout the financial year 2022.

One of the more recent CFTC actions was the fine imposed on Ooki DAO and its members, which was heavily criticized by a CFTC commissioner and members of the crypto community, who referred to it as “obvious regulation by enforcement.”

Prior to this action, Decentralized Autonomous Organizations (DAOs) were viewed by many advocates as “above the law”, and have resulted in the formation of legal entities within DAOs as a way to limit liability.