CFTC Chair Rostin Behnam on the Fight to Regulate Crypto

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1:24Hello and welcome to an episode of the Odd Lots podcast. I'm Tracy And I'm Joe Weisenthal. We are very happy to be recording a live episode in Chicago at the ISDA AGM. There are a lot of talking points. You hear a lot of things like leverage, liquidity risk, how to properly regulate and handle trillions of dollars worth of derivatives. But there's another thing that you hear quite a bit about as well, Joe. Right. Of course, nonstop talk about crypto. So obviously crypto itself wanes and ebbs in terms of how much people are interested or paying attention. Maybe we're still in a winter right now, but I feel like the next time there's a summer, a lot of how that market looks is going to be based on decisions and choices that are happening today by industry participants and regulators.

2:12Perhaps ironically, but not necessarily unexpectedly, when the lines on the chart go down in crypto, there does seem to be some extra regulatory attention paid to the market. So I am very pleased to say that we have the perfect guest to discuss all of this. We are going to be speaking with CFTC Chairman Russ Benham. Russ, thank you so much for coming on All Thoughts. Thanks, Tracy. Thanks, Joe. It's good to be here. I want to start out with a very simple question that I think everyone agrees on. Who should regulate crypto? Well, you know, we have a very unique system of financial regulators in the U.S.

2:49I don't think that's new or something novel to either of you or the audience or the listeners as well. And I think it's been built up over decades. It's been built up as a result of crises and different instances or sort of inflection points in the financial history of the U.S., both monetary system and financial markets. But because of that, we have over time developed a pretty comprehensive regulatory system where each agency, whether it's the market regulators or the prudential regulators, has a unique responsibility. And it really falls on what type of asset are they regulating. Is it a banking asset?

3:26Is it a market sort of financial asset with trading markets and whatnot? And we have the SEC and the CFTC as the market regulators and the banking regulators, which include the Fed, OCC, FDIC. So as much as the crypto conversation presents new and novel issues and questions about the underlying asset, how to regulate it, whether to regulate it, I do think, and I've said this many times before, we have to sort of use the same playbook that we've used in the past as we think about policy that we construct for crypto. So you mentioned that people are aware of, you know, the unique nature of the U.S.

4:02regulatory regime. But as much as we're sort of know that, like I still have very, you know, I'm not a Washington person. I don't know how it works. Like, do you and your counterparts at the other agencies, we see these headlines, right? And we'll talk about that. It's like CFTC has one view and this SEC has another view on these things. Do you guys call each other up and chat? Like, how does that work? That sort of, yeah, do you guys just talk? Gensler is here later. Yeah, like, can we get them on stage? Throwing that out there. Do you guys, yeah, do you just talk about these things? We absolutely do talk.

4:31We talk within the context of a lot of the interagency working groups, which you're familiar with, the FSOC or the President's Working Group. But we also do have one-on-one conversations. And a lot of these conversations that we have, and this is my perspective, of course, I can't speak for the others, is high level, sort of 30 ,000 feet about what we're thinking, what we're seeing, who the registrant pool is that we're starting to observe within our markets and how we need to approach this. A lot of the work gets done at the staff level, a lot of the technical, legal work, economic work, but we are shaping policy and we're shaping decisions as we see risks emerge, as we see new markets emerge.

5:10But communication is frequent, it's very transparent, and I will say this, I've said this many, many times before, we have common interests across the U.S. government in terms of what we want to accomplish and how we want to accomplish it. Can you maybe clarify that last bit? Because there is this ongoing debate about whether or not crypto should be regulated in a meaningful way at all. I guess the argument against regulating it would be that that way you kind of keep it out of the walled financial system, you get less contagion. So what exactly are you thinking in terms of regulating this space?

5:44What is the end goal? Yeah, you know, this is a question that I think about a lot, but it really comes down to me thinking about my position and my current role and how that intersects with the markets as they're developing. And I know and I can appreciate that others, including yourselves, might have a different perspective about crypto, how, if it should be regulated, and the experiences we had, most notably last year in 2022, and how those repercussions affected traditional markets, if at all. And there's a strong argument that they didn't impact the traditional markets. But as I think about my role, and let's just break down that, you know, that puzzle of financial regulators in the U.S.

6:29as one of two chairs of the two market regulators in the U.S., it's very difficult for me to sit back and say, you know what, this will just fizzle over time, or this is not in the best interest of the United States or economy, national security or whatnot, or we don't have to necessarily worry about this because there's no contagion risk to other parts of traditional markets. I think we've all read or heard or maybe know individuals who were hurt from last year's turmoil in the crypto markets. It is a largely unregulated market, notwithstanding some state-level requirements. And I do think my responsibility within the context of the mission of the CFTC is to protect investors.

7:16And when it comes to commodity financial assets, which many of these tokens are, I have to do everything I can with the power I have as chair of the CFTC to ensure that U.S. customers are protected. And we use every tool we have within our toolbox, whether it's regulatory, whether it's putting out notices and advisories, or most notably and importantly is using our law enforcement tool through enforcement. So we continue to use these tools, but I don't see, given the way the market's developing and evolving, and the CFTC does have a unique role and has had a unique relationship with crypto. Our relationship with crypto at the CFTC certainly precedes me.

7:59It goes back to 2014 is, I think, when we brought our first enforcement case. And we've seen the development of derivatives products on crypto over many years. We have listed futures contracts on both Bitcoin and Ether going back several years now. So we do have a very vested interest in the protection and the monitoring and the surveillance of this underlying cash market, which, as I said, remains largely unregulated. So I will continue advocating. I think there's a lot of individuals in Congress and around Washington who agree with me and certainly some who disagree. But I do always sort of fall back to that home base for myself as chair of this agency that I have to focus on protecting U.S.

8:45customers. And as long as this market exists, potentially grows, ebbs and flows in terms of size and market cap, we need to do whatever we can to protect those investors. All right. So we've been talking a little bit high level here. So I want to jump into just a specific question. And you mentioned the existence of Bitcoin and Ether futures that are traded. My understanding is that on the matter of Ether specifically, there is a different perspective at the CFTC and the SEC. Is it a commodity? Is it a security? And I have kind of a two-part question, which is, you know, how do you arrive at the view that, say, Ether is a commodity and therefore should be regulated as such?

9:27And then I guess more importantly, there are other coins out there. And so there are other Ethereum competitors, level one blockchain platforms like a Solana or something. Would the logic that leads you to sort of make the case that Ethereum should be seen as a commodity apply to other coins potentially as well? Well, it's less logic as opposed to legal analysis. And maybe those are within the same Venn diagram, right? Sure. Legal analysis hopefully is logical. My husband's a lawyer, and I would debate that statement. Yeah. But, you know, we, as I said, and Joe, you pointed this out, we have two listed futures contracts, one on Bitcoin and one on ETH.

10:09And this is not because we, the CFTC, sought out market participants or exchanges and said, you should do this. Nor is it because we have a list on our website that says these tokens are commodities and these tokens are securities. This was a market-driven effort by exchanges, probably driven by client demand, to list two particular tokens. And the process that sort of transpires when you list a contract, and this is not unique to crypto, this happens in that the ag complex, the energy complex, the metals complex, and others, is, you know, there's legal analysis done by the exchange. change. They have to conform with the laws and the regulations of the CFTC.

10:52There's open dialogue over sometimes many months to make sure that that contract conforms with our legal requirements. And then at some point, there's two avenues to go down. You can something called self-certify a contract, or you can seek approval from the commission. So this is what happened with both the Bitcoin and the Ether contract, Bitcoin in 2017, Ether in about 2020. And that is what we've done historically and consistently. And in the context of your question about is it a security or is it a commodity, there's no doubt we, within the agency and at the staff level, examine the characteristics of a financial asset to ensure that it complies with the law and that it falls within the definition of a commodity, and more importantly, is not a security.

11:40If you look up at the definition of a commodity under the Commodity Exchange Act, nearly everything is a commodity, including a security. It's just securities are exempt from the CEA. So we do have dialogue with the SEC and other agencies, and we go through this sort of legal analysis to ensure that we feel confident that when an exchange or registrant lists a contract, it does in fact comply with the law. Now, I'll add very quickly, and many in this room know this, and I'm sure many of your listeners know this as well, we have to drive our legal analysis from legal precedent, which your husband will know, right?

12:17And this Howey test, which talks about, you know, four factors about an investment of money in a common enterprise with an expectation of profit from the work of others. And that, for better or for worse, is this sort of driving force that sits as the foundation of our legal analysis to this day for digital assets when we think about that question about securities versus commodities. And I know Congress is contemplating this. We've raised this question. There are many characteristics about the digital financial assets which are common to traditional financial assets, but there are certainly many characteristics which are unique and I think demand a unique set of thoughts and policy-driven ideas about how and whether we should regulate it.

12:59So just on that note, could you have a situation where someone creates a coin or a token and they're raising money and it is a security as defined by legal precedent and, you know, the Howey test and things like that, but then technology enables it to become decentralized enough that it could be a commodity? Yeah, I mean, there's no doubt about that. And this is certainly a question that we've been grappling with. And I know Congress is thinking about it as well, that initially, Tracy, as you point out, there's going to be a pooling of capital from investors to start a protocol or to start a project.

13:35And at some point, there would be a milestone or an inflection point where that asset flips from being a security because of those characteristics and then ends up being a commodity. We've never had to deal with this, I think, in the context of traditional non-digital assets. But again, these are the types of questions that I force policymakers, elected officials, to think about which regime do these financial assets properly fit into. And the policy case that I've made as the chair of the CFTC is, you know, we have to think about how these assets exist within the financial ecosystem and what requirements we should layer on to each of the financial assets as it relates to customers and investors, right?

14:23And if you think about the SEC and the 33 Act and the 34 Act and how and why that those laws were built, it is in fact, and this term is thrown around a lot, but to bridge an information gap between an issuer of a security and an investor, right? To provide as much information between that centralized body of individuals that's running a company or running an organization or running a common enterprise so that investor, whether retail or institutional, can make the most informed decision. Fine. Commodity markets are completely different in the sense that you have decentralized financial assets, whether it's weak, whether it's crude, whether it's palladium, and you want to create a resilient, transparent market environment so that the individual investor, whether retail but more commonly institutional, understands the risks associated with investing in commodity markets, but more importantly can understand and know with confidence that the infrastructure around those trading markets, whether it's the intermediary, the exchange, the clearinghouse, the custodian, are well-regulated and sort of resilient in their ability to manage that trading and that execution.

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17:10Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. Brokerage services by Open to the Public Investing, Inc., member FINRA and SIPC. Advisory services by Public Advisors, LLC. SEC Registered Advisor. Generated Assets is an interactive analysis tool. Output is for informational purposes only and is not an investment recommendation or advice. Complete disclosures available at public.com slash disclosures. So you mentioned when a new commodity or when any new future is launched, the entity can either self-certify or go to you for approval.

17:49There is one type of entity that I'm pretty sure does not do any of that, and that is DeFi exchanges. If I were to launch a DeFi exchange, I'd come up with some new code that's like, oh, this could be a novel way of trading futures for some of these digital assets. What do I have to do to be in your good graces? What would constitute, are any DeFi exchanges doing that? What would get me in trouble? And are the laws clear for someone interested in the space such that they could create a code, manage the code, manage a DAO perhaps that runs the code such that they can stay on your good side? Yeah, Joe, you wouldn't be the first who would do that.

18:30So you're a little bit behind the ball there. But, you know, this does raise questions about whether or not you have individuals involved in programming and what the code is and how it's set. But ultimately, and I do think, you know, this raises this question about regulation by enforcement. And I very vigorously oppose, at least from a CFTC perspective, and that's the only agency I can speak for, is that we have done everything in our power, while I've been chair and including my predecessors, to remain transparent and to engage with market participants in this digital asset DeFi space to ensure they know as much as they can about what the Commodity Exchange Act requires and what is required of them if they're going to offer futures, options or swaps to U.S.

19:21customers. And I think it's easy to suggest, oh, there's no institution, there's no individual, it's just code. You can't regulate that. It's sort of self-effectuating. But that's really the wrong set of questions. It's really about what are U.S. customers being offered and exposed to and who is either individual or the group of individuals who set up that entity, that code, to offer those products. So we are not legal counsel. We don't provide legal advice per se. And I know that's a challenge. There are barriers to entry, as many people in this audience knows, to participate in regulated markets.

19:57But regulated markets are why we have the best markets in the U.S. and in the world. And it really is incumbent on individuals to understand and appreciate that if you're going to offer derivatives to U.S. customers, there is a very well developed and mature legal base and requirements for complying with the law. Speaking of exchanges, this wasn't necessarily a DeFi exchange, but a centralized one. I want to personally thank you for producing one of the most entertaining legal documents of all time in the form of the lawsuit against Binance. And for those of you in the audience who haven't read it, I highly recommend that you do.

20:36It is a good reminder to pick up the phone every once in a while and don't write everything down in emails. But was there any legal advice? That is not legal advice. But was there anything in there that surprised you or that said something about the nature of the crypto ecosystem itself and the way that it's being run? I mean, you had people openly talking about, you know, this this might be money laundering, but it's only$800. You can't even buy an AK-47 for that. This was in an email. I'm going to be careful about what I say and what I don't say, given that it's active litigation. I certainly can say that it was not our intent to entertain, but it is certainly a well-developed complaint and credit to staff at the CFDC for doing the really hard work to put that together.

21:27I think at this point, and I've been at the commission remarkably almost six years, nothing surprises me anymore. So we do our work. We do it hard. We know that there's a lot of individuals out there who either don't want to comply with the law, choose to evade the law, or don't know about the law. And sometimes they will do things that are surprising, including writing things down. But we are focused on making sure we're applying the law protecting investors, U.S. investors. And yeah, that case, it's ongoing and we're going to keep vigorously bringing bad actors to account here and we'll see what happens as that at this point is still active and those are only allegations.

22:10Does it feel like the digital nature of this space, the fact that the participants are so online, so much of the activity takes place online, does that make enforcement actions easier or harder from your perspective? Yeah, it's a good question. And I think it actually kind of goes to, I'm going to just pivot a little bit, but I think within the same context or theme, you know, there's a lot of individuals who question the use case for digital assets, right? And so often we hear about bad actors, illicit finance, utilizing this vehicle, digital assets, to sort of conduct their business, which is unfortunately nefarious and in sort of contravention to law and good practice.

22:56But what I've observed from a regulatory perspective, and recognizing the sort of counter to that is using traditional paper-backed fiat, what I've recognized over the past couple years working with my colleagues at the Treasury Department, FBI, other law enforcement agencies, other regulators is we're really developing a lot of very sophisticated tools to trace the use of digital assets as a means to conduct illegal activity. So I think from my perspective, it's still a little bit the jury is out on whether or not as these technologies develop and as the surveillance tools continue to mature, whether or not I think from a law enforcement perspective, we're going to be able to root out fraud and manipulation and illicit activity.

23:45in fact, easier than we do under traditional forms of illegal activity. So a year ago at this time, FTX was still a big thing. And they were in the process of attempting to sort of restructure how or pushing to restructure how futures were traded in the US, even beyond crypto, like a fundamental rethink of how futures are traded with potentially direct access to the exchange, proposals for 24-7 algorithmic automated margining, things like that. And at the time, I think you were like somewhat open to this idea. Then of course, FTX collapsed a few months later. And I think for now that's dead. But the core ideas, like, would you still be open to some of these ideas?

24:29And just in terms of like rethinking how we trade, obviously, they're still currently in people's minds, probably associated with FTX. But the ideas themselves in terms of like, what futures trading could look like in the future, could you see that conversation revisited at some point? Yeah. I think if you, as I reflect on 2022 and that FTX sequence of events, which goes back to 2021 when they bought the entity that they had purchased was LedgerX, which recently just got auctioned off to a bidder. I think it's my responsibility and any chair's responsibility to always be open to new ideas. We have these very clear milestone moments in market structure and market technology over the past 100 years that clearly have put markets on a different path and a different course.

25:24Whether that was, and in this city you can appreciate it better than anything else, going from pit trading to electronic trading some 20 years ago. I often would use that example to sort of demonstrate and illustrate how we have to be open to technological disruptions in market execution. It's just if we don't do it, we're going to potentially be behind from a U.S. perspective, and I think it's incumbent we think about it. The other point is with respect to FTX and LedgerX, that was not the first entity to come to the CFTC and request an approval for non-intermediation, which essentially wasn't what it was.

26:01And I said this as well. If you think, you know, over the course of 2022, as we were reviewing that application, which was a legal requirement for us to do, this wasn't some sort of arbitrary choice I made of, oh, okay, we have an application, let's look at it. Or I couldn't as easily dismiss it. We have a legal obligation to review and to respond to applications. And if we don't, then we're actually sort of at legal risk of being sued by the applicant for not being responsive to them. But we did have two public engagement activities, we'll call them that. We had a request for information or a consultation document in March of last year.

26:39And then we had a public roundtable around non-intermediation. And that was driven around just making sure that we were getting as much input from the public, whoever wanted to provide it, but also to have a larger discussion about market structure and non-intermediation. Because as we see this digital asset market mature and develop with traditional financial players wanting a piece and wanting to participate, whether through offering services or assets to their customers or potentially using the blockchain technology as a foundation for banking processes, we have this responsibility, I think, from a regulatory perspective to really think through these things.

27:25So despite what happened to FTX, the application was still ongoing. We weren't close to a decision. And there were certainly a lot of legal issues, risk issues, and policy questions that we were diving through. But I certainly think, as I said this before, that proposal wasn't the first of its kind, and it's not going to be the last of its kind. Speaking of new ideas, I'm going to pivot slightly from crypto, although I think this is actually related to it, because it feels like one of the lasting legacies of crypto, no matter what happens now, is it's sort of normalized gambling behavior by investors.

28:05So bets purely on token go up, token go down, line on the chart go up or down. And recently we have seen new prediction markets and entities forming things like CalShit and PredictIt that are offering all different types of bets. And I'm curious how you are viewing those through the lens of a regulator. Yeah. You know, I've had conversations with both of those entities. and there are certainly other entities that are trying or doing similar activities. And binary options, these prediction markets are not necessarily novel, but I think from a policy perspective and from my role, on the one hand, we have to think about what the law requires.