How do we make progress towards clear and effective crypto regulation?
How do we make progress in this town uh towards something that gives framework uh legislative clear uh regulatory framework for this industry. And to do so, I'm delighted to be joined by Commissioner Summer Merch uh merger who is uh at of course, the, the CFTC. Uh she was uh in addition to this role prior to this, she was the chief of staff for Dawn Stump who um and uh also worked in a different capacity under Heath Talbot, who is the chairman of the CF DC. Both of those people just to let you know, are also participating in our networking event and are, are good friends of coins. So I've had the pleasure of interviewing both of them, but I'm delighted to, to, to invite um the commissioner to the stage, Commissioner Messinger uh for a conversation. They're trying to corner the market. I know something. I can feel it get in on it. This, no, San That's not right. Can the price be going down? Something's wrong? Where's Wilson? What are they doing here? They're selling mortimer? Well, that's ridiculous. Unless that crop report car's helping. Um So one of my favorite movies of all time. I mean, truly an absolute classic first question therefore is like, how does the CFTC view that classic movie? Is it? Is it? And how close is it to reality? Um, you know, I haven't watched it in a while and I'm gonna check the ratings when I get home because I feel like I need to watch this with my Children if it's appropriate. Um, no, because they want to, they have no idea what I do. And so if there's anything in popular culture that helps explain my job, I think it's, it's useful. It is. I love it. Um So listen, um I thought we'd just start off um because it's, it's relatively new and topical. Um because I think it might be an interesting way for us to lead into some of the discussions, but you dissented recently in um uh uh an enforcement action that was taken by the CFTC against a number of DFI protocols. Um Just maybe just tell us about what your position was and what that dissent was all about and we can take it from there. Yeah, absolutely. Um You know, this isn't the first, first time I've, I've had a dissent where I felt as though we were using our enforcement powers in a way that um was kind of outside the bounds where there were policy questions that were better left to um whether it's policy maker or uh offering some guidance through notice and comment, rule making. And in this particular case, there were 3d 5 protocols. Uh we lo we, we brought them together the case together uh but they had different charges. So that bothered me a little bit because it did feel a little bit like we were trying to create a situation where we had a headline uh the D FI sweep, but they had very different cases. And, you know, one of my concerns is we were holding them to standards that we have not articulated that we have not made clear. And we really do need to sit down and say, if we're going to hold D FI um accountable, what is that mean? Uh And if we're going to say you need to be registered as AFC M or A E um which are regis registered uh classifications at the CFTC. How do you do that? Because right now that's not even a possibility. So we really need to sit down, engage with the community, have, you know, the opportunity for stakeholder engagement and set some clear rules of the road before we start holding people accountable. It, it did feel as if what you were getting out of the, the CFTC, which I think people looked upon listening to this industry more favorably as resisting the temptation it was going down that, you know, regulation by enforcement path. Um And it sounds like you're saying, OK, there are various ways in which we, you can act to do that. Do you need Senators Lemus Angela brand and the House to get together and give you a framework and the authority to do this. It sounds like you're saying there's things the CFTC should be doing with regards to rulemaking, to be able to give some clarity even within the absence of a legislative solution. Yeah, absolutely. You know, our authority is interesting. Uh, the reason we do need congressional, congressional legislation and we need that authority because right now there's no federal regulator over crypto spot markets. So this is cash markets. We have fraud and manipulation enforcement authority over anything that's a commodity, any, any trading of a commodity. So our enforcement team can come in and, and charge for fraud and manipulation in the trading of a crypto commodity. And, you know, and we've done that where this gets tricky is when we, when we are bringing an enforcement case in these cases, there was no fraud. Um But we're saying, well, you didn't abide by our rules. And so we are going to charge you. Well, we have never said how our rules apply to decentralized, um you know, protocols. We've never said how our rules apply to anything outside of centralized, you know, markets. So we really do need to have that conversation. It, it might take some new rule making to tweak our rules a little bit but that we, we can do. Um But the, what we can't do is provide uh day to day oversight, regulatory oversight of, of the cash market for crypto. And that's where we need Congress. Right. Because it does seem to be ambiguity that leaves a bit of a vacuum there. Right. I mean, Bitcoin is, because I think universally now both agencies see it as a commodity. Um, and certainly, if there's, um, you know, uh, futures based based on that, that's your responsibility. But yeah, who, who, who actually does regulate that spot market, I suppose is a question. But then the, the theorem is another question because the commission has come out and said, it's, it's a commodity. But, um, the SEC is a little vague on that. Could you ever find yourself regulating and then having that authority taken away? And, you know, how does that get resolved? No, that's the concern here. In fact, when you look at that, we have, um, a futures product trading on it because it's a commodity. So to have it classified as something else, you're suggesting that there's a different regulator overseeing that market that's already trading. So that leaves a lot of uncertainty and that's the opposite of, of what we need here. So until we, we have the clarity on who's going to regulate the spot market and some sort of framework to decide how we're going to, you know, determine what's a security and what's a commodity. We are leaving a lot of regulatory uncertainty. We're putting a lot of, you know, where, where people could be um offering some of the investor protections that we'd like to see, you know, that's not able to occur because people don't wanna run afoul of, of one of the two regulators. And so we really just kind of put ourselves in this situation where, you know, until we offer some sort of clarity, um we're going to see this activity, you know, move away from the US and, you know, we could lose out on a lot of innovation and opportunities in, in, in our financial markets. How, what is the process of working with the SEC and figuring this out? Right? Because presumably you just can't rule make in a vacuum, you need to think about what that relationship's like. But then in the absence of regulatory clarity, which it does seem given the dysfunction of everything no-one's predicting we're gonna get for another, at least another, you know, year and a half. Um How do you work this out with the SEC? That does seem to be taking a very different perspective on things? Yeah, I, I think we need to sit down the two agencies, the leadership of the two agencies and start creating a framework for how in the current environment, we're going to make some distinctions right now that honestly is being decided by our enforcement teams. You know, what case is the SEC gonna bring? What case is the CFTC is gonna bring, what, what tokens are going to be in either case, um, anytime you see where we both are, where both agencies are bringing an enforcement action, you know, presumably there's been some sort of conversation about who's claiming what in their, uh, enforcement, uh, case. Sometimes I think there are disagreements and, you know, this, that's not where that conversation should take place. That conversation should be taking place at the commission level, at the leadership level. It, I mean, I think one of your aides was telling me there's a, there's a precedent, the Shad Jackson uh Accord or something, maybe talk us through what that was about, that maybe could be a framework for SECFCCFTC Coordinations. Yeah, absolutely. Uh, the Shad Johnson Accord. Um, and I think if you're, if you're here later in the afternoon, I believe, um, the, the very smart, uh Dan Davis will probably touch on this as well. Um uh, but at what it was is, you know, we, there's a situation where, you know, there's some questions about, um, products that could be traded on, on CFTC regulated exchanges. Um There were, there were some court decisions that, that, you know, caused additional kind of questions. And so the leadership of the two, the, the chairman of the two agencies at that time, this was back in 1981 they sat down and said, here's, we're gonna split the jurisdiction here. Here's how you're gonna be able to offer, you know, certain products um on CFTC regulated exchanges and, you know, not have the SEC come in and say, you know, no, this is within our jurisdiction. So they've done that before and that was really used as kind of a template for, you know, further agreement for the rule making that was done post Dodd Frank on, on, um, some of the swap jurisdiction as well. Interestingly enough at the time when, when they had the discussion between the two agencies around some of the swap regulations, um Gary Gensler was the chairman of the CFTC. So he's been through this process as well of how the two agencies can work together and come up with a framework of how to, you know, how to clearly just delineate um jurisdiction where there's some overlap, you mentioned the risk of innovation going overseas. And, you know, we talked about the, the previous session with, with the two senators. Um and that, and alongside, I think, you know, these court decisions brings me to a similar perspective that I'd like to get you to weigh in on. That is like there's a concern that our institutions are, are, are, are sort of basically losing the trust of the public, right that, that Congress can't legislate. And the executive branch is, is regulating by enforcement, as you say, they should be creating guidelines and rule making. But there's not the only outlet for, you know, disgruntled industry players to go to one is to go to the courts and there's actually been, it seems like a string of victories for the industry in that regard. Or it's to actually literally take business of offshore and both of those things, I would argue undermine the authority and the trust in the institutions that should be actually regulating these things. Maybe you could just weigh in on that and like, what is the, do you feel as if uh the, the, the process in the courts and this bigger story internationally? Is it driving action? Are people starting to wake up? Is there, is there, is there an impetus here from, from that pressure to, to do something? I think. So, um I, I would say that, you know, as you see, some of the foreign jurisdictions create uh frameworks, especially with the Europeans and, and, and Mica and the work that they're doing um to create a, a framework for uh this regulate kind of a regulatory authority here. Um You know, I don't know if it, it undermines their authority as much as that undermines our leadership in the financial services market. So we're gonna, we're gonna lose out. We're going to see companies move um to Europe or other jurisdictions where there's regulatory certainty because they want to operate in a space that has clear uh clear, clear rules of the road and, you know, we're gonna be left behind almost. And so I think it is bringing people, more people to the table, more discussions that need to be happening, are happening. I think we've seen that in Congress. Um, I really appreciate what Senator Jill Brown had to say about, you know, Congress is, they do work, they, they do get things done. This is just a particularly hard issue but sometimes a little external motivation helps. Uh, and, you know, certainly I do hear this a lot when you talk to, um, congressional offices, the concerns about what the courts are deciding and the fact that they are making policy decisions that really should be left to Congress and the fact that you see foreign jurisdictions getting out ahead, I, I joke sometimes, sometimes the, sometimes the fact the way to Congress move a little, a little, a little quicker is to, uh, have Europe on their, on their heels. Uh, and that might be the case here that they don't wanna lose out to, you know, Europe and the UK moving ahead more quickly and getting things done so that, you know, businesses that we really would want to stay here, move over to those jurisdictions. Um, so, so it does look certainly from the way that the markets are behaving, uh, in the last couple of days that, um, they're placing a bet we're gonna get a Bitcoin ETF approval. What does that mean for the CFTC? I mean, this is an sec matter. Um, but it seems to me there's lots of sort of moving parts and all of that. Um, And so how do you foresee what, what role will this shape in some respects with the CFTC as this process presumably goes forward? Yeah, I, I think, you know, for, for the CFTC directly, um, it won't change what we do day to day regulatory, you know, our regu regulatory work and there are, uh Bitcoin futures, uh ETF S already um, on the market trading and, and, um, you know, I think we've seen some good volume there so it doesn't really change what we do, but it does, you know, there, there still is this question of who's overseeing the spot market. Um, and the ca you know, the cash market for the, the commodities or the securities that these are, these are based on and what Bitcoin we know it's commodities. So, you know, who's looking at that day to day to make sure there's not, um, fraud and manipulation or there's, you know, there's not some kind of illicit activity. Um, I think that question, you know, will persist. Um, but at the same time, you know, when you start seeing mainstream financial services enter into this market, it certainly brings to light the fact that this is gonna stick around and that we're going to have to deal with the questions around regulation, um, and what our role will be at our agency. So certainly it brings probably a little more, it highlights the fact that this isn't going away. This isn't a fad that's going to, um, be gone in, in a few years. Ok. I'll, I'll, I have to throw a slightly thorny one for you in the last couple of years we have here, but just, uh, dey. Right. We started out talking about those three protocols and it seems that it, it is a, a thorny one for regulators because where if they're truly decentralized, who do you go after etcetera? And we, you know, there's just been fin in bringing out uh this, this guidance on mixes and so forth. Um Is there a role for the CFTC in this? What is your view basically on how agencies both of them really should be approaching the DFI sector? Yeah, I, I mean, I think it's important we start with what we're going to, how we're going to define it. Um And if we're going to go after DFI protocols and bring enforcement actions for various rules, we have to be able to, to make clear how we're going to view um defy how we're going to define it. Um You know, if, if we decide that there's some, you know, some level of centralization involved. Um And that those are the people we're gonna hold accountable, who are we holding accountable, um who's gonna be liable? So I think it's, we need to have that discussion is to be out in the public. Uh And we need to really work with stakeholders to come up with that framework. So I think, you know, the, the, the more we, the more we talk about it and the more we think about it, you know, it really is a discussion that we should be having publicly and getting feedback so that everything is very clear as to who is going to be, um, you know, who has to abide by our rules, who has to register how they register, who's going to be held liable gets back to clarity, doesn't it? That's what, that's what we're all looking for here. All right. Well, uh, a round of applause, please for Commissioner Messinger. Thank you so much for your time.