Speaker 1: Hello, and welcome to an episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal.
Speaker 1: We are very happy to be recording a live episode
Speaker 1: in Chicago at the ISDA AGM. There are a lot
Speaker 1: of talking points. You hear a lot of things like leverage, liquidity, risk,
Speaker 1: how to properly regulate and handle trillions of dollars worth
Speaker 1: of derivatives. But there's another thing that you hear quite
Speaker 1: a bit about as well, Joe.
Speaker 2: Right, of course, NonStop talk about crypto. Obviously, crypto itself
Speaker 2: wanes and ebbs in terms of how much people are
Speaker 2: interested or paying attention. Maybe we're still in a winter
Speaker 2: right now, but I feel like the next time there's
Speaker 2: a summer, a lot of how that market looks is
Speaker 2: going to be based on decisions and choices that are
Speaker 2: happening today by industry participants in regulators.
Speaker 1: Perhaps ironically, but not necessarily unexpectedly, when the lines on
Speaker 1: the chart go down in crypto, there does seem to
Speaker 1: be some extra regulatory attention paid to the market. So
Speaker 1: I am very pleased to say that we have the
Speaker 1: perfect guest to discuss all of this. We are going
Speaker 1: to be speaking with CFTC Chairman Russ Benham Russ, thank
Speaker 1: you so much for coming on all thoughts.
Speaker 3: Thanks Tracy, Thanks Jo, It's good to be here.
Speaker 1: I want to start out with a very simple question
Speaker 1: that I think everyone agrees on, who should regulate crypto?
Speaker 3: Well, you know, we have.
Speaker 4: A very unique system of financial regulators in the US.
Speaker 4: I don't think that's new or something novel to either
Speaker 4: of view or the audience or the listeners as well,
Speaker 4: and I think it's been built up over decades. It's
Speaker 4: been built up as a result of crises and different
Speaker 4: instances or sort of inflection points in the financial history
Speaker 4: of the US, both monetary system and financial markets. But
Speaker 4: because of that, we have over time developed a pretty
Speaker 4: comp comprehensive regulatory system where each agency, whether it's the
Speaker 4: market regulators or the prudential regulators, has a unique responsibility
Speaker 4: and it really falls on what type of asset are
Speaker 4: they regulating. Is it a banking asset, is it a
Speaker 4: market sort of financial asset or with trading markets and whatnot.
Speaker 4: And we have the SEC and the CFTC as the
Speaker 4: market regulators, and the banking regulators which include you know,
Speaker 4: the FED, occ FD.
Speaker 3: I see, so.
Speaker 4: As much as the crypto conversation presents new and novel
Speaker 4: issues and questions about the underlying asset, how to regulate it,
Speaker 4: whether to regulate it. I do think, and I've said
Speaker 4: this many times before, we have to sort of use
Speaker 4: the same playbook that we've used in the past as
Speaker 4: we think about policy that we construct for crypto.
Speaker 2: So you mentioned that people are aware of, you know,
Speaker 2: the unique nature of the US regulatory regime. But as
Speaker 2: much as we're sort of know that, like, I still
Speaker 2: have very you know, I'm not a Washington person. I
Speaker 2: don't know how it works. Like do you and your
Speaker 2: counterparts of the other agencies? We see these headlines, right,
Speaker 2: we'll talk about that is like to see if TC
Speaker 2: has one view and this secs another view on these things?
Speaker 2: Do you guys call each other.
Speaker 3: Up in chat?
Speaker 1: Like?
Speaker 2: How does that work? The sort of Yeah, do you
Speaker 2: guys just talk?
Speaker 1: Gensler is here later, Yeah, can we get them throwing
Speaker 1: that out?
Speaker 3: Do you just talk about Wait, we absolutely do talk.
Speaker 4: We talk within the context of a lot of the
Speaker 4: interagency working groups, which you're familiar with, the f SoC
Speaker 4: or the President's Working Group, but we also do have
Speaker 4: one on one conversations, and a lot of these conversations
Speaker 4: that we have, and this is my perspective, of course,
Speaker 4: I can't speak for the others. Is high level, sort
Speaker 4: of thirty thousand feet about what we're thinking, what we're seeing,
Speaker 4: who the registrant pool is that we're starting to observe
Speaker 4: within our markets, and how we need to approach this.
Speaker 4: A lot of the work gets done at the SNAFF level,
Speaker 4: a lot of the technical, legal work, economic work. But
Speaker 4: we are shaping policy and we're shaping decisions as we
Speaker 4: see risks emerge, as we see new markets emerge. But
Speaker 4: communication is frequent, it's very transparent, and I will say this,
Speaker 4: I've said this many many times before. We have common
Speaker 4: interests across the US government in terms of what we
Speaker 4: want to accomplish and how we want to accomplish it.
Speaker 1: Can you maybe clarify that last bit, because there is
Speaker 1: this ongoing debate about whether or not crypto should be
Speaker 1: regulated in a meaningful way at all. I guess the
Speaker 1: argument against regulating it would be that that way you
Speaker 1: kind of keep it out of the wallt financial system,
Speaker 1: you get less contagion. So what exactly are you thinking
Speaker 1: in terms of regulating the space, what is the end goal?
Speaker 4: Yeah, you know, this is a question that I think,
Speaker 4: I think about a lot, But it really comes down
Speaker 4: to me thinking about my position and my current role
Speaker 4: and how that intersects with the markets as they're developing.
Speaker 4: And I know and I can appreciate that others, including yourselves,
Speaker 4: might have a different perspective about crypto, how if it
Speaker 4: should be regulated, and the experiences we had, most notably
Speaker 4: last year in twenty twenty two, and how those repercussions
Speaker 4: affected traditional markets, if at all. And there's a strong
Speaker 4: argument that they didn't impact the traditional markets. But as
Speaker 4: I think about my role, and let's just break down,
Speaker 4: you know, that puzzle of financial regulators in the US.
Speaker 4: As one of two chairs of the two market regulators
Speaker 4: in the US, it's very difficult for me to sit
Speaker 4: back and say, you know what, this will just fizzle
Speaker 4: over time, or this is not in the best interest
Speaker 4: of the United States or economy, national security or whatnot,
Speaker 4: or we don't have to necessarily worry about this because
Speaker 4: there's no contagion risk to other parts of traditional markets.
Speaker 4: I think we've all read or heard or maybe no
Speaker 4: individuals who were hurt from last year's You know turmoil
Speaker 4: in the crypto markets. It is a largely unregulated market,
Speaker 4: notwithstanding some state level requirements, and I do think my
Speaker 4: responsibility within the context of the mission of the SAC
Speaker 4: is to protect investors and when it comes to commodity
Speaker 4: financial assets, which many of these tokens are, I have
Speaker 4: to do everything I can with the power I have
Speaker 4: as Chair of the CFTC to ensure that US customers
Speaker 4: are protected, and we use every tool we have within
Speaker 4: our toolbox, whether it's regulatory, whether it's putting out notices
Speaker 4: and advisories, or most notably and importantly as using our
Speaker 4: law enforcement tool through enforcement. So we continue to use
Speaker 4: these tools. But I don't see given the way the
Speaker 4: market's developing and evolving, and the CFTC does have a
Speaker 4: unique role and has had a unique relationship with crypto,
Speaker 4: our relationship with crypto at the CFTC certainly precedes me.
Speaker 4: It goes back to twenty fourteen, is I think when
Speaker 4: we brought our first enforcement case, and we've seen the
Speaker 4: development of derivatives products on crypto over many years. We
Speaker 4: have listed futures contracts on both bitcoin and ether going
Speaker 4: back several years now, so we do have a very
Speaker 4: vested interest in the protection and the monitoring and the
Speaker 4: surveillance of this underlying cash market, which, as I said,
Speaker 4: remains largely unregulated. So I will continue advocating. I think
Speaker 4: there's a lot of individuals in Congress and around Washington
Speaker 4: who agree with me, and certainly some who disagree, But
Speaker 4: I do always sort of fall back to that home
Speaker 4: base for myself is chair this agency that I have
Speaker 4: to focus on protecting US customers, and as long as
Speaker 4: this market exists, potentially grows ebbs and flows in terms
Speaker 4: of size and market cap, we need to do whatever
Speaker 4: we can to protect those investors.
Speaker 2: All right, So we've been to tell you a little
Speaker 2: bit high level here, so I want to like jump
Speaker 2: into it just a specific question, and you mentioned the
Speaker 2: existence of a bitcoin and futures that are traded. My
Speaker 2: understanding is that on the matter of ether specifically, there
Speaker 2: is a different perspective at the CFTC and the SEC.
Speaker 2: Is it a commodity?
Speaker 3: Is it a security?
Speaker 2: And I was kind of a two part question, which is,
Speaker 2: you know, how do you arrive at the view that
Speaker 2: say ether is a commodity and therefore should be regulated
Speaker 2: as such. And then we're I guess More importantly, you
Speaker 2: know there are other coins out there, and so there
Speaker 2: are other Ethereum competitors level one blockchain platforms like a
Speaker 2: Salona or something. Would the logic that leads you to
Speaker 2: sort of make the case that Ethereum should be seen
Speaker 2: as a commodity apply to other coins potentially as well.
Speaker 3: Well, it's it's less logic as opposed to legal analysis.
Speaker 4: So maybe you know those are within the same bend diagram, right,
Speaker 4: Legal analysis hopefully is logical.
Speaker 1: My husband's a lawyer, and I would debate that statement.
Speaker 4: Yeah, but you know we, as I said, and Joe
Speaker 4: you pointed this out, we have two listed futures contracts,
Speaker 4: one on Bitcoin and one on Ether. And this is
Speaker 4: not because we the CFTC, sought out market participants exchanges
Speaker 4: and said you should do this. Nor is it because
Speaker 4: we have a list on our website that says these
Speaker 4: tokens are commodities and these tokens or securities. This was
Speaker 4: a market driven effort by exchanges, probably driven by client
Speaker 4: demand to list two particular tokens and the process that
Speaker 4: sort of transpires when you list a contract, and this
Speaker 4: is not unique to crypto. This happens in that the
Speaker 4: ad complex, the energy complex, the metals complex, and others.
Speaker 4: Is you know, there's legal analysis done.
Speaker 3: By the exchange.
Speaker 4: They have to conform with the laws and the regulations
Speaker 4: of the CFTC. There's open dialogue over sometimes many months
Speaker 4: to make sure that the contract conforms with our legal
Speaker 4: requirements and that at some point there's two avenues to
Speaker 4: go down. You can something called self certify a contract,
Speaker 4: or you can seek approval from the Commission. So this
Speaker 4: is what happened with both the bitcoin and the Ether contract.
Speaker 4: Bitcoin in twenty seventeen, Ether in about twenty twenty. And
Speaker 4: that is what we've done historically and consistently, and in
Speaker 4: the context of your question about is it a security
Speaker 4: or is it a commodity, there's no doubt we within
Speaker 4: the agency and at the staff level examine the characteristics
Speaker 4: of a financial asset to ensure that it complies with
Speaker 4: the law and that it falls within the definition of
Speaker 4: a commodity and more importantly, is not a security. If
Speaker 4: you look up at the definition of a commodity under
Speaker 4: the Commodity Exchange Act, nearly everything is a commodity, including
Speaker 4: a security. It's just securities are exempt from the CEA.
Speaker 4: So we do have dialogue with the SEC and other agencies,
Speaker 4: and we go through this sort of legal analysis to
Speaker 4: ensure that we feel confident that when in exchange or
Speaker 4: registrant lists a contract, it does in fact comply with
Speaker 4: a law.
Speaker 3: Now, I'll add.
Speaker 4: Very quickly, and many in this room know this, and
Speaker 4: I'm sure many of your listeners know this as well.
Speaker 4: We have to drive our legal analysis from legal precedent,
Speaker 4: which your husband will know, right, And this how we test,
Speaker 4: which talks about, you know, four factors about an investment
Speaker 4: of money in a common enterprise with an expectation of
Speaker 4: profit from the work of others, and that for better.
Speaker 3: Or for worse.
Speaker 4: Is this sort of driving force that sits as the
Speaker 4: foundation of our legal analysis to this day for digital assets.
Speaker 4: When we think about that question about securities versus commodities,
Speaker 4: and I know Congress is contemplating this, we've raised this question.
Speaker 4: There are many characteristics about the financial the digital financial assets,
Speaker 4: which are common to traditional financial assets, but there are
Speaker 4: certainly many characteristics which are unique and I think demand
Speaker 4: a unique set of thoughts and policy driven ideas about
Speaker 4: how and whether we should regulate it.
Speaker 1: So, just on that note, could you have a situation
Speaker 1: where someone creates a coin or a token and they're
Speaker 1: raising money and it is a security as defined by
Speaker 1: legal precedent and you know, the how we test and
Speaker 1: things like that, but then technology is enables it to
Speaker 1: become decentralized enough that it could be a commodity.
Speaker 4: Yeah, I mean, there's no doubt about that, and that
Speaker 4: this is certainly a question that we've been grappling with,
Speaker 4: and I know Congress is thinking about it as well.
Speaker 4: That you know, initially, Tracy, as you point out, there's
Speaker 4: going to be a pooling of capital from investors to
Speaker 4: start a protocol or to start a project, and at
Speaker 4: some point there would be a milestorm or inflection point
Speaker 4: where that asset flips from being a security because of
Speaker 4: those characteristics and then ends up.
Speaker 3: Being a commodity.
Speaker 4: We've never had to deal with this, I think in
Speaker 4: the context of traditional, non digital assets. But again, these
Speaker 4: are the types of questions that I think force policymakers
Speaker 4: elected officials to think about which regime do these financial
Speaker 4: assets properly fit into? And the policy case that I've
Speaker 4: made as the chair of the CFTC is, you know,
Speaker 4: we have to think about how these assets exist within
Speaker 4: the financial ecosystem and what requirements we should layer on
Speaker 4: to each of the financial assets as it relates to
Speaker 4: customers and investors. Right, And if you think about the
Speaker 4: SEC and the thirty three Act and the thirty four
Speaker 4: Act and how and why that those laws were built,
Speaker 4: it is in fact this term is thrown around a lot,
Speaker 4: but to bridge an information gap between an issuer of
Speaker 4: a security and an investor. Right to provide as much
Speaker 4: information between that centralized body of individuals that's running a company,
Speaker 4: or running an organization, or running a common enterprise, so
Speaker 4: that investor, whether retail or institutional, can make the most
Speaker 4: informed decision.
Speaker 3: Fine.
Speaker 4: Commodity markets are completely different in the sense that you
Speaker 4: have decentralized financial assets, whether it's weak, whether it's crude,
Speaker 4: whether it's palladium, and you want to create a resilient,
Speaker 4: transparent market environment so that the individual investor, whether retail
Speaker 4: but more commonly institutional, understands the risks associated with a
Speaker 4: investing in commodity markets, but more importantly can understand and
Speaker 4: know with confidence that the infrastructure around those trading markets,
Speaker 4: whether it's the intermediary, the exchange, the clearinghouse, the custodian,
Speaker 4: are well regulated and sort of resilient in their ability
Speaker 4: to manage that trading and that execution.
Speaker 2: See you mentioned when a new commodity or any new
Speaker 2: future is launched, the entity can either self certify or
Speaker 2: go to you for approval. There is one type of
Speaker 2: entity that I'm pretty sure does not do any of that,
Speaker 2: and that is Defy exchanges. If I were to launch
Speaker 2: a DeFi exchange, I come up with some new code
Speaker 2: that's like, oh, this could be a novel way of
Speaker 2: trading futures for some of these digital assets. What do
Speaker 2: I have to do to be in your good graces?
Speaker 2: What would constitute are any defile exchanges doing that? What
Speaker 2: would get me in trouble? And are the laws clear
Speaker 2: for someone interested in the space such that they could
Speaker 2: create a code, manage the code, manage a DOW perhaps
Speaker 2: that runs the code, such that they can stay on
Speaker 2: your good side.
Speaker 4: Yeah, Joe, you wouldn't be the first who would do that,
Speaker 4: so you're a little bit behind the ball there. But
Speaker 4: you know, this does raise questions about whether or not
Speaker 4: you have individuals involved in programming and what the code
Speaker 4: is and how it's set. But ultimately, and I do
Speaker 4: think you know this raises this question about regulation by enforcement,
Speaker 4: and I very vigorously oppose, at least from a CFTC perspective,
Speaker 4: and that's the only agency I can speak for, is
Speaker 4: that we have done everything in our power while I've
Speaker 4: been chaired and including my predecessors, to remain transparent and
Speaker 4: to engage with market participants in this digital asset defy space,
Speaker 4: to ensure they know as much as they can about
Speaker 4: what the Commodity Exchange Act requires and what is required
Speaker 4: of them if they're going to offer futures options or
Speaker 4: swaps to US customers. And I think it's easy to suggest, oh,
Speaker 4: there's you know, there's no institution, there's no individual, it's
Speaker 4: just code. You can't regulate that. It's sort of self effectuating.
Speaker 4: But that's really the wrong set of questions. It's really
Speaker 4: about what are US customers being offered and exposed to
Speaker 4: and who is the either individual or the group of
Speaker 4: individuals who set up that entity that code to offer
Speaker 4: those products.
Speaker 3: So we are not legal counsel.
Speaker 4: We don't provide legal advice per se. And I know
Speaker 4: that's a challenge. There are barriers to entry, as many
Speaker 4: people in this audience knows to participate in regulated markets.
Speaker 4: But regulated markets are why we have the best markets
Speaker 4: in the US and in the world, and it really
Speaker 4: is incumbent on individuals to understand and appreciate that if
Speaker 4: you're going to offer derivatives to US customers, there is
Speaker 4: a very well developed and mature legal base and requirements
Speaker 4: for complying with the law.
Speaker 1: Speaking of exchanges, this wasn't necessarily a DeFi exchange, but
Speaker 1: a centralized one. I want to personally thank you for
Speaker 1: producing one of the most entertaining legal documents of all
Speaker 1: time in the form of the lawsuit against Binance, And
Speaker 1: for those of you in the audience who haven't read it,
Speaker 1: I highly recommend that you do. It is a good
Speaker 1: reminder to pick up the phone every once in a
Speaker 1: while and don't write everything down in emails. But was
Speaker 1: there a legal advice that is not legal advice? But
Speaker 1: was there anything in there that surprised you or that
Speaker 1: said something about the nature of the crypto ecosystem itself
Speaker 1: and the way that it's being run. I mean, you
Speaker 1: had people openly talking about, you know, this might be
Speaker 1: money laundering, but it's only eight hundred dollars. You can't
Speaker 1: even buy an AK forty seven for that, Well, this
Speaker 1: was in an email.
Speaker 3: I'm going to be careful about what I say and
Speaker 3: when I don't say.
Speaker 4: Given that it's it's active litigation, I certainly can say
Speaker 4: that it was not our intent to entertain. But you know,
Speaker 4: it is certainly a well developed complaint. And credit to
Speaker 4: staff at the CFTC for doing the really hard work
Speaker 4: to put that together. I think at this point, and
Speaker 4: I've been at the Commission remarkably almost six years, nothing
Speaker 4: surprises me anymore.
Speaker 3: So we do our work, we do it hard.
Speaker 4: We know that there's a lot of individuals out there
Speaker 4: who either don't want to comply with the law, choose
Speaker 4: to evade the law, or don't know about the law,
Speaker 4: and you know, sometimes they will do things that are surprising,
Speaker 4: including writing things down. But we are focused on making
Speaker 4: sure we're applying the law protecting investors us investors. And yeah,
Speaker 4: that case, it's ongoing, and we're going to keep vigorously
Speaker 4: bringing bad actors to account here and we'll see what happens.
Speaker 4: Is that at this point is still active and those
Speaker 4: are only allegations.
Speaker 1: Does it feel like the digital nature of this space,
Speaker 1: the fact that the participants are so online, so much
Speaker 1: of the activity takes place online. Does that make enforcement
Speaker 1: actions easier or harder?
Speaker 4: From your perspective, Yeah, it's a good question, and I
Speaker 4: think it actually kind of goes to I'm going to
Speaker 4: just pivot a little bit, but I think within the
Speaker 4: same context or theme. You know, there's a lot of
Speaker 4: individuals who question the use case for digital assets, right,
Speaker 4: and so often we hear about bad actors illictit finance
Speaker 4: utilizing this vehicle digital assets to sort of conduct their business,
Speaker 4: which is unfortunately nefarious and sort of contravention to law
Speaker 4: and good good practice. But what I've observed from a
Speaker 4: regulatory perspective and recognizing the sort of counter to that
Speaker 4: is using you know, traditional paperbacked FIAT. What I've recognized
Speaker 4: over the past couple of years working with my colleagues
Speaker 4: at the Treasury Department, FBI, other law enforcement agencies are
Speaker 4: the regulators, is we're really developing a lot of very
Speaker 4: sophisticated tools to trace the use of digital assets as
Speaker 4: a means to conduct illegal activity. So I think from
Speaker 4: my perspective, it's still a little bit the jury is
Speaker 4: out on whether or not. As these technologies develop and
Speaker 4: as the surveillance tools continue to mature whether or not.
Speaker 4: I think from a law enforcement perspective, we're going to
Speaker 4: be able to root out fraud and manipulation and elicited
Speaker 4: activity in fact easier than we do under traditional forms
Speaker 4: of illegal activity.
Speaker 2: So a year ago, at this time, FTX was still
Speaker 2: a big thing, and they were in the process of
Speaker 2: attempting to sort of restructure how or pushing to restructure
Speaker 2: how futures were traded in the US and beyond crypto,
Speaker 2: like a fundamental rethink of how futures are traded with
Speaker 2: potentially direct access to the exchange, proposals for twenty four
Speaker 2: to seven, algorithmic automated margining, things like that, And at
Speaker 2: the time I think you were like somewhat opened to
Speaker 2: this idea. Then, of course FTX collapsed a few months later,
Speaker 2: and I think for now that's dead, but the core ideas,
Speaker 2: like would you still be open to some of these
Speaker 2: ideas and just in terms of like rethinking how we trade.
Speaker 2: Obviously they're still currently in people's minds, probably associated with FTX,
Speaker 2: but the ideas themselves in terms of like what futures
Speaker 2: trading could look like in the future, could you could
Speaker 2: you see that conversation revisited at some point.
Speaker 4: Yeah, you know, I think if you as I reflect
Speaker 4: on twenty twenty two and that FTX sequence of events,
Speaker 4: which goes back to twenty twenty one when they bought
Speaker 4: the entity sort of that they had purchased was leder x,
Speaker 4: which recently just got auctioned off to a bidder. I
Speaker 4: think it's my responsibility, in any chairs responsibility to always
Speaker 4: be open to new ideas. Right we have we have
Speaker 4: these very clear milestone moments in market structure and market
Speaker 4: technology over the past one hundred years that clearly have
Speaker 4: put markets on a different path in a different course.
Speaker 3: Right whether that.
Speaker 4: Was and in this city, you can appreciate it better
Speaker 4: than anything else, going from pit trading to electronic trading
Speaker 4: some twenty years ago, right that. I often you would
Speaker 4: use that example to sort of demonstrate and illustrate how
Speaker 4: we have to be open to technological disruptions in market execution.
Speaker 4: It's just if we don't do it, we're going to
Speaker 4: potentially be behind from a you know, us perspective, and
Speaker 4: I think it's incumbent we think about it. The other
Speaker 4: point is, with respect to FTX and leder x, that
Speaker 4: was not the first entity to come to the CFTC
Speaker 4: and request an approval for non intermediation, which essentially was
Speaker 4: what it was. And I said this as well, if
Speaker 4: you think you know over the course of twenty two
Speaker 4: as we were reviewing that application, which was a legal
Speaker 4: requirement for us to do. This wasn't some sort of
Speaker 4: arbitrary choice I made of oh, Okay, we have an application,
Speaker 4: let's look at it, or I couldn't as easily dismissed it.
Speaker 4: We have a legal obligation to review and to respond
Speaker 4: to applications, and if we don't then we're actually sort
Speaker 4: of at legal risk of being sued by the applicant
Speaker 4: for not being responsive to them. But we did have
Speaker 4: two public engagement activities i'll call them that. We had
Speaker 4: a request for information or a consultation document in March
Speaker 4: of last year, and then we had a public round
Speaker 4: table around non intermediation, and that was driven around just
Speaker 4: making sure that we were getting as much input from
Speaker 4: the public whoever wanted to provide it, but also to
Speaker 4: have a larger discussion about market structure and non intermediation
Speaker 4: because as we see this digital asset market mature and
Speaker 4: develop with traditional financial players a piece and wanting to participate. Why,
Speaker 4: whether through offering you know, services or assets to their
Speaker 4: customers or potentially using the blockchain technology as a foundation
Speaker 4: for you know, you know, banking processes. We have this responsibility,
Speaker 4: I think, from a regulatory perspective to really think through
Speaker 4: these things. So despite what happened to FTX, you know,
Speaker 4: the application was still ongoing. We weren't close to a decision,
Speaker 4: and there were certainly a lot of legal issues, risk issues,
Speaker 4: and policy questions that we were diving through. But I
Speaker 4: certainly think, as I said this before, that proposal wasn't
Speaker 4: the first of its kind, and it's not going to
Speaker 4: be the last of its kind.
Speaker 1: Speaking of new ideas, I'm going to pivot slightly from crypto,
Speaker 1: although I think this is actually related to it, because
Speaker 1: it feels like one of the lasting legacies of crypto
Speaker 1: no matter what happens now is it's sort of normalized
Speaker 1: gambling behavior by investors, so bets purely on you know,
Speaker 1: token go up, token go down, line on the chart
Speaker 1: go up or down. And recently we have seen new
Speaker 1: prediction markets and entities forming things like Calshi and predict
Speaker 1: it that are offering all different types of bets and
Speaker 1: I'm curious how you are viewing those through the lens
Speaker 1: of a regulator.
Speaker 3: Yeah, you know, I have.
Speaker 4: I've had conversations with both of those entities, and there
Speaker 4: are certainly other entities that are trying or doing similar activities.
Speaker 4: And you know, binary options, these prediction markets are not
Speaker 4: necessarily novel. But I think from a policy perspective and
Speaker 4: from my role, you know, on the one hand, we
Speaker 4: have to think about what the law requires, and the
Speaker 4: law is very clear when it comes to these types
Speaker 4: of contracts that.
Speaker 3: It is illegal to list a.
Speaker 4: Contract that has to do with war, assassination, terrorism and
Speaker 4: illegal activity gaming or something that's out in the public interest.
Speaker 3: Right.
Speaker 4: So of that five or six items that I just
Speaker 4: listed off, most are pretty clear. War terrorism, assassination, gaming
Speaker 4: becomes a trick or a tricky issue that we are
Speaker 4: we have dealt with, and we're dealing with right now.
Speaker 4: Something against the public interest also becomes tricky, right, And
Speaker 4: that's where as we see this emergence of products, and
Speaker 4: this is a combination or a confluence of events driven
Speaker 4: by technology, market disruption, barriers to entry essentially lowering or
Speaker 4: being eliminated, and that really is a sort of by
Speaker 4: product of phones and access to markets, clearly a shifting
Speaker 4: and consumer an investor demand, retail investor demand around products
Speaker 4: and access to markets, and then an expansion of the
Speaker 4: type of products we list right where historically just down
Speaker 4: the road you'd have ag products, you'd have energy products,
Speaker 4: you'd have metals products. Then you had the emergence of
Speaker 4: financial futures, you know, forty fifty years ago, and now
Speaker 4: we're sort of entering this next paradigm and it's been
Speaker 4: going on for the better part of a decade where
Speaker 4: with this confluence of events, technology, investor behavior, and barriers
Speaker 4: to entry, folks are saying, why should we be limited
Speaker 4: in the types of products that we can trade or
Speaker 4: have access to with this sort of legacy group of products,
Speaker 4: why does it just have to be these few risk
Speaker 4: management tools. We have so many risks in the economy,
Speaker 4: so many risks to are businesses, whether small, mid size,
Speaker 4: or large, so many risks individually, and we've seen them
Speaker 4: in the past couple of years, whether it's you know,
Speaker 4: Russia invading you the Ukraine and what impact that has
Speaker 4: on consumer prices and inflation, whether it's a pandemic, a
Speaker 4: once in a century pandemic that affects everyone in a
Speaker 4: very unique but substantial way. Why should we not be
Speaker 4: able to manage these risks? So I think, from my perspective,
Speaker 4: have to always start the baseline as the law, what
Speaker 4: it allows, what it doesn't allow, engaging with Congress and
Speaker 4: seeing whether or not they want to spand or limit
Speaker 4: that that those provisions or keeping them the same, and
Speaker 4: whether within those two provisions I mentioned gaming and the
Speaker 4: public interest, we as a commission in me by proxy
Speaker 4: as chair can sort of lead a discussion about what
Speaker 4: road do we want to go down and what potential
Speaker 4: products could we start to list or allow stakeholders resistaurants
Speaker 4: to list that would stay within the confines of that
Speaker 4: legal framework and also allow markets to evolve, grow and
Speaker 4: sort of shift with this consumer sentiment. Right, But there
Speaker 4: are there are a lot of risks associated with you know,
Speaker 4: potentially listing contracts around political elections or other types of events.
Speaker 4: And this is where the Commission really has to dig in,
Speaker 4: get you know, stakeholder input, but hopefully make decisions in
Speaker 4: a very concerted, cautious and balanced way.
Speaker 2: What is the concern around political contracts? Because just as
Speaker 2: a consumer of news, I love them. I love being
Speaker 2: able to say, oh, you know so and sot on four. No,
Speaker 2: I don't even want to bet. I just want to
Speaker 2: see the line. And I actually, you know, I find
Speaker 2: it useful to see where consensus is to be able
Speaker 2: to put a price on that. They're definitely there are
Speaker 2: definitely times where I watch the news, we don't know
Speaker 2: what's going on, and I look and like the markets
Speaker 2: at like ninety percents, like the Insider, the people who
Speaker 2: follow this stuff do know, and there's useful information. They're like,
Speaker 2: I wanted to exist in twenty twenty four of why
Speaker 2: won't it?
Speaker 3: So Look, I'm unbiased. I believe in markets.
Speaker 4: I believe in efficient markets and price discovery obviously, and
Speaker 4: the importance of the intersection between efficient, well run markets
Speaker 4: and how they can price risk for capital allocators or
Speaker 4: decision makers. I would say, and this is often not
Speaker 4: thought of, and it doesn't surprise me. But just to
Speaker 4: walk you through a hypothetical, and I'm going to take
Speaker 4: a quick step back to the crypto conversation. We don't
Speaker 4: have and it just should be clear to everyone. You know,
Speaker 4: I've said this, We've discussed this. I don't have legal
Speaker 4: authority to police cash crypto markets. We do have this
Speaker 4: very limited authority within the CFTC to police cash markets
Speaker 4: if there's fraud or manipulation. And the policy idea behind
Speaker 4: this authority that Congress provided to us is that if
Speaker 4: you're going to have potentially fraud or manipulation in an
Speaker 4: underlying contract or an underlying cash market that could impact
Speaker 4: CFTC regulated markets, the CFTC should be able to police
Speaker 4: those markets.
Speaker 1: Right.
Speaker 4: We wouldn't want manipulated cash markets to impact the markets
Speaker 4: we regulate. So now let's pivot back to this conversation
Speaker 4: around election contracts in theory if and just taking into
Speaker 4: the context what we see in the news, what we
Speaker 4: listen in the news, and how news and its impact
Speaker 4: on elections and how we behave has changed and evolved
Speaker 4: over the past decade. Imagine a situation where we have
Speaker 4: alleged fraud or alleged manipulation of an election and someone
Speaker 4: coming to the CFTC and say, you know, you have
Speaker 4: a contract listed on an election in you know, ex
Speaker 4: district in why state and we believe there was fraud
Speaker 4: because of hardware, software, news, you name it, right, you
Speaker 4: need to police that fraud. So, without being too indirect,
Speaker 4: what I'm trying to say, is the CFTC could end
Speaker 4: up being an election cop and I don't think that's
Speaker 4: what Congress meant or intended for us to do. And
Speaker 4: I think that raises for me personally, and I can't
Speaker 4: speak for the Commission or my colleagues a lot of
Speaker 4: legal questions and policy questions about whether or not you
Speaker 4: would want a financial regulator policing elections.
Speaker 1: That's super interesting, and I'm now imagining in my head
Speaker 1: like a headline in the year twenty thirty about CFTC
Speaker 1: issues enforcement action against Russia for electtion meddling, the sparking
Speaker 1: World War three, which I'm sure no one wants. I
Speaker 1: can't bet on it. But actually related question on prediction markets.
Speaker 1: You talked about people pitching these as a hedging strategy.
Speaker 1: So we have a business risk that might be related
Speaker 1: to this thing, and if we had a betting contract
Speaker 1: we could mitigate that risk. At what point does that
Speaker 1: kind of overlap with insurance?
Speaker 4: Yeah, I mean in many respects derivatives markets have. There
Speaker 4: is natural overlaps between insurance markets and derivatives markets. They're
Speaker 4: unique products, obviously in the way they're structured and the
Speaker 4: cost whether it's the premium on the insurance side, or
Speaker 4: the margin on the futures or the derivative side, the
Speaker 4: duration of the contract itself, and this aspect of delivery
Speaker 4: if you're talking about physical commodities. So there are many
Speaker 4: different components or characteristics that differentiate the two, but it's
Speaker 4: certainly not a unique They're both risk management products, right,
Speaker 4: And it's a question that we deal with sort of
Speaker 4: all the time.
Speaker 2: So I want to go back to sort of something
Speaker 2: that Tracy brought up, which is this sort of like
Speaker 2: this gambling on everything mentality, and people are just placing
Speaker 2: bets on all kinds of things. And you know, I
Speaker 2: was reading some of the public comments to the FTX proposal,
Speaker 2: and one of the criticisms of it in terms of
Speaker 2: restructuring is, oh, this is just going to bring more
Speaker 2: retail people into futures trading. It's de facto gambling. People
Speaker 2: are going to lose a lot of money. It's very risky.
Speaker 2: Do you have a position, essentially on the question of,
Speaker 2: like what is the right level of sort of retail
Speaker 2: participation in these markets? Do you factor into your thinking
Speaker 2: like these are sophisticated markets and there should be some
Speaker 2: curbs on the degree to which mom and pop is
Speaker 2: playing in sophisticated financial markets or are you sort of
Speaker 2: like neutral on this question. And as long as the
Speaker 2: trading is done with integrity and not manipulated, that is
Speaker 2: sort of up for the market to decide how much
Speaker 2: public participation there is.
Speaker 4: Yeah, I mean it becomes very difficult for me to
Speaker 4: tell an individual investor how they can either invest or
Speaker 4: allocate their capital. I think, as chair, you know my
Speaker 4: number one responsibility and this kind of goes to your point, Joe,
Speaker 4: is that we do everything we can to ensure that
Speaker 4: the markets are transparent, farewell regulated as much information is
Speaker 4: flowing from the regulated entity to the customer in terms
Speaker 4: of disclosures about risks associating with investing in leverage markets,
Speaker 4: the risk of loss around any investment at all.
Speaker 3: And then I think it puts.
Speaker 4: A burden and I say that not necessarily a negative
Speaker 4: way on the agency. As markets evolve, and we've seen this,
Speaker 4: and I'll use a quick example.
Speaker 3: We all remember.
Speaker 4: The game stop Reddit trading in the equity markets back
Speaker 4: in twenty twenty. We had actually seen quite a sharp
Speaker 4: move in some of our markets in the metals complex
Speaker 4: at the same period, and it was driven a lot
Speaker 4: by social media, so silver right, and it's hard to
Speaker 4: move those markets. Those are very deep markets, very entrenched institutionally,
Speaker 4: and to be able to move those markets through some
Speaker 4: sort of externality in this case social media is not easy.
Speaker 4: But point being is are we have and we continue
Speaker 4: to see an influx of retail participation, of retail interest
Speaker 4: in our markets. And this goes to what I was
Speaker 4: saying earlier about barriers to entry being lowered because of
Speaker 4: technology disruption, retail behavior shifting and wanting more access to
Speaker 4: markets and new products, and I think that just puts
Speaker 4: the onus or burden, however you want to frame it
Speaker 4: on us, including my successors, to make sure that we're
Speaker 4: really upping the ante in terms of how we're sharing
Speaker 4: information to investors in the general public about the risks
Speaker 4: associated with derivatives markets and what it means to invest
Speaker 4: in these markets and what the risks are. But you know,
Speaker 4: going back to your original point, I think it becomes
Speaker 4: very difficult for any chair or any commission to.
Speaker 3: Say you can't do this. Now.
Speaker 4: Obviously, we have tests on the equity side, it's the
Speaker 4: Accredited Investor test.
Speaker 3: With us, we have this.
Speaker 4: Eligible contract participant or ECP kind of a wonky term
Speaker 4: to participate, most notably in swaps markets. But you know,
Speaker 4: we do have some framing about certain markets and who
Speaker 4: can participate in them. But if you're thinking about just
Speaker 4: pure futures and options on futures, in my view, it's
Speaker 4: all about disclosures, information flow and availability and knowledge about
Speaker 4: risk of laws.
Speaker 1: Since we're talking about risk in general, I wanted to
Speaker 1: ask you about cybersecurity. In the aftermath of the Ion hack,
Speaker 1: which unsettled the derivatives market and probably unsettled some of
Speaker 1: the weekends and workdays of some people in this room,
Speaker 1: you talked about the potential need for additional rules around cybersecurity.
Speaker 1: What would those look like and how are you thinking
Speaker 1: about them?
Speaker 4: Yeah, we don't as a market regulator, and I know
Speaker 4: the SEC is in the same camp. We don't have
Speaker 4: a legal authority to register to police to supervise third
Speaker 4: party vendors, right, So we have a registrant who then
Speaker 4: outsources some back office processing or settlement services or cyber services,
Speaker 4: you name it. I'm sure a lot of these services
Speaker 4: are outsourced. We cannot peek into register, regulate, supervise that
Speaker 4: entity and I think by and large this is another
Speaker 4: situation which is not uncommon in the regulated space, where
Speaker 4: naturally our registrants have vested interest in ensuring the viability
Speaker 4: of their entity and the health of the markets and
Speaker 4: the ecosystem, so they're going to do their due diligence.
Speaker 4: We do have guidance and advisories within the CFTC to say,
Speaker 4: you know, this is what we expect from you as
Speaker 4: you engage and contract with vendor and vendor services. But
Speaker 4: you know, tracy to your point, the policy question, especially
Speaker 4: with what we dealt with with ion, is should the
Speaker 4: CFDC have new legal authority to either and I'll sort
Speaker 4: of talk about the spectrum of options is keep things
Speaker 4: status quo and just continue to issue either advisories or
Speaker 4: guidance and best practices of what we expect from our
Speaker 4: registrants as they engage with vendors. Or is it to
Speaker 4: shift to a regulated structure where we then have we
Speaker 4: the CFTC have authority to regulate and register in some way,
Speaker 4: shape or form, the vendor, the third party provider, or
Speaker 4: somewhere in between. And this is not inconsistent with what
Speaker 4: prudential regulators currently do. It's called the Bank Supervisory Act
Speaker 4: I believe is they can supervise vendors or third parties
Speaker 4: if that vendor is providing a essentially a regulated service
Speaker 4: to the bank, to the regulated entity. And you know,
Speaker 4: I've proposed these ideas to Congress. I think the conversation
Speaker 4: is active and each has its own benefit and risk,
Speaker 4: Each has its own benefit and responsibility. But I do
Speaker 4: think it's something that we have to think about because
Speaker 4: in the context of cyber risk, regardless of size of
Speaker 4: the registrated registered registered entity, this is you know, single
Speaker 4: point of failure issue that as we saw with Ion,
Speaker 4: which really was not a huge provider of back office
Speaker 4: services to US entities. More specifically, this had a pretty
Speaker 4: significant impact on our ability to do our job, most
Speaker 4: notably issue this commitment of Traders report, which you know
Speaker 4: we heard a lot about, but you know, a serious
Speaker 4: risk and something that I think demands a new policy conversation.
Speaker 2: So right before we got on stage, we watched this
Speaker 2: video about the rise of voluntary carbon markets and how
Speaker 2: this is going to be a big market and companies
Speaker 2: using financial products to offset some of their carbon consumption.
Speaker 2: You know, one of the there's sort of one of
Speaker 2: the questions that comes up in carbon markets or offset
Speaker 2: markets is the quality of the asset itself. If I'm
Speaker 2: buying an offset, did this really reduce some sort of
Speaker 2: carbon emissions or is it some sort of is it
Speaker 2: a gimmick? Will the CFTC as these markets develop, mostly
Speaker 2: just focus on the trading of these offsets or also
Speaker 2: the quality of these offsets, the projects that generate these offsets,
Speaker 2: whether they're genuinely sort of doing what they claim.
Speaker 4: Yeah, this goes back again to a consistent theme of
Speaker 4: our conversation is what interest do we the CFTC have
Speaker 4: in the regulated market and then naturally the unregulated market
Speaker 4: or the underlying market. Excuse you, so, in this case
Speaker 4: with the VCM market, the voluntary carbon market, there are
Speaker 4: at least two listed futures contracts on registered exchange CFTC
Speaker 4: registered exchanges, and just by virtue of that reality that
Speaker 4: we have regulated futures contracts, I then have a vested
Speaker 4: interest in the underlying market, right and if there is,
Speaker 4: in fact, as you raise Joe, questions about the integrity
Speaker 4: of the registries and the actual offsets, whether or not
Speaker 4: they're really meeting their goals of sequestering x tons of carbon,
Speaker 4: whether the project really exists, you know, is there additional
Speaker 4: carbon being sequestered or is it just, Oh, I have
Speaker 4: a thousand acres of trees, let me just generate some
Speaker 4: credits that have been sitting there for thirty years. We're
Speaker 4: not an environmental regulator. I say that often. I understand
Speaker 4: that there are limitations to what we can and cannot do.
Speaker 4: But as was said earlier, there are a number of
Speaker 4: private sector market driven initiatives, the Integrity Council on Voluntary
Speaker 4: Carbon Markets and others trying to create standards and best
Speaker 4: practices around the voluntary carbon market. So we are looking
Speaker 4: at all aspects of the market and all aspects of
Speaker 4: what the private sector is doing, and thinking about what
Speaker 4: role we can play in ensuring that the underlying market
Speaker 4: has integrity and credibility, so that and most importantly, the
Speaker 4: markets that I regulate have the same credibility, because that
Speaker 4: price dislocation that might occur between the underlying and the
Speaker 4: cash and the derivatives is obviously something that's very important
Speaker 4: to us, and we need to make sure as the
Speaker 4: law very clearly states that our contracts are not readily
Speaker 4: susceptible to fraud and manipulation, and if there are issues
Speaker 4: in the underlying market that raise questions about fraud or
Speaker 4: manipulation that naturally is going to have an impact on
Speaker 4: our markets, and something that I would care deeply about
Speaker 4: and want to address.
Speaker 1: Speaking of credibility, Congress currently hashing it out over the
Speaker 1: debt ceiling, I don't want to ask you about that directly,
Speaker 1: but maybe we could talk about it through the lens
Speaker 1: of the treasury market, because I know this is something
Speaker 1: you've considered. You gave a really good speech on this matter.
Speaker 1: I think it was November of last year. How confident
Speaker 1: are you that the treasury market can withstand some sort
Speaker 1: of unexpected disruption along the lines of what we saw
Speaker 1: in March twenty twenty when the market was royaled partially
Speaker 1: because of treasury futures.
Speaker 3: Well, two very different.
Speaker 4: Situations, right The issues that we dealt with in twenty
Speaker 4: twenty were certainly generational at best, you know, in terms
Speaker 4: of how markets reacted, as we all remember in this room,
Speaker 4: the huge move downward because of demand destruction and that
Speaker 4: very odd correlation between you know, treasury markets moving in
Speaker 4: the same direction as equity markets. What's happening right now
Speaker 4: in the debt ceiling debate is very different, and I
Speaker 4: don't want to even begin to predict how that might
Speaker 4: impact treasury markets because they're just very different. And I think,
Speaker 4: you know, I'll probably leave it there and hopefully that
Speaker 4: things will get hashed out and figured out, and I
Speaker 4: have confidence in the President to be able to do that.
Speaker 4: What we experienced in twenty twenty And as I think
Speaker 4: about that in those few months and some of the
Speaker 4: dislocations we saw between futures and cash, you know, I
Speaker 4: always pull myself back and have to, you know, we
Speaker 4: have to remind ourselves of what we went through and
Speaker 4: how the economy and markets were reacting to that situation,
Speaker 4: which was unprecedented sort of historically. And I do think
Speaker 4: by and large, and you know, can't forget about the
Speaker 4: fact that we had intervention from the Federal Reserve and
Speaker 4: through these multiple facilities. But markets did perform quite well,
Speaker 4: and the infrastructure and the market structure I think was
Speaker 4: in place. But we did see dislocations, and you know,
Speaker 4: this was the rebo market dried up. We had huge volatility,
Speaker 4: which created huge shifts and demands for initial margin and
Speaker 4: variation margin. So it should not come as a surprise
Speaker 4: given the volatility and the unknowns that were occurring at
Speaker 4: that moment.
Speaker 1: All right, well we're going to have to leave it there,
Speaker 1: but Chairman Benham, thank you so much for coming on
Speaker 1: add Lots, giving us some insight into how you're thinking
Speaker 1: about a lot of these, you know, thorny and new
Speaker 1: and complicated issues. So thanks so much, thank you, thank you,
Speaker 1: thank you for joining me. Well, that was our conversation
Speaker 1: with CFTC Chairman Russ Benham at the ISDA Annual General Meeting.
Speaker 1: Thank you so much to IZDA for inviting us to
Speaker 1: record live on stage. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me on Twitter
Speaker 2: at the Stalwart. Follow our guest Russ Benham. He's at
Speaker 2: CFTC Venom, Follow our producers Carmen Rodriguez at Carmen Arman
Speaker 2: and Dash Bennett at Dashbot. And follow all of the
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