CFTC’s Michael Passalacqua Reveals Plan B for Crypto Regulation After CLARITY Act Stalls

Michael Passalacqua (0:00)

The goal of this is to provide a federal option for crypto asset exchanges to opt in to a federal framework, one national uniform framework, under the CFTC's oversight.

SPEAKER_2 (0:16)

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Renato Mariotti (1:07)

Welcome to The Policy Protocol, your weekly espresso shot of fintech law and policy.

Everything that happened distilled down to what actually matters. I'm Renato Mariotti, a partner of Paul Hastings. I'm here with my co-host, Rebecca Rettig, CLO of GEDA Labs. Rebecca, I will tell you, I'm traveling this week at my law school reunion. What are you up to this week?

Rebecca Rettig (1:35)

Just working, typing away. There's so much going on in the world and in the regulatory space, and our guests will talk a lot about that this week. But yeah, just really sitting here typing, thinking through lots of different issues and excited for all that we're working on.

Oh, actually, I was in your city this week just for a brief few hours. I did the Innovation Panel at the Chicago Fed's Payment Symposium on Tuesday, which was really cool and had a great group of speakers. And it's actually shocking how much the Fed has focused on innovation in the last couple years. So yeah, pretty amazing.

Renato Mariotti (2:14)

Absolutely. Well, I remember your recent panel on prediction markets, and that really takes me to what I think my hot topic of the week was, which is that the CFTC declared that sports book bets aren't swaps. Last Friday, the CFTC published an interim final rule carving casino style gambling outside of the definition of swap. There's a companion proposal writing sports, political and weather event contracts in. So, why were they doing that? Well, look, there was two appeals courts that ruled against a prediction market such as Cal-Shee. And part of their reasoning was that sports swaps would sweep in casinos, that that definition meant that the sports book at the Caesars or Harris Casino would potentially be a swap.

Realistically, this is a way for the commission to clean that up.

My, you know, my take, and I said this last week, is I really don't think any of these cases are turning on the words of the statute. I think they're turning on gut feel. You know, does this look like gambling to a judge? And this rule really answers the worry that some of those judges have. Unfortunately, it doesn't always change, I don't think, what a judge sees when they're looking at the product, given that there's so many things like parlays and combos and things like that, that are, that are, you know, resemble sports event contracts right now. Obviously, this is going to be heading up to the Supreme Court soon.

Rebecca Rettig (3:52)

So my hot topic of the week is a, as everyone said, a bombshell report. And we don't usually use the word bombshell. From the OCC, it came out this week and found that between 2020 and 2025, based on a review of 100,000 complaints, America's GSIB, so these large banks, systematically debanked or denied banking to lawful businesses based on political and reputational risk. They looked at the six most affected industries, and no surprise, digital assets was one of them.

And I think it confirmed a lot what we all knew. I think some of the other interesting things that came out of the report were discussions about how banks were subject to this significant external pressure.

I think both from sort of the local feds and the overall fed, and that also there was a lot of congressional oversight. Looking at some of these banking activities, we of course know there was a lot of guidance that came out during the last administration that really suggested that banks could not bank certain types of businesses in certain ways. But I think it confirms that there really was, you know, that we all weren't sort of hallucinating. And again, look, it wasn't just crypto as one of the D-Banks industries that they found, but, you know, I think there was really data that they looked at. And, you know, I think it sounds that banks also had adopted reputational risk policies, which allowed public opinion and social pressure to influence who banks deemed not worthy to access financial services. One interesting thing that happened after the report is Graham Steele, who was the Assistant Secretary for Financial Institutions from 2021 to 2024, said he did not agree with this report. There wasn't enough data to support it. No surprise, except this is a review of 100,000 complaints. So and look, the OCC also had a very big report out this week on a big sanctions violations by a bank. So the OCC and banks have had a big week in any number of ways. But to transition back to the world of the CFTC, one of Renato's favorite topics and one of mine too, we have a great guest today, Michael Passalacqua, who is giving us the honor of joining us. He's Senior Advisor to Chair Mike Selig of the CFTC and he's head of the CFTC's Innovation Task Force and works on everything crypto and AI and innovation at the CFTC. Welcome, Mike.