Unchained - CFTC Commissioner Caroline Pham on Why US Crypto Regulators Get a B- Ep. 365

Starting point is 00:00:00 Hi, all, a couple quick notes before we begin. First, this interview with CFTC Commissioner Caroline FAM was recorded before the news about the liquidity or solvency issues with Celsius and three arrows capital were announced. Second, I'm sad to say that this week, Unchained Editorial Assistant Mark Murdoch is leaving. Ever since joining about a year and a half ago, he's been an indispensable part of the operation. He's really owned the transformation of the newsletter from a weekly to a daily production and made the Unchained Daily newsletter what it is today. He's been a true crypto native who I've been able to rely on in about five million different ways, and he really rescued me when I was in the throes of fact-checking for my book,

Starting point is 00:00:41 which was one of the longest endurance tests I've ever experienced work-wise. Having Mark as my right-hand person was the only way I was able to keep everything else running during that time. He's off to work in crypto itself now, but I'm sure he'll continue to be a background influence here at Unchained. I'm grateful to him for being such a kick-ass, reliable, problem solver, and I am proud to see him go off and do great things in crypto. Thanks for everything, Mark. And now on to the show. Hi, everyone, looking to Unchained.

Starting point is 00:01:14 You're a no-hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the June 21st, 2022 episode of Unchained.

Starting point is 00:01:32 This episode of Unchained is brought to you by Beefy Finance, the multi-chain yield optimizer. Beefy is the easiest way to earn more from your crypto. Deposit funds into Beefy's secure vaults to auto-compound yield across 12 blockchains.

Starting point is 00:01:49 Got crypto? Choose Beefy. With the Crypto.com app, you can buy I earn and spend crypto in one place. Download and get $25 with the code Laura. Link in the description. Today's guest is CFTC Commissioner Carolyn Pham. Welcome, Commissioner Fam.

Starting point is 00:02:07 Hi. Thank you for having me today. You became a CFTC commissioner in April. Tell us how you came to this role and how you got interested in crypto. Yes, absolutely. I just realized that I actually have to give a disclaimer before I begin my remark. So maybe I'll just go ahead and do that now. The views that I'm sharing today are just my own, and they don't represent the full commission or any of my fellow commissioners.

Starting point is 00:02:32 So let me tell you about my background and how I got started in crypto. You know, my crypto journey probably started, actually. I think it was in 2013, maybe 2011 or 2013, but probably more 2013. You know, at that time, I was a council to former commissioner Scott O'Malley. And I just remember the Bitcoin Foundation coming in. And it was kind of like, you know, are you my mother? Do you regulate me? And they were telling us about Bitcoin and what it could do and, you know, what its origin story was.

Starting point is 00:03:05 And at that time, when we were thinking about it, we basically were like, well, it's interesting. Because it is on the one hand something that seems to be worth something. But then also people are using it to get something else. Sort of like an exchange, like a payment network. And it's funny to me about how just about 10 years later, that's kind of the same way that we think about Bitcoin as a store of value or as the means of exchange. And yes, at that time, we determined that it was most likely that we had jurisdiction over it as well as potentially the Fed. And that kind of began our journey from there. You also had told me previously that you have worked at the CFTC before.

Starting point is 00:03:44 So can you just describe the trajectory of your career outside of crypto as well? Sure, of course. And actually, I realized that that was only the beginning of my crypto journey. It wasn't even what I've been doing recently on crypto. So let me tell you what I was doing at the CFDC and then I'll get you up to speed on what I was doing most recently. And that's just kind of how regulatory and crypto and just the broader financial system have all come together. So I was a council for Commissioner Scott Amelia, as I said, at the CFDC before. And in that role, we were really just working on implementing all of the the reforms after the financial crisis. You know, Congress had just passed the Dodd-Frank Act, which for the first time required comprehensive regulation over the swaps and the CFTC was granted authority over this, I think, like 700 trillion notional market at the time. You know, at that time, it was then CFDC chairman, Gary Gensler, and we had a very ambitious rulemaking agenda because we had so much work to do. I think there were maybe almost 100,000. rules that we were mandated to write essentially under the Dodd-Frank Act. And so we just hit the

Starting point is 00:04:53 ground running and it was a full-on sprint. That would have been really, you know, how do you regulate a new, or not a new, but how do you regulate an existing asset class that it doesn't yet have that regulatory framework around it? It has some, but nothing so comprehensive and complete from registration to risk management, to a compliance program, to capital, and all of the different internal business conduct, external business conduct, making sure that protections are in place, record keeping all of those things. So that's really where I got my experience in building out and designing the rules and regulations that would be appropriate, balancing the public interests, balancing market and commercial needs, but also in making sure that there's strong

Starting point is 00:05:38 protections in place. I also have spent time at a think tank in the past. So I was a visiting fellow at the George Washington University's Center for Law, Economics, and Finance. And so in that role, I was again studying the financial crisis, but then looking at it from the lens of the entire U.S. financial regulatory system, so not just market regulators, but also bank regulators and customer protections. And then from a broader perspective, looking at it from a comparative lens, you know, what is the U.S. regulatory framework vis-a-vis the framework in the EU or for the UK or other places around the world? And then I was really happy to have my daughter. That's when I was the part-time visiting fellow. And then when I was looking at going back to work, you know,

Starting point is 00:06:27 I was able to get a spot back in Commissioner Amelia's office. And that was really great. So that was interesting because it was towards the end of Dodd-Frank implementation, the rulemaking of Dodd-Frank. And when Commissioner O'Malley left the CFDC, I then needed a job being in his personal office. If he leaves, I don't have a job anymore. So I then accepted a job offer at Citigroup, and I moved to New York to start a new team in compliance, which was called Markets Regulatory Implementation. And it was really to put compliance on a forward footing, you know, looking ahead to the new regulations and what do we need to implement and design so that way it's not reactive,

Starting point is 00:07:08 but it's proactive from a compliance perspective. And there, I really covered global financial regulatory reform. I also covered U.S. regulatory change management for the markets and security services businesses. That was about 100 regulatory authorities, actually. It was quite a lot to get your arms around. But then I had a lot of different opportunities and expanded my coverage after that. So I was the global head of swap dealer and Volker compliance. I started to cover emerging risks. And that's where my sort of traditional finance background started to really intersect with my interests in crypto and in all things like new and exciting and tech and everything. So one of the emerging risks that we were looking at in 2017 was cryptocurrency because more

Starting point is 00:07:56 and more people were adopting it and using it. There was interest in it. And people were trying to open up accounts with crypto exchanges, but then pay for it, you know, with their credit cards or their bank accounts. And so that's when we started to really look into that. And so I've been covering crypto, among many other new and exciting things. I always like the new and weird stuff since 2017. And then what was really exciting because part of my job, you know, all along has been in, you know, taking the rules and regulation, figuring out what they mean, and then how do you design an effective compliance program around that? And part of that is, honestly, the regulatory strategy. When you look at something, you have to do. There's so many

Starting point is 00:08:41 different questions that you have to ask about figuring out what the rules are that apply. What is the legal entity that you're doing it out of? What is your customer markets? You know, what jurisdictions will you be in, you know, what the product is and all of those things. So then I started to work much more closely with the different innovation and product development teams with city ventures and other things there. And that was really exciting. And so I was very excited that my last role was actually in the institutional clients group business development team as the head of market structure for strategic initiatives. And some of those strategic initiatives included exploring with new opportunities in digital assets and helping to assist with what the product

Starting point is 00:09:27 strategy would be there. And what about crypto interested you? What role do you see it playing in the financial system? You know, what was exciting to me about crypto in the very beginning was just the fact that somebody had come along and made something out of nothing. You know, normally it's always governments or central banks that are coming up with with money or something that you can exchange and get something else for. And so it's interesting to me in how Bitcoin was something that you could buy something with, you know, where you could exchange it for something else.

Starting point is 00:10:03 So that could be, you know, border or trade or something. But it wasn't the normal financial system. It was interesting to me. And so that was exciting. That was interesting. The possibilities of the technology. I just always like the new and weird stuff, like I said before. So it was something that was very, very creative, very innovative, very disruptive.

Starting point is 00:10:30 What's your overall philosophy around how regulators should work with the crypto industry? Because there was a photo that you tweeted of yourself with FTX, the O, C.O, CM Bankman-Fried, and the former CFTC chair and commissioner Mark Wedchin. And I think some people felt from the photo that it seemed you were too cozy with the crypto industry. And on the other hand, Coinbase, for instance, said that when it tried to have meetings with SEC chair Gary Gensler, they say that he refused to meet with them. So how friendly do you think regulators should be to the industries they regulate and how much do they collaborate with them versus regulating them without getting input from them? So I think this is a really important question that really gets to the heart of the American system of government and what it means to be in a democracy and what it means to be in a participatory democracy. So from my perspective, the ideals that I see for government and the kind of regulator that I want to be is, first of all, I want to be empowering public access to government.

Starting point is 00:11:39 You know, I've seen it myself, you know, from being in the private sector where governments and how regulators work is a black box. People don't understand how decisions are made. People don't know what are the different inputs or factors or, you know, data that is being looked at. And when people feel like they don't have any visibility into something and there's no transparency, people start to feel like, obviously that they're not being heard, but also to become very skeptical of the process through which regulatory decisions are being made. And I think that's really unfortunate because transparency is one of the greatest ideals of our American democracy. And it's something that's really important to me. So besides empowering public access to government,

Starting point is 00:12:31 you can see that I've been very active on social media, on Twitter, and on LinkedIn, in because, again, I think it's important that people can see what I'm doing. I am working hard for the taxpayer. You know, I am here. I'm rolling up my sleeves and I'm ready to work. And that's something I've done all my life. You know, hard work and being a lifelong learner. Those are just the two things that, you know, personally for me have guided me and I think have also led me to some really exciting, you know, opportunities and, you know, twists and turns that I never would have imagined that my life would have taken. Besides that, I think that when you think about regulation, right, I mean, just for my personal philosophy, I am a person who is very supportive

Starting point is 00:13:16 and believes in free markets and the power of free markets. And that, you know, having American innovation and American competition and unlocking the ability of the markets to provide solutions, that's something that's very important to me. And I do believe in self-determination and a lot of other things that I think are very, again, classic American ideals. So when you take that approach to things, and in particular, when you look at sort of a free market's perspective, and you couple that with the principles-based regulation that the CFTC has, that means you're supposed to engage with the industry.

Starting point is 00:13:58 The door is open. Anybody should be able to come in at any time and come and talk to a regulator. If only some people are getting access to a regulator, I think that's something that's a challenge that needs to be looked at. But there should be open access to government and to regulators. So I think that's very important. And that's what I've been doing. You know, that week, especially because it was my first week on the job and basically my second week on social media. So maybe word of maybe pro tip for everybody that Twitter is only for professionals.

Starting point is 00:14:29 But, you know, I was taking pictures of all of my meetings and then I was tweeting them. So people could see what I was doing and what I was up to. My first meeting was with the ag community. That's very important. The CFTC's roots are in ag. And my roots are in ag. I'm from the Central Valley in California, which is a rural area. And I did 4-H and competed at the California State Fair and the county fair.

Starting point is 00:14:52 So I had my first meeting with ag. And then my second meeting was with energy, especially given the volatility in the the global commodity markets, you know, with the Russian invasion of Ukraine and other shocks to the global commodity markets right now. So that's something that it was important to me because of what's happening in the news, because the price has gone up so dramatically and continues to do so. And then the third meeting was with FTX. You know, they actually were coming to do meet and greets with all the new commissioners.

Starting point is 00:15:23 And so they met with everybody. And they met with me. And it was nice to be introduced to them as it's nice to be introduced to anybody. It's just a normal meet and greet. And, you know, of course, they have an application. And so I got an overview of that. You recently published an op-ed with SEC Commissioner Hester Perce, calling for your two agencies to cooperate when it comes to crypto regulation.

Starting point is 00:15:45 What was the impetus for writing this opinion piece together? So I've known Commissioner Perce for a very long time from when I was at the commission the first time. And she's a very well-known scholar on administrative law and on securities. regulation and on financial market regulations. So it's really been wonderful to know her and to work with her over the years. And she's really a leader and a visionary in many respects. So the idea about maybe doing something together was very appealing. And she's collaborated with other CFTC commissioners in the past, particularly Commissioner Brian Quintenton on some other initiatives around swap regulation, a derivatives regulation from Dodd-Frank. So when you have

Starting point is 00:16:29 the crash in Terra and having, you know, as I said, billions of dollars in value being destroyed. I mean, any kind of market disruption, you know, may be something that merits further study, but something that was this big that also had knock-on effects to the broader crypto markets. It's something that should be studied. And it's something that should be studied, as I said before, in an open public forum where there are representatives from different parts of the industry and the public interests that are there to talk about it. And I'm pleased that the CFTC has done that recently

Starting point is 00:17:03 with a roundtable on non-intermediation and clearing. And honestly, there's a precedent for this because when there was the flash crash and there was linkages between the futures markets and the equities markets back in 2010, the CFTC and the SEC engaged in a joint study and a report that they did. And there were a lot of engagement with the public at that time.

Starting point is 00:17:25 And so it was a good result. and I think it's a good result now as well. In the op-ed, you and Commissioner Perce call on your agencies to have a series of public roundtables to discuss responsible crypto-regulation. What's been the response from your respective agencies? Does it look like they will act upon the suggestion? Like I said before, I can't really speak for certainly not my chairman

Starting point is 00:17:48 and definitely not for the SEC chairman. So we'll see what they have in mind. But I think with the increasing focus and increasing realization, that there does need to be a clear. and holistic regulatory framework over crypto assets. And particularly with the proposals that have been put out in the Senate, you just had the Loomis Gillibrand bill. And then also, of course, other proposals from the House Agriculture Committee like the Digital Commodity Exchange Act. And the Senate Agriculture Committee is also working on their proposals too. So I just think this is

Starting point is 00:18:21 really reaching that moment where you've got critical mass, where we really do need to work together to come up with something that's responsible and pragmatic. So at this moment in time, so we'll talk about the Lomas Jellabrand Bill in a second, but at this moment in time, I just am curious to get your opinion on how you would kind of grade U.S. regulators so far on their regulation of crypto. What are some of the key areas you think the U.S. can improve upon when it comes to regulating crypto, and, you know, where do you think they're doing well? So I think a lot of things about the U.S. approach to regulation is, again, uniquely American.

Starting point is 00:19:00 It's uniquely American because of our Constitution. It's uniquely American because of federalism, where we have state regulation and then we have the federal government. And essentially, if there isn't an overriding federal interests in something, then it should be reserved to the states. Because of many different reasons, the way that the financial regulatory framework in the United States has evolved, we do have prudential banking regulators, the Fed, the OCC and the EIC at the federal level. We have the regulators. We have the SEC who, you know, has been around for a very long time with their jurisdiction over securities and securities markets and those market participants. And then you've got the CFCC with a very long history, even well. before when the CFDC was officially created in 1975, but that dates back all the way to, I think,

Starting point is 00:19:53 the late 1800s or early 1900s, because farmers have to go to market and they have to be able to hedge their risks. So that's something that is really important, that the history and why we have this American system of so many different regulators, there's a reason for that. And I'll just go ahead and say right now that I don't think the CFC and the SEC should be merged. So I'll just address that right out front. So you have that to the American system. Now, one of the things that's good about it is there's a lot of expertise that each of these agencies brings. And there's a unique mission and a particular perspective or lens that they bring to the table. And I think that's one of the reasons why we have the most vibrant and the most liquid and what we've been able to do

Starting point is 00:20:43 with markets, what we've been able to do with capital formation, really the American leadership. And I think that of the uniquely American ways in which we regulate financial markets and support a strong financial regulatory framework contributes to that. But because, again, we have what commissioner of person I called decentralized regulation, it does mean that it's slower to come together to implement something that would be comprehensive, because there's so many different players. When you look at other regulatory frameworks, particularly those that have more of a civil law background as opposed to a common law background, there is a predisposition towards government regulation towards what we in America would call

Starting point is 00:21:31 big government. And that's perfectly normal and in keeping with the traditions of those countries and their histories. And so you've had the EU come together and has been working for quite a long time on a comprehensive markets and crypto assets regulation, which has pretty clear definitions for how existing financial instruments should be treated under existing regulatory frameworks, but then also comes out with some comprehensive stable coin regulation. And I think they're planning on having that go into effect in 2025, that they're still working through their legislative process, which is pretty complex. If you compare the two approaches, I don't know that you can say that one is better or worse because you have to consider what is appropriate for that country for those markets or for their context and their historical background.

Starting point is 00:22:27 No regulation is happening in a vacuum. I think that's something important to keep in mind. And I also think that for the United States, we don't necessarily. need to be first. I think when when the United States shows up to a party, I think, you know, we may very well become the bell of the ball. So I think when we're ready to move, we move. And that's, that's a big deal. So it's probably more important to get it done right than to be first. But I also think at the same time, it's a balance. You can't be last and you can't sort of miss that moment. And that's the kind of thing. You know, it's so hard to time any kind of market.

Starting point is 00:23:06 But I do think when you look at the fact that you've got, you know, somewhere around two trillion, you know, in these crypto assets, it's the right time now for the United States to do something to make sure that we're enabling those American innovators, that U.S. businesses that want to get into this are able to do that, and that we're not seeing capital flight to other jurisdictions, because why are we not keeping it here right now and keeping up with that great American tradition. So if you were to give a grade to U.S. regulation so far, crypto, what would it be? Yes, after my lecture, let me think about what I would grade it.

Starting point is 00:23:44 Maybe like a B minus. I'm not going to answer the question about like, is this on a curve? A B minus. Because I do think that the existing regulatory frameworks, they are flexible enough, they are broad enough. You know, both both the CFTC and the other framework. financial regulators. I mean, Congress really did come up with very elegant designs for each agency and the authority of each agency. And there's a lot of tools that agencies have to provide clarity. The problem, of course, is that the agencies need to do that. And I think what you're seeing right now

Starting point is 00:24:20 is because there hasn't been that clarity happening at the agency level, Congress has stepped in to provide, again, that comprehensive framework. And that's also very appropriate because that It is something that only Congress can do. Each regulator can only do what's within the limits of their authority. This week that we're recording, Senators Cynthia Lemmiss and Kirsten Gillibrand released a bill, the Responsible Financial Innovation Act, which proposes to have the CFTC be the default regulator for crypto. It outlines an approach for tokens called ancillary assets that basically enables tokens to not

Starting point is 00:25:01 be regulated by the SEC. What do you think of this proposal? Again, I think one of the things that's so great about this proposal is that it is comprehensive. I mean, it is really touching upon many different aspects of the overall crypto asset ecosystem, from tax to, of course, the CFC jurisdiction, the SEC jurisdiction, but also customer protection. And then also, you know, considering some other challenges when you think about the different types of crypto assets. So a lot of times. what people are focused on is either tokenization of real assets.

Starting point is 00:25:39 So that would be, you know, just taking a security and putting it on a blockchain. But then there's also these, you know, truly novel native crypto assets like Bitcoin, for example. And so, well, if you think about it, so you've got tokenized financial instruments, you know, securities or derivatives or, you know, whatever they might be. But then you have something that's like Bitcoin, a digital asset, commodity, and then you have utility token. And I think what's really elegant about the concept of an ancillary asset is I think they are trying to solve for utility token piece and how to bridge that gap from when you might not have all of that clarity that something is truly a utility

Starting point is 00:26:25 token and should be treated as such. So in a moment, we'll talk about some other ways to regulate tokens, but first a quick word from the sponsors who make this show possible. Join over 10 million people using crypto.com, the easiest place to buy, earn, and spend over 150 cryptocurrencies. Spend your crypto anywhere using the crypto.com visa card. Get up to 8% cash back instantly, plus 100% rebates for your Netflix, Spotify, and Amazon Prime subscriptions. Download the crypto.com app now and get $25 with the code Laura. Link. in the description. Ontario.ca.

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Starting point is 00:28:55 You know, this is something that I think is really important is that people really drill down into each token, and it's really a case-by-case determination. And I do think that when you have a lot of tokens that are out there where people really are trying to raise money to do some kind of commercial endeavor, you know, again, I'm not a securities lawyer, but I think, you know, if it meets the Howie test and all of that, you know, that's an investment contract and that's a security that the SEC is regulating. Now, I think it's the right time. I mean, the 40-page guidance or framework that the SEC put out, I think, in maybe 2017 on how to apply the how we test, that's something that could certainly be updated and for all of the activity and for what we know now.

Starting point is 00:29:46 And I think that's something that, again, as so many in the industry are asking for regulatory clarity, you know, just tell us, like, what to do or how does this apply? So I think that's very appropriate. So if something is an investment contract, then it's really just a digital security, then it should be regulated as a security. I think sometimes we have to really remember that regulations should, for the most part, be technology neutral.

Starting point is 00:30:15 I mean, if you just look at when you had the telegraph to the telephone and then fax machines and now the Internet and now Web 3, It's been amazing how you can take a law that was designed for, I think, telegraph communications and use that to regulate the internet. But I think that's also kind of the beauty of our American system of government and of the rule of law here and the tremendous amount of flexibility that you have to take something and then to interpret it and modernize it and bring it up to date. And Commissioner Purse also has had a proposal out for a few years for a token safe harbor that would enable. tokens to start out being offered by a centralized group, but then decentralized within a number of years in order to avoid being classified as a security. What do you think of that proposal?

Starting point is 00:31:06 So I think it's a really good way of trying to come up with a solution for an existing challenge. And that's what I really appreciate about different proposals that people are putting forth, is that they're very solutions focused. It's really like on the outcome. And what is the pathway and how do we get there? Because honestly, I think it's very rare that something that's done on a big bang basis really works, right? I mean, I have been on the implementation side of things, and it takes time to operationalize rules and to put into place all of the compliance frameworks and what you need to do around risk management and all of that. So I think it is always good when we allow a clear runway or glide

Starting point is 00:31:50 path for innovation to be able to thrive. And do you have a preference between that versus the approach that the Lemus-Gillabrand bill takes? I think it's too early. I'm still reading through the bill at 69 pages, and I want to give it the kind of careful thought and consideration that it completely merits, given the amount of work and the amount of input it's had from so many in the industry and in government. In an interview with CNBC, you talked about some existing regulation that you feel could apply to crypto now. Some examples you gave are around leverage and foreign exchange. trading. Can you just talk in general about what you see as kind of low-hanging fruit opportunities

Starting point is 00:32:31 that regulators have not taken advantage of in crypto? Yeah. So this is something that I've spoken about because I think it's important. I think over the years there have been some maybe crossed wires or some misinterpreted narratives that are out there about the CFTC and its jurisdiction. And so, you know, I'll give my version of it. And then we'll see how we'll see how that works. But the CFDC, has such a broad authority. And when you think about it, because really it was around growers and producers, farmers, ranchers, commercial end users being able to bring their products, whatever they might be, to market and to hedge their risks and to have price discovery, it makes sense that you

Starting point is 00:33:13 would have the definition of a commodity being incredibly broad. So what I've been saying in some of my recent appearances is, you know, if something's not a security, then the CFC probably has some regulatory touch points over it. And there's a couple different ways that we can have that. So everyone's talked a lot about the anti-fraud and anti-manipulation authority that we have, the power to bring enforcement actions over the spot markets. And that's something that we've used time and time again, and we've been bringing cases, you know, fraud and manipulation cases in the crypto space since 2015. And I think that's been an effective way of really going after just true scams or frauds. It doesn't matter, I think, what the market is or what the product is. There will always be

Starting point is 00:34:01 the scammers and the fraudsters who are trying to take advantage of people. And it's really breathtaking the number of different kinds of scams that are out there. But at the end of the day, it's getting the trust of somebody and taking advantage of them. And that's just not right. But, you know, over the years, the CFTC has had some areas where I think if you look at the public interest in protecting the retail public has sort of provided that overriding federal interest so that something that would have traditionally been regulated by the states is something that the federal government should have a stay in. And so two of those specific areas that are under the CFTC's jurisdiction that's in our statute is in the area of retail foreign exchange transactions, and then also in the area of leveraged commodity transactions. And so those are two areas where those kinds of products are marketed and available to a very broad swath of the general public. And unfortunately, there's also a lot of fraud in those areas. And so there's a regulatory framework that the CFTC has around that.

Starting point is 00:35:12 And so it's really a question that I'm putting out there for everybody, which is, you know, here we have two areas where we have used it quite successfully to protect the retail public. And so maybe we should take a look at those areas and see if those might work for the crypto asset space. And then we can build upon something that we already have. It's always much easier to extend the regulatory perimeter of the current existing, regulatory framework than to try to stand up something new from scratch. It may be that standing something up new from scratch is better. And so I think if we can have better, we should have better. But I think also we should look at what tools we have available now while we're trying

Starting point is 00:35:54 to get to that better place. It's funny because actually my next question for you was going to be how you thought regulators could address the fact that there are so many redpoles and scams and crypto. So you actually feel that those two regimes might apply in this area to help basically protect customers when it comes to rug pulls and scams and crypto? I think that you could look at these two areas and see how we could apply them to crypto assets or if we ought to do some sort of rulemaking or interpretations to take that same type of regulatory framework with the protections and accept. send it over crypto assets. So it's something that definitely is a question that I have. And there's

Starting point is 00:36:39 many more experts that are out there that are in these markets. And there's all of the fantastic lawyers that are out there that I know will probably be excited to comment on this piece and share their ideas. But that's something where I think it's a good place to start looking. You're the sponsor of the CFTC's Global Markets Advisory Committee. And you've said in interviews that you want to inform international standards to help level the playing field for the U.S. when it comes to crypto assets. How do you propose doing that? So I have, you know, one of the jobs that I had in the private sector was to oversee

Starting point is 00:37:14 and to help to build out a global regulatory affairs framework and to go and advocate with not only the international standard setters, but with non-US and U.S. regulators all around the world. And I think that it's always important to have strong collaboration and cooperation and cooperation and just frankly, communication with our regulatory counterparts all around the world. So many things I think can be solved by having, you know, open dialogue and open lines of communication. And so that's what I really want to foster with my sponsorship of the Global Markets Advisory Committee is to truly create a multilateral forum where you can have the private

Starting point is 00:37:55 sector and the public sector, including non-U.S. regulators or international standard setters, come together to really openly debate and discuss, you know, the biggest challenges of the day that are impacting global markets and then to come up with solutions. You know, I'm a pretty practical person, especially having come from the private sector. And so every time I look at a problem, I'm like, how do we solve it? And I'm very results focused. So I want to really have a forum where we have the biggest and the major, you know, market participants and infrastructure and public interest groups from all around the world come together, look at these challenges, propose policy recommendations that we can then have say, well, you know what, we did the heavy

Starting point is 00:38:38 lifting. We've done the work on this. And then go and propose that to international bodies such as IOSCO, the international organization of securities commissions, or even the FSB, the Financial Stability Board. And hopefully it will really be an opportunity to show thought leadership and to also collaborate. Obviously, for the last month or so in crypto, Terra, USDA, the former algorithmic stable coin, has been top of mind for people for a very good reason. In an interview with CNBC, you implied that algorithmic stable coins may actually be derivatives. Is that your stance? And if so, then how do you think algorithmic stable coins should be regulated? This is something that I noticed when I was reading, I think a Bloomberg article about

Starting point is 00:39:27 out of Forbes interview that Jeremy Aller, who's the CEO of Circle, had given. And in it, he had said that he thought that some of these algorithmic stable coins were synthetic derivatives. And when I read that, I said, oh, well, if they are derivatives, guess what? My life's work has been to implement rules and regulations for the derivatives markets, for the swaps markets. And so, again, that's something that I think is, you know, going to be left to product lawyers. And, you know, in that interview, I also talked about sort of how the U.S. has been looking through at stable coins through two different lenses, trading stable coins and payment stable points.

Starting point is 00:40:07 But so if these are, in fact, derivatives, and that's a complex product analysis, then we have a regulatory framework for those, right? So we have a very comprehensive swaps regulatory framework that, as I mentioned, includes registration, a compliance program, or risk management program, counterparty and customer protections, and just really the whole swath of requirements that you need. And it's ready to go. And it's something that Congress, you know, in addressing the financial crisis, you know, when you had risky, complex, opaque financial instruments, they solved for that. And I think when I look for solutions, I look to what's existing and what's around because that's just a faster way to

Starting point is 00:40:48 get to the end game. You have also said that you worry that things like TaraUSD could represent a new shadow banking 3.0. What did you mean by that? This is something that's been a focus of mine, I think, for the last couple of years, particularly, you know, when you had COVID and the global pandemic and then the impacts of that, incredibly disruptive impacts of that to economies all over the world and to the global financial system and some of the issues that we saw with the market volatility, with the pressures in the funding and liquidity markets, and incredible amount of government support through different programs undertaken by central banks around the world. And I worked on that and I was involved in that. And one of the things that was

Starting point is 00:41:41 very important in the academic study around Dodd-Frank was shadow banking. It was looking at the non-bank financial sector and, you know, what were the risks and the issues there. And so I think when you look now, one of the things that is on the FSB work program is the non-bank financial intermediaries. And, you know, to what extent, what is their role? And when we look at, you know, public capital markets and private capital markets and the players in each of that, what are the dynamics there? And so I think crypto is, you know, clearly non-bank. And it is something that, you know, other regulators have expressed the concern. Of course, that this is something that is existing outside of our current regulatory perimeter. And it needs to be brought inside the

Starting point is 00:42:37 regulatory perimeter. And I think, you know, that's shadow banking. And maybe this is a shadow banking 3.0, Web 3.0, I thought that was, you know, more interesting than 2.0. But I think it really is, what do we do when something is outside the regulations? And what are the concerns when something is outside the regulations, right? I mean, one concern is, of course, systemic risk. We need to have the right prudential requirements in place to mitigate potential systemic risk. That's capital requirements, margin requirements, liquidity requirements, and risk management departments. We have to combat illicit finance. So we have to make sure that we have strong anti-money laundering laws and strong sanctions and strong laws to combat the financing of

Starting point is 00:43:18 terrorism. And then, of course, to make sure that there's the right protections in place for all market participants, but particularly those that are not as sophisticated, what in our regulatory frameworks, you know, we refer to as retail. And so I think all of those are the reasons why you would want to look at something that might be shadow banking, that might be a way to be outside the regulatory perimeter and is outside, therefore, some of these very fundamental requirements about mitigating systemic risk, about combating illicit finance, and in making sure that the right protections are in place from market participants. The crypto industry has said that many of them feel that the regulators want to maintain the existing system of

Starting point is 00:44:08 regulation, which is focused on intermediaries, whereas crypto is proposing a system that doesn't have intermediaries. So from your perspective as a regulator, how should regulators regulate this kind of system that is at least aspiring to not have intermediaries? Do you think it should impose a system that maintains the intermediaries, or do you think that there is a way to regulate without having intermediaries? I think that this question is probably best answered with another question, because, you know, as a regulator, you kind of try to think about what are the pros and cons, essentially, about different proposals or market structures. And what's the public interest? You know, how do we do the greatest good and try to prevent

Starting point is 00:44:57 market harm or customer harm. So I think one of the reasons why you've evolved a market structure that includes intermediaries is because the intermediaries are the ones that face their clients, their customers, and have all kinds of protections in place for that. And they know their clients and they know their customers. And I think if you just want to speak plainly, I mean, that's one way of thinking about it. And then for regulators, they regulate the intermediaries. And they put it on intermediary to make sure that everything that they're engaging in is safe and is protecting, again, customers. And so the question I have is if you remove the intermediaries, then who is going to make sure that all of that is happening? Another part of that is like third party risk

Starting point is 00:45:44 management, for example. So, you know, in financial services, you have so many vendors and providers. I mean, this can be any number of thing from, from technology vendors to like real estate management. I mean, it's truly like anything that's in your business, right? So it's the obligation of that intermediary to have the appropriate due diligence and to be responsible if something happens with those vendors, for example, and, you know, somebody gets tacked and loses everything and that was a vulnerability that you didn't protect against. So who's going to do that oversight and due diligence over this broader ecosystem? I don't think it's realistic to say that every single one of those vendors should be directly regulated by the government. That's just not realistic. And regulators

Starting point is 00:46:34 have limited resources. So I think it's almost in a way about how do you like 10x regulators' resources and try to make sure that you're able to protect the public interest and to really realize that you are, we're providing oversight over an entire ecosystem or market. So that's really the question that I have. And I look forward to, you know, what people think about that and what different examples or ideas might be about how to tackle that. And, you know, it's really, those are really the considerations, I think, when you think about what's, how do you, how do you make sure that the protections are in place? From a market structure perspective, I think it's always great to be exploring innovations

Starting point is 00:47:19 in market structure and market structure evolves over time. And so again, it's all about being thoughtful about how you do it and in really examining all of the different angles because these are areas where you don't want to make mistakes. And I think you want to be really thoughtful about any unintended consequences, right? And I think that's something that's important. FTCS recently proposed replacing futures commission merchants with automated trading on a platform created by FTCS. Do you support this proposal? I think it's something that I can't speak about right now because it is an open application.

Starting point is 00:48:04 And so, you know, I think the best thing that I can say about this is that it's a really interesting, a novel proposal. It is something that I'm really pleased that the commission had a very, comprehensive roundtable with all different market participants to debate and to discuss. I think that's really important that the public has the opportunity. Again, these are the experts that are running these businesses to come in and to tell us about, you know, what they see. And I will just look forward to continuing to learn more about this. The staff are working on it.

Starting point is 00:48:36 And to if there's a time when I need to evaluate it, then I will do so. And I'd actually like to ask you a more general question with this, technology were implemented, then obviously there would be auto liquidations. And I was curious what your thoughts were on how that might affect volatility and whether that would be a positive or negative effect. Well, auto liquidation can be pro-cyclical. And I think that's something that's really important to look at. And I think also you have to think about what are the market participants that are involved. because for some people, they might be okay with being auto liquidated. But as we've heard, that doesn't work for particularly commercial hedgers.

Starting point is 00:49:20 You know, you can have also, you might be able to have a high frequency trading firm that is perfectly fine with dealing with an auto liquidation protocol. But, you know, you may have somebody else who's, as they've said, goes to bed at night and wakes up in the morning and doesn't want to be blown out of their position overnight. So I think you really have to consider, you know, is this technology, fit for purpose. Who's using it? Why are they using it? And really evaluate it that way. What have I not asked you about that you think would be interesting or relevant to the listeners of Unchained? I don't know. I didn't think about that. I mean, this has been such a great

Starting point is 00:49:58 series because there are so many different viewpoints that come on and talk about different things. And so, I mean, I'm happy to tell you more about myself and how I look at things. I mean, I am new and I'm coming to the stage. And so it could be something that your listeners might be interested in. Yeah, go ahead. Go ahead. So, you know, as you know, I mean, I think I am in, gosh, week eight now of my commissionership. And it's pretty funny because some people have been telling me, they're like, you know,

Starting point is 00:50:32 Caroline, you are not still in the private sector, right? You know that you are now in government. But I think probably for most of my life I've kind of only moved at like one speed. But I've been very excited to do this. I mean, I walked away for my career to take on this opportunity because I thought it was something where I just might have a right set of skills and experience and background to really make an impact and to really do something that's meaningful here that people are really looking for and people's companies and businesses and their, you know, their futures are

Starting point is 00:51:14 really writing on us getting it right. And that call to public service is really important to me. And it's especially important to me. And I've, you know, discussed it in my confirmation hearing about how, you know, my parents were rescued by the Americans on the last day of the Vietnam War and just the opportunities that we've had to come and start a new life here. And that's been so, so powerful to me to try to give back. especially to everybody that helped my parents when they were here with a new baby and trying to get established. So, you know, I feel like this is what I can do here. So when I think about what are going to be my guiding principles or, you know, what's sort of the lens through which I'm

Starting point is 00:51:54 viewing everything, I mean, the first thing is clear rules of the road. It's funny because I did the Dodd-Frank rulemaking and then I went to the private sector and I had to implement it. And I I was thinking, oh, gosh, this is my penance? Because when you start to look at the rules and you try to figure out how do I actually build a system for this or process for this, and you really need things that are more black and white, you have to make a decision. Is it going to be this or is it going to be that? You can't really have this sort of loosey-goose. And that's a business decision. And it's based on risks. And it's an art, really. It's not a science. It's really an art. So there need to be clear rules of the road. And I think people want regular.

Starting point is 00:52:32 I think this idea that, you know, the responsible actors in the crypto economy don't want regulation is a falsity. I think that in order to have growth in compliant markets, we need to be able to show the guideposts. And, you know, what is compliant so that way people can start to put their investment dollars to work, their, you know, hard capital. And, you know, look, markets just work best when you have clear and simple rules with common standards. And particularly for global markets, they should be harmonized because when you don't have harmonized global rules over global market, then you are basically allowing for the importation of operational complexity. And that raises risks and costs.

Starting point is 00:53:19 And, you know, things to just be simple as much as possible and standardized. So that's one thing. Then the two lenses, I think I'm really taking into my commissionership. The first one is growth. So how do we promote and support growth in both traditional and new markets and products? So in the traditional space, you know, again, with everything that's happening in global commodity markets and with everything that happened during COVID, particularly in March 2020, how do we make sure that we have those deep and liquid markets? Because those markets best enable price discovery and risk management. And that's the core mandate that the CFTC has is to promote market integrity and facilitate the price discovery and the risk management.

Starting point is 00:54:06 But then there's also supporting and fostering the growth in new markets and products. And so part of that is, of course, the crypto, which we've been talking about. But there's other potential new markets and products. There's obviously ESG is another area that the CFTC and the rest of the world has been focused on. And there's probably other things that people are doing that, you know, I'm just starting to learn about on the different learning tours that I've been doing. But we should be supporting growth. We should be supporting innovation, of course, in a responsible way. The second lens that I'm using is really progress. And this is, again, progress in, you know, traditional and new markets and products. So there's a lot of issues that are still kind of lingering. I almost call it the Dodd-Frank hangover as is kind of still working through the last.

Starting point is 00:54:52 of the global regulatory reforms, there's operational challenges and other issues. And so I think that's something that's important to focus on and to make sure that we aren't making things harder than they need to be. And then progress on the new issues like crypto. I think it's so important that we actually are moving the needle on some of these, and we are actually able to demonstrate and show some progress. And so that's when I'm looking at everything, I'm going to be thinking about it from that way. Great. Where can people learn more about you and your work?

Starting point is 00:55:26 So I have a webpage. If you go to the CFTC website and you, I think you click on about the CFTC and then it has the commissioners and the chairman and you can click on it and see me. And I also am on social media that's we talked about. So you can follow me. My official account is at CFTCFAM, but you can also follow me at Caroline Defam. And then I'm on LinkedIn as well. It has been a pleasure to having you on Unchained. Thank you so much for having me.

Unchained - CFTC Commissioner Caroline Pham on Why US Crypto Regulators Get a B- Ep. 365

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