Jan 10, 2024

CFTC Commissioner, Christie Goldsmith Romero joins "First Mover" to unpack a report that urges policymakers to look at DeFi.

Video transcript

Finance 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. That was CFTC Commissioner Christy Goldsmith Romero on what we can expect from the regulator in 2024 that interview in just a few minutes. Good morning and welcome to first mover on coin desk where we bring you your top news headlines every morning along with some interviews from some industry heavy hitters. If you're a fan of the show, you might notice our format looks a little different if you have suggestions or feedback. Don't be afraid to DM Me on Twitter. My handle is on the screen right now. We will take serious feedback, try to implement it into the show. If you troll me, you won't get a response. All right, let's take a look at the top news headlines of the day, Blackrock and Venne two of the 13 firms hoping to launch a spot. Bitcoin ETF filed updated documents on Tuesday. The filings indicated that the two entities were among the hopeful issuers that the sec sent comments to in the past 24 hours. The changes included wording that seeks to mitigate damage to shareholders in the event of insolvency and avoid conflict of interest between the ET F's authorized participants. The SEC is widely expected to approve all the applications this week as it faces a January 10th deadline for one of the applications by ARC and 21 shares. The CFTC is bringing defi back into the spotlight. The agency wants policymakers to look at ways of identifying individuals involved in decentralized finance. In a report, the CFTC said, quote, the pseudonym and disintermediation provided in most defi systems presents serious concerns for policymakers focused on ensuring am l and countering financing of terrorism regimes are effective and provide appropriate protections and victim recourse for consumer and quote. Last June, the CF DC won a lawsuit against Uki DAO for offering unregistered commodities. They also sued three companies for offering illegal derivatives trading. Those cases were all settled and former hedge fund manager and the host of CNB C's Mad Money. Jim Kramer said in a TV segment on Monday that Bitcoin was quote topping out days after he said Bitcoin was quote here to stay. Kramer's picks have the tendency to move in the opposite direction so much so that there is even an inverse Kramer ETF an instrument designed for exclusively shorting assets mentioned by the popular TV Personality as of 9:45 a.m. Eastern time. Bitcoin is trading at $46,668 up about 3.5% on the day. There. You have it, the top news headlines of the day, get more updates on Coin desk.com. Ok. Let's move now to our first interview. 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 Romero Christie. Welcome to the show. Good morning. Thanks for having me. Well, 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 formed 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 sub-committee 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 apps and, and systems in this broader ecosystem. So I, I think it's good that Congress wants to get involved. I think it's 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 risk 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 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, Binance 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, 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 Romero. It's now time for chart of the day. The chart of the day is presented by crypto.com, the leading crypto platform trusted by over 80 million users worldwide. Ker research aims to answer what caused last week's Bitcoin crash. The research firm points out a lesser known indicator price slippage slippage is the difference between the expected price at the time of market order and the price at which the order actually executes. This chart shows the average slippage for a hypothetical $10,000 market order on Binance Coinbase and crack in. We can see here that on January 2nd slippage rose above 0.02% and remained there for over a day. This suggests that liquidity deteriorated even as prices stalled in the $45,000 range last week. Market watchers attributed the drawback to a report from Matrix Port head of research Marcus Thin titled Why the SEC will reject Bitcoin spot ETF S. Again, this data from KIO shows that there could have been other factors at play. Let's now turn to our next interview. We're gonna get a little spot, Bitcoin ETF 101. All eyes are on crypto markets as the industry awaits the highly anticipated spot Bitcoin ETF approval in the United States. That's all we've been talking about on this show. Amongst all the noise, you might find yourself asking what is a spot, Bitcoin ETF. Now I have the perfect person to explain this to you. Coin desk's managing editor for global Policy and Regulation. Nick Day joins us now, welcome back to first mover. Nick. Hey, good morning, good morning. You are gonna break down spot Bitcoin ETF S for us. Why don't you start off by just telling us what is it spot Bitcoin ETF is really just, you know, any other kind of uh financial trading instrument. So, uh you know, if you go to your brokerage account, Schwab or whatever, you know, used to be TD Ameritrade, um you can buy shares of an ETF uh you know, things like tied to I DS 100 or other company stocks or whatever. So any retail investor can access, any traditional financial firm can trade in them all the spot. Bitcoin ETF is, is a way of beating this kind of retail accessible trading vehicle or Bitcoin. So that if you as a retail investor or as a financial institution want to get access to Bitcoin's price, you don't need to worry about the wallet. You don't need to worry about setting up an account at crypto exchange or dealing with uh you know, private keys or anything like that. Just go to whatever brokerage account you used or whatever market maker or trading program you use and say, hey, I want exposure to Bitcoin's price and an ETF should allow you to gain access to that and talk to us about the difference between a Spot Bitcoin ETF which is yet to be approved and a futures ETF which has already been approved. Yeah, it's really just we know what the underlying asset is. So spot Bitcoin ETF will have direct exposure to Bitcoin itself. The companies that are issuing these products or that want to issue these products will have the actual Bitcoin that they're holding. It's gonna be, you know, the digital asset itself for futures. ETF in the US, most of these tend to be based on Bitcoin's expected price based on uh Bitcoin futures price for these contracts that are trading on exchanges like co and uh NYC and all that and those products are you know, obviously slightly different. It's not Bitcoin itself. It's what Bitcoin's future price might be bets on the future price. So it's not exactly a direct exposure to digital asset price. Also, a lot of the Bitcoin futures contracts that trade in the US right now are cash settled, uh, especially the ones that ETF are exposed to. So it's kind of, uh, an investment vehicle based on the future. Uh, I bet on the future price of Bitcoin that isn't actually going to be settled in Bitcoin or it's, yeah, a little bit that abstracted away. So it's not direct exposure the same way as spot between ETF could be. Ok. I wanna get into the pros and cons now, what are the benefits or the pros of a spot? Bitcoin? ETF? Yeah. You know, if you're a Bitcoin advocate and you're wondering why you get into or sorry if you're, uh, trying to convince people to get into ETF, you might say something like it's, uh, you know, regulated financial instrument. The SEC is overseeing the ETF itself and as we've seen over the past couple of weeks, especially the SEC has asked the issuers making number of sessions or modifications to their applications that would, uh, make the regulator more comfortable with approving its product. So the ETF itself is a regulated structured product. It's a very familiar product too to the US state system. People know what an ETF is. People have, you know, some understanding go, you know, how much ordered I might get the cons, of course, are, you know, Bitcoin is a very volatile asset we've seen, you know, even over the past couple of days price raised in excess of 5%. And uh that's the kind of thing that might make traders and investors a little bit more uncomfortable with uh you know, so investing in any asset really, but Bitcoin, of course, that is a known unknown. We know that it's probably gonna be a little bit volatile. What that means for traders and investors after the ETF go alive, assuming they are in need of proof this week. Uh is, you know, something that remains to be seen besides volatility, any other drawbacks or cons. Well, I mean, obviously, you know, you're not investing in Bitcoin directly, you're investing in a natural instrument that's close to Bitcoin uh through, you know, third party. So uh if you're truly crypto curious, then this is perhaps not the vehicle for you. If you're seeing that, you know, there are all these headlines about, you know, crypto going up in price and people making crazy returns. But you don't want to uh you know, as I said, go through the, you know, hassles of setting up your own wallet or having to take their own private keys. Then you know, an ETF might make more sense, but it does mean that you are not, you know, you don't own your keys you don't own the Bitcoin. It's not really, you know, investing in a digital asset, just kind of investing in, you know, financial instrument that is, you know, Tyson price is digital asset. It's baby steps. Maybe you start with the ETF and then you move on to a centralized exchange and then from there, the world is your oyster. So maybe if you're, maybe if you're crypto curious, you start here. Yeah. Yeah, it depends on how you're looking at it. You know, you're purely an investor, maybe this is fine for you. This is all you're looking for. Uh if you're interested in the, you know, broader philosophy under Bitcoin, then yeah, as you said, it just be a opening gateway. OK. Nick, I want to ask you about spot Bitcoin ETF s that already exist. Two of the countries they exist in are Brazil and Canada and I believe the eu as well, what can we learn from those product launches? I see that one is actually a really hard question to answer, I think because the investing communities in those regions and countries are not quite the same as the one in the US. So those products, as you say have been trading uh for a while and they've gotten some interest and we saw the futures as well, you know, bit futures. Uh ETF launched a Canada prior to launching in the US and we weren't really able to get a whole lot from you know, those particular launches, the futures, ETS launches, uh they just happen but, you know, it's a different amount of investing capital that's, you know, playing around with these uh vehicles. Um But the only thing we can say for sure is that, you know, they're so far, don't appear to have been any major mishaps on the, uh you know, Canadian Brazilian or even the European Union spot, Bitcoin ETF S that we've seen. So that may be a good sign for the US uh counterparts, but it's really hard to drive direct, you know, food at this point. Ok. Nick, we're gonna have to leave it there. Thank you very much for joining First move for this morning. Thank you. That was Coin Desk's managing editor for global policy and regulation MCD. Thanks so much for watching first mover today and thank you to our guests CFTC, Commissioner Christy Goldsmith, Romeo and Coin Desk's Global policy and regulation. Managing editor Nick Day, like I said at the beginning of the show, if you have any feedback or suggestions for us DM, the on Twitter, my handle is on the screen right now. And if you can't get enough of us, check out the Markets daily podcast on the Coin Desk podcast Network that is also hosted by me. That is a wrap for first mover. We'll see you tomorrow, the CFTC. Regular

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