Good afternoon to you all. Thank you to R3 for inviting me to speak at CordaCon in London.
I am grateful to be in such a special place, although not one without sadness. I send my deepest condolences to the people of the United Kingdom, the Commonwealth, and all those who honor the life and legacy of Her Late Majesty Queen Elizabeth II.
The United Kingdom’s special relationship with the United States runs from foreign policy to culture to finance. London is the most important overseas financial center for the United States economy. Our countries currently trade more than $260 billion dollars’ worth of goods and services each year, we are each other’s number one source of foreign direct investment, and two-way direct investment totals over $1 trillion. New York and London have long vied for first place among the world’s leading financial centers. London’s history and financial innovations relating to market structure, financial products like contracts for difference, foreign exchange, and technology have placed it among the forefront of finance.
Indeed, more than 800 years ago, the Magna Carta was sealed in Runnymede, an hour or so’s drive from here. Beyond the historical particulars, that document—and the innovations it contained—have come to serve as a foundational expression of ways individuals could seek rights and protection. These principles find new forms in the U.S. Bill of Rights and beyond, woven into our special relationship that continues today. This relationship includes a close and vital commerce—not just of goods and services, but also of ideas.
This is why we’re all here—to come together and talk about building the future of markets and to engage in the commerce of ideas and innovations. And not a moment too soon.
It continues to be a time of rapid innovation. Financial market infrastructures (FMIs), intermediaries, other participants, authorities, and global bodies are all laser focused on crypto assets and DLT. Legal and legislative developments—think of the proposed bills working their way through the U.S. Congress, and others such as the European Union’s Markets in Crypto-assets (MiCA) Regulation, and international efforts at the G20, the Financial Stability Board (FSB), and the International Organization of Securities Commissions (IOSCO)—together raise questions about what the future global regulatory landscape for crypto assets could and should look like. And the crypto crash, risk management failures, and substantial retail losses, gives urgency to the need to balance innovation with retail protection and appropriate regulation.
Corda is a blockchain intended for enterprise applications, including by financial institutions. As you all know, financial institutions are highly regulated, no matter where you are in the world. That means that financial institutions and their activities are inside the regulatory perimeter and subject to important safeguards. That means that important protections for risks to the entity and the financial system are in place. And, importantly, that means that protections for clients, customers, and consumers—whether institutional or retail—apply to financial activities.
The CFTC has been talked about a lot recently. In the U.S., there is a big debate over spot crypto market regulation. But it seems to me that every time someone is talking about the CFTC, there is confusion over the CFTC’s current role in ensuring that there are important protections for the retail public in our markets.
We can see the 800-year-old principles of the Magna Carta in the extension of these protections beyond just the most powerful. That’s what I’d like to tell you more about today: the CFTC and retail protection. First, I’ll briefly describe the CFTC regulatory framework for retail protection. Second, I’ll lay out the CFTC divisions and offices that have a role in retail protection. Finally, I’ll propose how the CFTC could do even more under an expanded retail protection mandate by creating an Office of the Retail Advocate.
I’ll go ahead and say now that the views I express today are my own, and not necessarily those of the Commission or other Commissioners.
CFTC Regulatory Framework and Retail Protection
At its core, the CFTC writes and enforces rules, and supervises market activity and market participants. Under the authority granted by Congress in the Commodity Exchange Act (CEA) of 1936, as amended, the CFTC registers and oversees exchanges, clearinghouses, large traders, and the companies and individuals who handle customer funds or offer trading advice.
Holding wrongdoers accountable is an important part of the CFTC’s oversight of the markets. The CFTC investigates and prosecutes violations of the CEA and CFTC regulations, and provides other adjudicatory forums to address alleged misconduct. To help market participants protect themselves, the CFTC educates customers about their rights, protections, and how to spot, avoid, and report fraud. And under the Bank Secrecy Act (BSA) and Patriot Act amendments, the CFTC works to prevent, detect, and prosecute international money laundering and the financing of terrorism with respect to CFTC-registered futures commission merchants (FCMs) and introducing brokers (IBs).
Let me tell you about the sheer scale of what the CFTC does. Since Dodd-Frank, we’ve had hundreds of rulemakings for new or changed rules. We have global jurisdiction for the most complex products—derivatives—across all asset classes, from corn and wheat, to gold and palladium, to Treasury futures and interest rate swaps, to weather and event contracts. We have safeguarded our markets through incredible stresses, disruptions, and dislocations, and through incredible shifts in market structure like reforms for derivatives trading, margin, clearing, and benchmarks, or Brexit or IBOR transition. We have oversight of global systemically important entities—U.S. and non-U.S. FMIs and U.S. and non-U.S. banks. And we have imposed billions and billions of dollars in penalties, with only about 160 staff in the Division of Enforcement.
Not only does the CFTC do all of that in its oversight of institutional markets, but the CFTC also ensures market integrity and fairness, protects customers and customer funds, and enforces against fraud, manipulation, and other market abuses in retail markets too.
How does the CFTC do that?
The CFTC provides resources for the retail public to check registration and disciplinary history and submit a tip or complaint about violations or suspicious activities. The CFTC provides a path for people to obtain reparations in an inexpensive, expeditious, fair, and impartial forum. People can check the CFTC’s Registration Deficient List (RED List) to identify unregistered foreign entities that solicit Americans to trade. People can learn about trading and how to protect against fraud or other abuses by reading CFTC publications, advisories, and articles or watching CFTC videos. Finally, the CFTC also has dedicated customer education resources for the agricultural community, as well as on binary options and digital assets.
As the U.S. Congress, the Administration and Treasury Department, other regulators, market participants, and public interest groups work on digital assets regulation, I believe we’ll see the benefit of having the CFTC’s principles-based framework that is more flexible and more adaptable to new changes and new risks.
In the meantime, the CFTC has broad existing authorities. In my view, the SEC regulates the securities markets, and the CFTC has regulatory touchpoints with virtually everything else. There’s no question that the CFTC has strong anti-fraud and anti-manipulation enforcement authority over spot commodity markets, which we have used from the beginnings of the agency. The CFTC has successfully brought nearly 60 crypto enforcement actions since 2014, with hundreds of millions of dollars in penalties, and recently filed an action charging a $1.7 billion dollar international Bitcoin Ponzi scheme. The CFTC also has oversight over certain spot retail FX and spot retail leveraged commodity transactions. I believe that these could be good places to start while Congress thoughtfully works through tasking us with additional authority.
As I’ve said before, the key takeaways are that the CFTC’s regulatory framework is relatively asset- and technology-neutral. Our focus on principles-based regulation, customer protections, market integrity, risk management, price discovery, and transparency has worked well for our markets—including retail markets—for decades.
The basics for market regulation and market conduct apply across any asset class or technology. Don’t lie. Don’t cheat. Don’t steal. Be responsible. The following CFTC Divisions and Offices, among others, have roles in retail protection and upholding these basics.
The Market Participants Division (MPD) oversees the registration and compliance activities of firms with retail customers. These firms include FCMs, IBs, commodity pool operators (CPOs), commodity trading advisors (CTAs), retail foreign exchange dealers (RFEDs), swap dealers (SD), and other swaps and futures market participants.
In its oversight, MPD seeks to ensure that these registered market participants are financially sound, protect customer assets, and meet statutory fitness and conduct standards. These requirements are thorough. They include: capital, margin, customer asset segregation, and customer protection requirements; internal and external business conduct standards, including ethics, governance, execution, information sharing, risk management and compliance, and effective confirmation and settlement; and reporting, disclosure, and record keeping obligations.
The National Futures Association (NFA), as a self-regulatory organization (SRO) under CFTC oversight with certain delegated functions, also plays a significant role in protecting the retail public. The NFA registers and licenses CFTC registrants on the CFTC’s behalf. Among other things, the NFA conducts examinations, and enforces customer protection rules such as marketing and advertising. And then there are other designated SROs that have rules, protect against market abuse, and enforce compliance.
The Office of Proceedings runs the CFTC’s Reparations Program. Customers that have been the victims of alleged misconduct, by registered trading firms or individuals, that violates the CEA can seek damages for losses through the CFTC’s Reparations Program. The Reparations Program provides an affordable and efficient forum for these victims. The CFTC’s Judgment Officer can hear reparations claims, review evidence, and take the necessary steps to issue a binding and enforceable decision.
The Office of Customer Education and Outreach (OCEO) does just that: it publishes financial education messages and conducts outreach. Promoting awareness and sharing warnings of scams and schemes can help people avoid fraud, deception, and unsuitable financial products. A recent example is a warning of scams linked to the Covid-19 crisis or risks of cryptocurrencies. The Dodd-Frank Act mandates that the CFTC undertake customer education initiatives and provides for a Customer Protection Fund of up to $100 million dollars.
The Division of Enforcement (DOE) protects the public and preserves market integrity by detecting, investigating, and prosecuting violations of the CEA and CFTC regulations. DOE investigates leads, tips, and complaints and aggressively prosecutes harm to retail customers, including in areas like precious metals, foreign exchange, and binary options. DOE includes the Market Surveillance Branch, which monitors trading activity to detect and prevent manipulation or abusive practices and to ensure compliance with CFTC regulations for speculative position limits.
The Whistleblower Office is a branch of DOE that administers the CFTC’s Whistleblower Program, which was established by the Dodd-Frank Act. The Whistleblower Program provides monetary incentives to individuals who come forward to report possible violations of the CEA, and has awarded hundreds of millions of dollars. It also provides anti-retaliation protections for whistleblowers.
The Division of Market Oversight (DMO) registers and oversees exchanges and certain trading platforms. DMO reviews applications for registration and examines for compliance with the CEA and CFTC regulations, including the Core Principles. Designated contract markets (DCMs), one type of exchange, have to comply with twenty-three Core Principles. These Core Principles help ensure customer funds are protected, risks are managed, and trading is fair, efficient, and transparent. DCMs also have to ensure that listed contracts are not readily susceptible to manipulation, and to have rules and resources in place to detect and prevent manipulation, price distortion, and disruptions of the cash-settlement or delivery process. And DCMs have to have appropriate risk and oversight procedures and controls.
A Proposal for the Office of the Retail Advocate
As you can see, the dedicated staff of the CFTC are on the job every day to protect retail markets. I commend them for their hard work and tireless service.
Now, as I’m sure you’re aware, there are a number of U.S. legislative proposals that would make clear and expand the CFTC’s authority over spot digital commodity markets. I am pleased that the Congress is tackling these important issues. The CFTC will faithfully execute the law, whatever it may be, and uphold our mandate to ensure market integrity and protect against market abuse and misconduct.
You may also be aware that there are some who raise questions about the CFTC’s engagement with the retail public and our oversight of retail markets. As I’ve just described at length, the CFTC has the experience, expertise, and track record for the job.
But I have another answer that should remove any doubt—should the CFTC be granted additional authorities over retail markets, then one proposal could be to also establish an Office of the Retail Advocate that would further enshrine the CFTC’s current customer protection mandate under Dodd-Frank.
Like I’ve said before, what’s old is new again. Many government agencies have offices that are mandated to engage with and promote the interests of the public—to stand up and speak for people who might not otherwise have a voice, who are being overlooked or left behind or worse in their pursuit of the American dream and the opportunities from American innovation and capital markets. The rules need to work for everyone, big or small.
Having an Office of the Retail Advocate is a tried-and-true way to advance customer protection. I believe in using good ideas when you find them, and the SEC and the U.S. Small Business Administration (SBA) both have offices that champion those who need it.
The SEC has an Office of the Investor Advocate, which was established by statute. It has four core functions: to provide a voice for investors in policymaking, to assist retail investors in resolving problems they have with the SEC or an SRO, to study investor behavior and conduct research and economic analysis, and to support the SEC’s Investor Advisory Committee. The SEC also has the Office of the Advocate for Small Business Capital Formation and the Office of Investor Education and Advocacy.
The Office of Advocacy of the U.S. SBA is the independent voice for small business within the Federal government, the watchdog of the Regulatory Flexibility Act, and a source of small business statistics and research. Its impact is far-reaching and it represents the millions of Americans that are small business owners.
I hope that these ideas spark further discussions on ensuring that the retail public has a voice in these debates in Washington, D.C.
Regulation of the Future: Building the Future of Markets
My approach is to get all the information, learn as much as possible, and then find pragmatic solutions. I’ve been doing learning tours with market participants to get as much information as possible about the technology, use cases, opportunities, and risks. I’ve been traveling internationally to learn from other jurisdictions who have implemented regulatory sandboxes and regulatory registration and oversight regimes. I’ve had the benefit of their years of observations and learnings. Now, I hope to apply all of this to make good policy that is informed and pragmatic.
Ten Fundamentals for Responsible Digital Asset Markets
As I’ve said before, digital assets and DLT could change our markets. It might still be early, but there are promising use cases if we can achieve blockchain stability and scalability across layer 1, 2, or whatever’s next. There are also familiar and in some ways predictable risks that could impact consumers, investors, and business protections; financial stability and financial system integrity; combating and preventing crime and illicit finance; national security; the ability to exercise human rights; financial inclusion and equity; and climate change and pollution. There are also the inevitable scammers and fraudsters.
I’ve identified ten fundamentals for responsible digital asset markets. This is a common-sense starting point and there is broad agreement across international standard setters and authorities on these fundamentals or slight variations.
First, we need to identify the particular product or service. You have to know what something is before you know what rules apply. This means knowing whether a product is a security. This means knowing whether it is a novel, native crypto asset or a traditional financial instrument cleverly rebranded but still subject to existing laws and regulations. These kinds of questions are being worked through here in the U.S. as well as abroad in other jurisdictions, and at the international standard setter level.
Second, the product or service must be within the regulatory perimeter. If there are areas of the financial system that are apparently outside and unregulated, such as a “shadow” crypto financial system—shadow banking 3.0—then the appropriate response is to bring them inside. This is what the CFTC did in large part for the OTC swaps market after Dodd-Frank. And while Congress continues its work on developing legislation, there may be other ways as well to make sure the CFTC and others are exercising the full extent of their existing market oversight, supervisory, and enforcement authorities.
Third, we must mitigate systemic risk. We’ve seen disruptions spread from the collapse of projects such as Terra and Luna, revealing potentially undisclosed connections, exposures, and interdependence among large participants that increases the risk of spread amongst and beyond crypto. We need to address this.
Fourth, we must combat illicit finance and national security risks. Our markets need to be safe from exploitative money laundering, cybercrime and ransomware, narcotics and human trafficking, and the financing of terrorism.
Fifth, we must appropriately use activity-based and entity-based regulation. Market regulators oversee product activity, and who engages in it. Prudential supervisors oversee entities, and the activities they engage in. Same, but different.
Sixth, we must protect customers and the retail public. There should be requirements for disclosure, suitability, and education at a minimum. People should know what they are getting into. Recent news reports, about potential lack of protections in the event of bankruptcy for customers holding digital assets on platforms, raise real concerns.
Seventh, we must ensure transparency. DLT presents great opportunities in this regard.
Eighth, we must vigorously enforce market conduct rules. If you are lying, cheating, or stealing—if you break the rules—then you should face the consequences.
Ninth, we must address conflicts of interest. There should be requirements for appropriate governance and oversight; prevention or management of conflicts of interest such as prohibition, disclosure, or information barriers; and alignment of incentives amongst market participants.
Tenth, we must promote free markets that will unlock American innovation. I believe that markets work best when there are clear and simple rules with common standards. That’s something I learned time and again in government and in the private sector. Regulation shouldn’t unnecessarily increase operational complexity or costs, especially costs that then get passed down. The rules shouldn’t be so difficult, conflicting, or overlapping that they are impossible to implement in the real world. Lack of regulatory coherence impedes the ability of regulated institutions—who have the experience and the resources—to actively participate in digital asset activities and responsible innovation.
The CFTC already has a principles-based regulatory framework for many digital assets that aligns to these ten fundamentals. We are ready to go. Where we have rules at hand, let’s use them, as recommended in one of the recent Treasury reports under the President’s Executive Order. Recent market events, including big losses for regular people, show us that we need to take action now.
I believe we must focus on forward-looking laws and regulations that are durable and flexible. As technology and markets continue to evolve, this proactive—not reactive—approach will future-proof our regulation and oversight.
These new technologies present opportunities and risks. DLT platforms, whether permissioned or permissionless, promise potentially substantial and rapid gains in efficiency, transparency, and access across a wide range of use cases.
As we engage in the commerce of ideas, and as we adapt to these new changes and new risks in markets and beyond, regulators must keep retail protections front and center. The CFTC’s offices and divisions will continue their work. We have ready-made regulatory frameworks for derivatives markets—both institutional and retail—that have stood the test of time. We have our core principles and business conduct standards. We have broad anti-fraud and anti-manipulation authority. And should new authorities be granted, and new mandates such as an Office of the Retail Advocate, we will use those as well as our existing retail protections and efforts.
As we move forward to the innovations, markets, and regulations of the future, we can draw on fundamental principles stretching hundreds of years back, just a few miles from here: the ideas that legal protections should not be limited to the most powerful. As we head into an exciting future, we should have flexible regulations that stay evergreen for everyone.
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Raphael Auer, Marc Farag, Ulf Lewrick, Lovrenc Orazem and Markus Zoss, “Banking in the shadow of Bitcoin? The institutional adoption of cryptocurrencies,” Bank for International Settlements Working Paper No. 1013 (May 18, 2022), available at https://www.bis.org/publ/work1013.htm.
Bank for International Settlements Annual Economic Report 2022, available at https://www.bis.org/publ/arpdf/ar2022e.htm.
CFTC Chairman Rostin Behnam, Testimony Regarding the Legislative Hearing to Review S.4760, the Digital Commodities Consumer Protection Act at the U.S. Senate Committee on Agriculture, Nutrition, and Forestry (Sept. 15, 2022).
Commodity Futures Trading Commission, “Annual Report on the Whistleblower Program and Customer Education Initiatives” (Oct. 2020).
Commodity Futures Trading Commission, “CFTC Strategic Plan 2020-2024” (July 8, 2020).
Commodity Futures Trading Commission, “Customer Advisory: Use Caution When Buying Digital Coins or Tokens” (July 16, 2018).
Commodity Futures Trading Commission, “FY2020 Division of Enforcement Annual Report” (Dec. 2020).
Commodity Futures Trading Commission, “President’s Budget Fiscal Year 2023” (Mar. 21, 2022).
Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, speech at Eden Hall, the British High Commissioner’s Residence in Singapore, “Some lessons from the crypto winter” (July 12, 2022).
Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, speech at SIBOS, “Is ‘crypto’ a financial stability risk?” (Oct. 13, 2021).
Daniel Davis, “The CFTC’s Focus on Retail Markets,” Futures and Derivatives Law Report (Mar. 2022).
Exec. Order No. 14067 of Mar 9, 2022, “Executive Order on Ensuring Responsible Development of Digital Assets,” 87 Fed. Reg. 14143 (Mar. 14, 2022).
Financial Stability Board, “Assessment of Risks to Financial Stability from Crypto-assets” (Feb. 16, 2022), available at https://www.fsb.org/2022/02/assessment-of-risks-to-financial-stability-from-crypto-assets/.
Ronit Ghose, Judy Zhang, Kaiwan Master, Ronak S. Shah, and Yafei Tian, “Future of Money: Crypto, CBDCs, and 21st Century Cash,” Citi (April 2021), available at https://www.citivelocity.com/citigps/future-of-money/.
Chair of the Basel Committee on Banking Supervision and Governor of the Bank of Spain Pablo Hernández de Cos, Keynote speech at the 36th Annual General Meeting of the International Swaps and Derivatives Association, “Computers and money: the work of the Basel Committee on cryptoassets” (May 12, 2022), available at https://www.bis.org/speeches/sp220512.htm.
Magna Carta (1215).
Sharmin Mossavar-Rahmani, Matheus Dibo, Jakub Duda, Oussama Fatri, Shahz Khatri, Shep Moore-Berg, and Yousra Zerouali, “Digital Assets: Beauty Is Not in the Eye of the Beholder,” Goldman Sachs (June 2021), available at https://www.goldmansachs.com/what-we-do/consumer-and-wealth-management/private-wealth-management/intellectual-capital-f/beauty-is-not-in-the-eye-of-the-beholder/.
CFTC Commissioner Caroline D. Pham, Commodity Futures Trading Commission, Keynote address at the 18th Nasdaq Technology of the Future Conference—Reimagining Tomorrow’s Markets, “Regulation of the Future: Building Responsible Digital Asset Markets” (June 28, 2022).
CFTC Commissioner Caroline D. Pham, Commodity Futures Trading Commission, Keynote Address at the EUROFI Financial Forum Prague 2022, “Money and Life, the Metaverse, and Everything” (Sept. 7, 2022).
Executive Director, Markets Sarah Pritchard, Speech at the CityUK Annual Conference, “Finding opportunity in a world of uncertainty” (June 30, 2022).
U.S. Department of Treasury, “The Future of Money and Payments: Report Pursuant to Section 4(b) of Executive Order 14067” (Sept. 2022).
U.S. Department of Treasury, “Crypto-Assets: Implications for Consumers, Investors, and Businesses” (Sept. 2022).
U.S. Embassy & Consulates in the United Kingdom, “Our Relationship: Policy & History,” available at https://uk.usembassy.gov/our-relationship/policy-history/.
U.S. Securities and Exchange Commission Office of the Investor Advocate, “Fiscal Year 2023 Report on Objectives” (June 30, 2022); see also https://www.sec.gov/advocate.
CFTC Chairman Heath P. Tarbert, Remarks to the City of London Corporation, “A Special (Regulatory) Relationship” (Sept. 24, 2020).
U.S. Small Business Association Office of Advocacy, bulletin, “The Small Business Advocate” (May 31, 2022); see also https://www.sba.gov/.
 See CEA § 2(c)(2)(C)–(D), 7 U.S.C. § 2(c)(2)(C)–(D); see also David L. Concannon, Yvette D. Valdez & Stephen P. Wink, “Not in Kansas anymore: The current state of consumer token regulation in the United States,” in Global Legal Insights—Blockchain & Cryptocurrency Regulation (3d ed. 2021).