CFTC Commissioner on DeFi Identity, Regulation Outlook in 2024

The CFTC regulates future swaps and options. And as you heard earlier in the show, the agency wants policymakers to look at ways of identifying individuals involved in defi joining us. Now to discuss is CFTC Commissioner Christy Goldsmith, Romeo Christy. Welcome to the show. Good morning. Thanks for having me. Let's talk about this report that was released. Talk to us about some of the motivations behind it. Yeah. So first of all, this is an uh this is not a, a report of the CFTC. It's an advisory committee and so I sponsored the technology advisory committee. And what we did was we gathered technology experts uh in a broad and diverse um uh viewpoints and we uh form from there a subcomittee on digital assets and, and Blockchain. So one of the issues that have been coming up is defi and it's not really understood sometimes I think, and I think policymakers and regulators are really grappling with it. And I think the industry um is also looking at defi and saying, well, you know, what do we need to be doing going forward? And so this is what I charged the subcomittee to do to really look at it and, and try to be as balanced as possible and start with, how do you define defi what is defi what are the issues that come up with defi? And so that's what the committee worked on, the subcomittee worked on and then they voted to release the report. Uh yesterday, it's interesting that, you know, that D I is a facet of this industry that's not really understood besides the report. what do you think needs to happen as we move forward? So that policymakers, regulators can understand the ins and outs of D I to better regulate it? Well, I think uh that's a, that's an excellent question, Jen. I think the first question is people often say is something centralized or decentralized. And a key finding of this report was the finding that the sort of existing systems now and ecosystems are not really one or the other. It's this spectrum, I mean centralization or decentralization uh is not just one thing, it's, it's uh economic benefit and access and, and governance and all of these issues that play into it. And so this, this report really dives into that structure. Um and that concept and, and the issue about defi and the potential benefits of defi and risks of defi really are um heavily dependent upon how it's structured. And so given that there's all these different structures in the spectrum of centralization and decentralization. Um you know, where, whether the benefits can be realized and whether the risks um are come to fruition, are really dependent upon the design of that system. And so the design becomes very important. Now, the report has been published, but it really is up to policymakers to take the report to implement it, to create legislation that takes these recommendations into account. What, tell me how you're feeling about uh about legislation. Do you think we're going to get any before the next elections? One of the things I think is gray is that there are so many policymakers looking at this industry and, and determining that there needs to be some additional legislation here. I think that's a, I think that's a really good thing but it's complicated, right? And, and things like uh sectors of the industry are changing, like defi uh D I is not one thing. It's, it's a number of different apple and, and systems in this broader ecosystem. So I, I think it's good that Congress wants to get involved. I think it's uh understandable that it takes some time and is challenging. Uh But, you know, I think regulators are also grappling with this. The CFTC has brought a number of enforcement actions in the D I space. So I think, you know, one of the key recommendations of the report is that regulators and policymakers sort of look at the existing regulatory landscape, figure out where D FI fits in now and then where, where there might need to be greater legislation. Uh D I right now does send uh stand at the center of a lot of the illicit finance, a lot of the cyber hacks. And so I think, you know, it's not only incumbent upon policymakers and regulators to be thinking about how do you mitigate those risks but also on the industry itself. Now, the report says that policymakers should identify the projects of greatest concern, but there's not really any indication as to what will happen after that. Tell me, have any projects been identified already or are there projects that you're looking at? I don't think we went into it trying to sort of name and shame any particular company, right? You know, the this is a group of experts who you could see the push and pull when you read through the report about trying to figure out what are the specific risks. So once they, they've, they've done a really comprehensive list of the risks that could be president defi uh in particular or illicit finances, one and then made sort of recommendations about how you would look at that, how you would dig into the more detailed risk and what is underlying those risks. And so and then they advance, you know, 11 recommended one recommendation on how you address illicit finance and that relates to, to establishing identity. You know, one of the arguments we often hear from folks in the industry when it comes to illicit finance is that, you know, criminals have used cash for eons of years before D fi existed. Now, some defi tokens, some cryptocurrencies are being used but it, it, it's one and the same, the criminals are going to find a way to, to commit crimes, whether or not D I exists. How would you respond to that? Well, I would respond that I've been in federal law enforcement for 20 years and I have brought a number of illicit finance cases. I brought a, a large number of money laundering prosecutions and investigations. And so we'll never stop fighting that in the federal government. We've got to combat that and that's for not only the protection of customers but our national security, but just remember that when we're talking about digital assets, it moves a lot faster than a bag of cash. Do you think that the CFTC is moving fast enough, um, to put some of these protections in place? I think we're doing a pretty good job and we brought a number of, uh, major, uh, enforcement actions but also other actions trying to send a signal like in the D I space. And we are also regulating, actively regulating the trading of Bitcoin futures and ether futures. And we, we learn less in that and we have to make policy decisions in, in that. And so we are moving ahead, I don't think though that we should stop studying this and this is, you know, one way to approach regulation, which is, you study it first before you make decisions and that's what this is an attempt to do. Moving away from DFI to C I. No. AC I now, sorry, the CFTC, um, settled charges against B along with other government agencies recently. Um, talk to us about how you're moving forward from that. How should other centralized exchanges be operating to ensure that they are compliant with US? Regulations even if they're not operating in the US? Yeah, I mean, I think if you, if you're acting like an exchange and you're touching on us customers and you have other us connections, you know, you're going to fall within us regulation. I, I think that's pretty simple and, you know, we have the situation where uh b knew what they were doing. Um They knew that they were, they were reaching us customers and us investors, you know, we've had this before in other cases. So, you know, we're going to catch you, you know, so, um this is a time where if you're, if you're going to be in our space, you're supposed to be registered with us or you're not supposed to be in our space, we're gonna continue to bring those cases. Um But then we also have exchanges who are registered with us that are actively, you know, having uh regulated trading of Bitcoin futures and ether futures and we're going to continue to supervise that and, and put in the rules in place that will ultimately protect customers, um while ensuring that we're able to, to foster and promote innovation that is ultimately responsible. It sounds like you're saying we should expect some more regulation by enforcement, especially when it comes to D I. Is that correct? So, uh, you know, enforcement is a part of regulation. So we don't stop, uh doing enforcement cases while we're also putting regulatory guidelines and, and rules in place. So we're, we're doing both. Uh, and that's what, you know, that's what regulators do. Um, and I don't call that regulation by enforcement. I, you know, enforcement is a part of regulation and I've been in, in federal enforcement for 20 years. I started, uh at the SEC and then I went over to Treasury and, and, and led a criminal law enforcement office for, for 12 years and then came over to the CFTC. So it's a, it's a big part of it. You know, you can't, um, you can't let those who are breaking the law be able to operate in our markets, um, not following the rules and that's what we found with finance and, and some others. But if there are no clear rules, right, we have this report making recommendation to policymakers. Is it fair to say that the rules aren't being followed? Do you, do you think that some decentralized exchanges, some centralized exchanges are operating in a gray area? So, I mean, I think the cases we've brought, we've proven, um, we've gotten them through court. And so I think, you know, I, I voted on those cases so there was very strong evidence in those. I mean, I think with each case, when it comes to enforcement, you take the facts as you get them. Uh, uh, you know, I don't think that, that what this report says is that the law isn't clear. I think this report tries to describe what defies promises but what it actually is in reality and tries to break it down so that there's a foundational understanding so that when regulators and polic policymakers later go to look at defi and say, what do we do with this? What do we do in terms of bringing some accountability or responsibility? We sort of listed out the factors to consider and the risks, what the different policymakers, what Congress will do with that, it is really up to them. But I want to make sure that, you know, we were getting the benefit of all these experts uh on the technology advisory committee of the CFTC to put their two cents in to see this push and pull this balanced discussion of it so that, you know, everyone had a foundational understanding can better understand it before you regulate it again. Studying before you regulate is not a bad thing. It's, it's very, very uh helpful commissioner. I want to just zoom out a little bit now for people who are listening to this interview, who are reading the news reports on this report, who um, interact with defi protocols, maybe just a little bit or, or maybe a lot. What do you hope they take away from this? Well, I hope, I hope they take away from this, that the, you know, the government is actively interested in protecting them and, and putting in place the, the particular guard rails and particularly around illicit finance or other customer protection. Cyber hacks is a really a serious risk in defi and so, you know, II I hope that they take away that the government is interested in protecting them, is interested in protecting our system from illicit finance um to try to make it safer. Ok. Commissioner, we are going to have to wrap it there. Thanks so much for joining the show today. Thank you. That was CFTC. Commissioner Christy Goldsmith Romeo.