Oct 19, 2023

As part of CoinDesk's State of Crypto Week, presented by Chainalysis, former CFTC commissioner Dawn Stump discusses her take on the biggest challenges and gaps in the U.S. crypto regulatory landscape.

Video transcript

This week, we are taking a closer look at the state of crypto regulation and that's presented by cha analysis. Joining us now to discuss is former CFTC commissioner Don Stump. Welcome to the show. Don. Hi. Thank you for having me back. Thanks for being back. Always. You're always the great first guest to have on. You really bring the energy and we need that this morning. All right, we're talking about uh crypto regulation a lot going on in the regulatory front in the United States, in your opinion. What's the right next step that needs to happen? Get this clarity that the industry calls for so much? Yeah, I think there are a couple of things. One I do very much believe that Congress is going to have to authorize someone to one of the regulatory agencies. I have a preference but one of the regulatory agencies to oversee and regulate the day to day um uh spot market in the crypto uh community. I mean, there is a giant gap there. It's been well discussed, but I do think it's, it's gone unaddressed for far too long. Um Additionally, I think the regulators themselves owe the marketplace, some greater clarity as to how they are going to apply their existing regulations. And I think that could be done through guidance through rule makings. But in either case, it requires public input. I do think that the onus is both on Congress and the regulatory community. Welcome back. Don, you know, this might all be the case, but what we're seeing now is a congress that's kind of distracted with a lot of things. First of all, it doesn't have a speaker and it might not get one for another week. Second of all, there, there's a war and, and appropriations going for two war to helping supply our allies, Ukraine and Israel. And that's probably going to be priority. Number one. Number three is that we have a AAA lack of volume in the crypto space right now. And it seems as if there, there's this pressure to regulate crypto from Congress has subsided tremendously. Do you think that they will get around to doing it any time soon? And if not, do you think that the SCC will try to fill that vacuum even more so than it has already? I I concur with you that there are a lot of distractions that are preventing legislation from moving forward and um also complicated by the fact that the chairman of the House Financial Services Committee has new responsibilities and his role as interim speaker. Um I, I do believe that in lieu of Congress taking action, not only will the regulators continue to try and fill the void, but they could fill the void in a way that informs not only the market participants as to what their obligations are, but also could enhance their enforcement programs. Um And by that, I mean, there are a number of enforcement cases that have come about that are relative to fraud and certainly that should always be the priority of the regulator. But there are these other enforcement cases that contend that there has been a failure to register, whether it's unregistered securities or a failure at the CFTC to register as an infrastructure provider. Those actually, in my opinion require a bit more clarity from the regulators again in the form of guidance or enhanced rule making as to how they are applying their rules. I think there's a great deal of confusion and I think it's evidenced by the fact that in many of these cases, you have dissents from some of the commissioners not as not because they're making a political statement, but because they very much believe that the statutory and the rules that they have put forward in the past are not a perfect fit and require updating and enhancements and refinements. Um Hi, I just got to see you back. I'm just curious like what the general mood is toward crypto um in Washington, as we know, there's some, you know, high profile, high profile trial going on right now. There's been just a lot of, a lot of things happening. I mean, do you get the sense that people are positively inclined or, or, I mean, because for a while it seemed like there was definitely, it was definitely negative that a lot of people in Congress seem to see crypto quite negatively and we're not particularly motivated to do anything at all. And I'm just curious if you think the mood has changed, got worse, got better. I don't know that it's gotten worse. I, I do believe that it has, um, that the negativity that came about soon after the collapse of FTX has subsided a bit and that I think the industry has done um a relatively good job of raising their hand and saying, those of us who are serious about offering these products, recognize that we're going to have to have customer protections, investor protections, um enhancements to the way we manage custody, settlement, segregation of client assets. And I think there have been constructive conversations about how to advance those um, requirements. I think they've been more constructive in other jurisdictions to be quite honest, but I do think that the US has had constructive dialogue on, on a variety of these points. Um Again though, I think other jurisdictions have been much more inclined to develop a regulatory regime that specifically addresses the unique nature of some of the uh the underlying technology that dons crypto. What jurisdictions do you think are getting it right. I'm not sure that Europe is getting it right. But they're devoting a lot of time and attention that I think is, is uh they should be commended for. Um So and there are, there are others like Europe is just one example. So just kind of following up on Lawrence's point, you know, what specifically would it take to get some movement on this? Right? Because like, for example, for a while, we thought that Stablecoin regulations were the low hanging fruit like these were going to happen and then like that's been mired in Congress forever, right? So like, what would it actually take given, you know, Laurence mentioned about all the distractions going on and all sort of like the chaos in Washington, what would we need to actually get some momentum on some of these issues? You know, like, for example, as you said, you know, assigning whatever agency to, you know, have more authority over these. Like, what, what, what, what would it take to actually get something to happen? Yeah, I, I think that there is, has for quite some time been a misconception over controversy among the regulators. I actually think the regulators in the United States could themselves come together and it's challenging, but it's been done before, could come together and develop recommendations that are consensus based that could gain traction with Congress. Congress would very much appreciate a consensus among the regulators. And I don't think that's actually as tall of an order as, as maybe has been portrayed. Uh the CFTC and the SEC are not fighting about this. They are both doing what they need to do to ensure that with their current authorities, they can continue to protect uh the market, but they need additional authorities. At least the CFTC does again, no one is regulating a vast amount of spot crypto and that is terribly unfortunate. They're not doing that yet. But if the SEC now that their hand has been forced into uh coming up with uh something regarding uh an ETF at some point to come up with a, an explanation of why they should or should not regulate it. Is it possible that should they decide to uh legalize it if you will? So they decide to uh allow all these spot ETF S to launch that they could use that as a backdoor to regulate spot crypto in general. Can they use that as a justification to say, look, since we are regulating an ETF a spot ETF, we have the right to regulate spot crypto exchanges. Yeah. So I think, you know, the ETF regime has been long established, there are ETF S today that um largely are composed of commodity futures positions and the CFTC in that case still regulates the futures and the SEC regulates the ETF. Um obviously, we have that in crypto already, but, but we also have that in gold. Um The other ETF S tend to have securities that underlie them and, and the SEC will regulate the securities. Um, your question is an interesting one. If the ETF itself has something in it that is a, um, you know, perhaps not commonly recognized as a security or a commodity future, would that be an opportunity for the SEC? Certainly the SEC is going to have an interest in the underlying components of any ETF, um, particularly if they can make the point that the underlying components are securities and they, they certainly may choose to do that if they approve, um ETF S outside of ETS based on commodity features, I guess on that topic, given your experience and we've asked a few people with CFTC experience this on the show, the Ether Futures ETF was recently approved. Do you think that that signals E as a commodity? I think it is a commodity. Probably, I don't know, my position on this has long been, I'm not sure what that actually gains you in the context of regulation. Um No one financial regulator is tasked with regulating commodities. In fact, the CFTC doesn't regulate commodity spot commodities, they regulate commodity derivatives. And so I think for a very long time, there was confusion in the marketplace relative to the CFT CS role here. The CFTC is not authorized currently to regulate the spot market uh for any commodity. All right. And quickly before we wrap up, we got to get your thoughts on D I here, the CFTC recently charged 3D 5 firms offering illegal derivatives trading. How do you think DFI protocols should be looking at this and should be thinking about regulation as they move forward? I think this is a prime example of an area that the regulator owes the public more um information about how they and they would expect the technology providers to come in and register with the CFTC. I'm, I'm not condemning the, the um the settlement. I'm simply saying that um there seems to be confusion as evidenced by at least one of the commissioners dissenting under the um argument that if you are going to contend the agency is going to contend that these entities should have been registered as either a futures exchange or a swap execution facility or a futures commission merchant. We need to the, the agency needs to clarify how that can be achieved. You can't simply enforce without providing a pathway to registration. All right. And as we talk about the state of crypto, we can't leave out this story last week. Us, regulators targeted former Voyager Digital CEO Steve Ehrlich with lawsuits claiming he engaged in fraud and deliberately misrepresented his customers, government protections. If we zoom out here, what should other CEO S working in the space take away from this? Uh how should they be engaging with regulators to avoid something like this? So here again is a case that was somewhat complicated by the fact that it had both a fraud component and a failure to register component. The fraud component I think is, is fairly well established and, and fair to be honest. I think that any CEO and um this space should be very cognizant of the statements that they make to their clients, the statements that they make to um government officials, the statements that they um expect to benefit their business have real meaning in the context of the the occurrence of a problem. When there is a problem, those statements um need to be accurate and, and honest. And so fraud is, has been something that I think folks in the space have taken note of. This is an area where the CFTC can go after um fraudulent activity in the spot market. Otherwise they can't regulate it. But this case was complicated by the fact that it also had a failure to register component, the component I was talking about earlier that requires a bit more. I think clarity from the agency as to how these entities are fitting into the cur how they might fit into the current regulatory categories that the agency um expects to oversee. Don. Thanks so much for joining us this morning and providing that insight. Have a good day. That was former CF DC commissioner Don Stump.

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