Kraken Parent Backs CFTC's Plan to Regulate Spot Crypto Without Congress

Jonathan Jachym (0:00)

These fundamental rules are just absent in the US. And it's not for lack of bipartisan consensus that they're needed. So, you know, the CFTC using existing statutory authority and building on that, I think the Bitnomeo model is a great example of how that's worked. This is just real critical for US competitiveness to get this right and to get it right fast.

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Rebecca Rettig (0:57)

Welcome to The Policy Protocol, your weekly sprethershot of the latest in fintech law and policy. Not just what happened, but distilled down to what actually matters. I'm Rebecca Rettig and I'm the co-host and I'm here with my co-host, Renato Mariotti. How are you, Renato?

Renato Mariotti (1:12)

I'm doing great. I'm doing great. I'm here at the Digital Chambers Chicago Forum. I'm going to be doing a fireside chat with David Miller, the Director of Enforcement at the CFTC in just a bit.

But I'm sneaking off to the side to record our show.

Rebecca Rettig (1:30)

Well, there will be a lot to talk about today with respect to the CFTC, a lot to talk about on your panel. I'm sure there will be a lot to talk about for many episodes to come. I feel like even though there's been a change and clarity didn't pass, I don't think the news has slowed down. I don't think that conference circuit has slowed down. I think we'll be seeing a lot. This week, it's also been going on Token 2049, and DAS Asia has been going on and seen a lot coming out of their big announcements and just a lot of people and a lot of good energy around it.

But moving into the news, and because this is a CFTC-centric podcast, what's your hot topic of the week?

Renato Mariotti (2:14)

Oh, my God. My hot topic of the week has to be the CFTC announcing that they want to regulate spot crypto exchanges without Congress, right? We all thought the Clarity Act failed, that that would mean that spot crypto wouldn't be regulated by the CFTC. But no, on Monday, the CFTC floated a new kind of exchange called a crypto asset market. It's just an advance notice. It's not a rule yet. Of course, the catch is that technically the CFTC doesn't regulate spot markets.

It can't license the exchanges, but the workaround is a provision of Dodd-Frank. Essentially, if retail deals offered with leverage, they have to trade on an exchange unless the asset is actually delivered within 28 days. So essentially, the CFTC makes a couple of moves. Offered means offered. So if customers can choose margin, you're covered even when they pay cash. But delivery, which is how futures contracts, if you hold them to the end, you end up with a lot of corn or oil or something. In this case, delivery means coins in your own wallet on chain. So an exchange's ledger entry doesn't count. If you offer margin, you have to be a CFTC exchange. I think it's a very clever move by the CFTC. It's a clever interpretation of the Commodity Exchange Act. It's one that in the past, the CFTC has used against leverage, precious metals dealers, and they're turning it into a whole market structure.

I think the issue though, Rebecca, is after Loper-Bright, judges don't have to defer to the CFTC's reading. So it'll be interesting to see how durable this reading is in the long run.

Rebecca Rettig (3:54)

It's true. And look, when you have an advanced notice of proposed rulemaking, you're gonna get a lot of feedback. I was actually at the Fordham Law Blockchain Regulatory and Legal Symposium. It was huge. There were about 400 crypto fintech lawyers there. And this is actually where Chair Selig announced the rulemaking and his views around it. The most interesting part of the speech was that he did a trip down memory lane at the beginning of this speech where he talked a lot about Bitcoin, went into Ethereum and the history around it. The notice of proposed rulemaking also does a little trip down memory lane, like a self-reflection of maybe we didn't do it right with Hukidao and all the other enforcement mechanisms we had had. But one of the things that Chair Selig said directly, and I think he's really emphasizing with respect to the industry is, give us feedback. We want to do this right. We're not quite sure if we read it correctly. I do think the feedback process is really powerful. When you say unclear whether it will get challenged or not, sure, maybe around the edges, but I would think especially post-clarity and hearing what financial institutions have to say, they would welcome there being a new regulated entity under the CFTC's jurisdiction.