CFTC vs. Uniswap, Prediction Markets, & Crypto | Commissioner Summer Mersinger

In this episode, we speak with CFTC Commissioner Summer Mersinger about the rapidly changing world of cryptocurrency regulation. Commissioner Mersinger provides a detailed look at the differences between the CFTC and SEC, their roles in overseeing digital assets, and how the regulatory landscape is evolving with DeFi and crypto markets. She discusses the CFTC’s recent dissent in the Uniswap case, the challenges of classifying assets as commodities or securities, and the implications of U. S. regulations on the global crypto industry. Whether you're a crypto enthusiast, a DeFi developer, or just curious about how the U. S. government is approaching these new technologies, this episode offers invaluable insights into the future of crypto regulation. ------ 📣0x v2 | NEXT GEN PRICING ENGINE https://bankless.cc/0x ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🗣️TOKU | CRYPTO EMPLOYMENT https://bankless.cc/toku ⚡️CARTESI | LINUX-POWERED ROLLUPS https://bankless.cc/CartesiGovernance ⁠ 🦄UNISWAP | BROWSER EXTENSION https://bankless.cc/uniswap ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle ------ ✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/72?referrer=0x077Fe9e96Aa9b20Bd36F1C6290f54F8717C5674E ------ TIMESTAMPS 0:00 Intro 5:20 Commissioner Mersinger 8:20 CFTC vs. SEC Regulation Differences 9:44 Assets: Commodities vs. Securities 21:59 Consensus on Digital Assets as Commodities 26:03 CFTC vs. SEC Rivalry Dynamics 28:25 Bureaucracy a Feature or Bug? 29:34 Overregulation in Crypto: CFTC vs. SEC 36:15 Uniswap Case: CFTC Enforcement Action 47:41 The Regulatory Paradox of Decentralized Finance 1:00:09 CFTC Enforcement Decision-Making Process 1:02:02 Addressing Crypto Prediction markets in crypto 1:15:08 Engagement for Productive Crypto Future 1:19:52 Continuing engagement and conversation is essential 1:20:55 Closing & Disclaimers ------ RESOURCES Commissioner Summer Mersinger https://x.com/cftcmersinger Commissioner Mersinger’s Dissent https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement090424 Uniswap Action https://www.cftc.gov/PressRoom/PressReleases/8961-24 ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures ⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Even just three or four years ago, you had members of Congress saying this is all this is all fake. It's all money laundering. It's all criminals. Maybe there's a few that still say that, but but very few. And people are recognizing that this is legitimate market. These are important markets and that we need to make sure we're we're not pushing all of this activity offshore.

• 0:27Ryan Sean Adams?

  Welcome to Bankless, where today we explore the frontier commodities and the government agency, at least in the US, that regulates them. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. We have a CFTC commissioner on the podcast today. And the reason David and I booked this episode is because we're sort of wondering, what is the status of the CFTC? Are they friend or foe of crypto in the United States? There was this case that we saw, I think it was two weeks ago, David, which is a Uniswap versus CFTC settlement case. And we get into the details in today's episode, but it kind of raised our eyebrows. And the question is, is the CFTC emerging as a crypto ally? Or are they going the way of the SEC and Gary

• 1:09Ryan Sean Adams?

  Gensler? So we had Commissioner Mersinger on the podcast today, who actually dissented from the settlement action with the CFTC. And she gives the reason for that dissent and the broader context. We talked about Uniswap. We talked about leveraged tokens. We talked about prediction markets, all of the things that are adjacent to this important regulatory agency in the US and crypto.

• 1:29David Hoffman?

  There's a lot of similarity between the CFTC and the SEC. I think our listeners are going to be more familiar with the SEC, simply because it's been more of a player in our world with Gary Gensler. And then also, the commissioner that we've had on the podcast before from the SEC has been Hester Purse. And I think Commissioner Mersinger, I think, has a lot of similarities to Hester Purse, like first principles driven, free markets, reduce government, very first principles oriented, and kind of just like true to the purpose of these organizations, and also interested in coming on a crypto podcast, and frequently dissents with some of the enforcement Actions from the overall organization.

• 2:13David Hoffman?

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• 2:58David Hoffman?

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• 3:40David Hoffman?

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• 4:23David Hoffman?

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• 5:08David Hoffman?

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• 5:18David Hoffman?

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• 6:02David Hoffman?

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• 6:15Ryan Sean Adams?

  Bankless Station, we are very excited to introduce you to Commissioner Summer Mercer. She is a Commissioner for the U.S. Commodities Futures and Trading Commission. That is known. I'll give you the acronym. That is the CFTC, is probably what you've heard it as. She was nominated by President Biden and confirmed by the Senate in March 2022. And I would say regarding cryptocurrency, at least so far, Commissioner Mercer has emerged as more on the advocate side. She's got a clear and balanced view on your regulation and crypto and how these things intersect. We'll talk about one of her most recent dissents in the course of this episode. But Commissioner Mercer, welcome to Bankless for the first time.

• 6:52Speaker 00

  Yeah, thanks for having me on.

• 6:54Ryan Sean Adams?

  Well, it's great to have you. So it's been a while since we've had a somebody from the CFTC on. I believe, David, if like you might recall this, so I think we had Brian Quintenz on. That's right. That had to be like two or three years ago. A while ago. And then we had a former chair, Chris Giancarlo, on the episode. He wrote a book, actually, about crypto, but we sort of like talked to him post being at the CFTC. So it's great to hear from the CFTC again, and I think we should start here. Like, just by way of recap, can you tell us what the CFTC regulates in the US?

• 7:26Speaker 00

  It's always a good place to start. I do have to give my standard disclaimer, which is the views I share today are my own and not necessarily those of the CFTC or my fellow commissioners. So kind of the basics of the CFTC, it's a mouthful to say the full name, but we regulate markets. So those markets span just, you know, it's crazy how far, when you think about it. Everything, I would say, from cattle to crypto, literally, we have markets that are, you know, determining the future price of live cattle. We have markets that are looking at, you know, what will be the potential price of Bitcoin. And we really are just overseeing the markets.

• 8:09Speaker 00

  So we're probably more product agnostic than than maybe this SEC. So we are regulated, or our markets are also, they have a lot of what we call self-regulatory functions as well. So the idea is let the markets operate. We kind of there to make sure it's a level playing field. Make sure the rules allow for, you know, fairness in the markets. But at the end of the day, we really just want these markets to show what the price of commodities will be in the future. And also where it's necessary, people can use our markets to hedge their costs.

• 8:50Speaker 00

  So that's the idea behind it. We really did start in the agricultural sector. We You know, corn, cattle, and we have come very far from there. But it's, you know, and we have, you know, markets now that are looking at everything from, you know, kind of the, the interest rates to prediction markets. So we, we cover a lot of ground.

• 9:15Ryan Sean Adams?

  So covering markets is a lot of ground. That's a very broad thing. How do you differentiate between what you guys regulate, what you guys cover and what the SEC regulates? Because I think maybe somebody in the SEC is like, well, we also regulate markets. Where is that line? Where is the line between the CFTC and the SEC?

• 9:35Speaker 00

  So I'll probably answer this as the, you know, is it a commodity or is it a security? And that's, it's a simple question with a complicated answer. What I try, I try to simplify it to, you know, everything that's bought and sell, sold in commerce is a commodity. And it's a commodity until somebody calls it a security, essentially. So, you know, we can deem something a commodity under our jurisdiction, except for onions and movie theater tickets, which is a long story. But we, everything that's got bought, sold, it's a commodity. But if the SEC comes in and says, you know what, we think this fits our tests and this is a security, then it becomes a security. So you can actually, securities are commodities.

• 10:20Speaker 00

  So I think this gets, this is where it gets really complicated when people are saying, you know, what's in your jurisdiction? What's in the SEC's jurisdiction? Our jurisdiction is really everything bought and sold until the SEC comes in and says, you know what, this is, this is somebody trying to raise funds. This is someone raising capital. And now it's a security.

• 10:40Ryan Sean Adams?

  Okay, so the default for assets in markets is that they are all commodities unless the SEC says that they're a security. And hopefully the standard is more than the SEC actually claiming something is a security, right? They actually have to prove that it's a security in court and they can't be quote unquote arbitrary and capricious. But let's talk about like some real world assets then and run it through sort of the test of is it a commodity or is it something else? And by the way, is there another category? Is like there, are there commodities, securities and other things like currencies? Or are we just commodities and securities when, when the US looks at regulation in asset markets?

• 11:19Speaker 00

  You know, when you start to talk about currencies, you know, that is somewhat of another category.

• 11:24Ryan Sean Adams?

  Okay.

• 11:25Speaker 00

  You know, when you talk about foreign currency exchanges, we call that Forex or, you know, foreign exchange. And that has been regulated, you know, more on the commodity side or a commodity future side, because it looks a lot like a futures product. And, you know, we have other kind of categories like, you know, baskets of swaps that become, you know, a type of a security or under our jurisdiction as a swap. So it does get much more complicated than that. And certainly there are some tests that the SEC will hopefully use before they declare something as security.

• 12:06Speaker 00

  And then there are times where we may have an asset class that goes back and forth between a commodity and a security. And we have to do constant analysis between the two agencies of whose oversight is it. You know, it can get, it can get pretty complicated. But when you look at it in the basics, and I often use cattle because I grew up on a cattle ranch. But, you know, cattle, they're not, they're not a security. They're a physical commodity. You're, you're buying it, you know, you're either buying it at the auction house or you're selling it at the auction house. Presumably you're selling it for money and you're buying it for food. You're not, you know, trying to raise capital through some kind of, you know, common enterprise.

• 12:47Speaker 00

  So that's kind of the basic idea of, you know, where a commodity sits. And then, you know, we have our markets that are looking at, okay, what will that price be the next time I go to the auction house?

• 13:00Ryan Sean Adams?

  Yeah, this is interesting because this comes into play with like the Howey test, right? Which was like an orange grove. By the way, I'm not like a legal expert, but it's like, forgive me if I like screw up the details here. But basically, if you did something.

• 13:13Speaker 00

  I do it all the time.

• 13:14Ryan Sean Adams?

  Yeah, okay. It's like if you did something, you took oranges or cattle, let's say, which are commodities. And you sort of grouped these together and you issued like, you know, cow token security, something like this as a stake inside of this like, you know, fantastic cow. Opportunity that I as a company am going to create value for. Then you can transform commodities maybe into securities. It's what my understanding of the Howey test was all about. Anyway, enough about Orange Groves because, gosh, we've talked so much about that. We could run through a basic test. So in the real world, we have these things called like collectibles. Like baseball cards are are collectibles or like Pokemon cards. You like maybe famously in front of Congress are are collectibles in the in the real world.

• 13:57Ryan Sean Adams?

  Are collectible, are baseball cards commodities and why?

• 14:01Speaker 00

  I mean, they are, you know, but they're not something that that requires regulation. Right? Like they're not, there's not necessarily a a market where buyers and sellers are being linked up. I mean, yeah, you may say if you're going to a trade show with your baseball cards. But, you know, I think there are certain things in interstate commerce that don't really make sense. And the the idea of, you know, would these fall under your jurisdiction, you know, CFTC? And part of it is we look at, you know, would these commodities be, you know, part of our markets? Would somebody offer a futures product on a baseball card?

• 14:46Speaker 00

  I guess they could. And in that case, that might change the the narrative a little bit. In fact, before before Dodd-Frank, the narrative really was if we have products on our markets, trading, you know, futures products on on a commodity, then if there's some sort of manipulation that's affecting that futures market, then, you know, we could possibly go in with enforcement. Dodd-Frank broadened our fraud enforcement to basically all commodities in interstate commerce. And so then it gets a little more tricky as to, OK, how do we make sure we're not doing something like, you know, going after some sort of fraud in a Pokemon card, you know, game

• 15:28Speaker 00

  or, you know, a school, a school ground dispute over, you know, who, if you traded equal, you know, Pokemons here, I think that's how it works. But Um, you know, and a lot of that just goes to this idea of, you know, is there a market with kind of broad buyers and sellers coming together to who want to be selling these in a way that, you know, can show, can give you some price discovery that can kind of tell you like, what's the price of this market look like?

• 15:57Ryan Sean Adams?

  So I guess there's an element of scale here and it sounds like the CFTC's job is just like, when there's like enough scale in any kind of like market, then your role here is to, to make sure that the market works and it's efficient and it's like, like neutral and there's not players who are kind of like manipulating it in some way. What's really interesting about cryptocurrency, of course, is like, we can achieve scale for things that look a lot like collectibles or baseball cards very quickly. And you can even think of a world of like gaming assets, you know, and if you have some sort of massive multiplayer RPG and there's like a flaming sword item drop in some sort of game and that gets represented as a digital token, as an NFT inside of some platform.

• 16:40Ryan Sean Adams?

  And suddenly there's this massive, we could scale this to like hundreds of millions of dollars or even billions of dollars of market activity for virtual gaming items. Well, that's kind of a weird market that the CFTC has not sort of played in because with baseball cards, you might scale this to like, you know, trade shows or something like this, like private markets, garage sales and the CFTC, it's not a big enough market to get involved, but maybe when we have gate of gaming items and they're in the tens of billions of dollars, maybe the CFTC does need to take note when there's sufficient scale. Like, what's your take on this?

• 17:11Speaker 00

  So this is one of my favorite kind of, you know, slippery slope arguments that I make a lot internally. This idea that like, if we keep going down this road of like, you know, we wanted to start calling more and more things under our jurisdiction and bringing enforcement cases, there will come a day where I'm suddenly regulating my son's Roblox game and his like skin purchases, all the weird purchases that he makes inside that game.

• 17:38Ryan Sean Adams?

  Right.

• 17:38Speaker 00

  Uh, and I'm like, I don't think that's what we want to be doing here. That seems, that doesn't seem like where we should be spending our regulatory. Oversight and time. So I think there is a little bit of that, like, we've got to be smart about where we're going and where we want to focus. And honestly, sometimes it is this idea of there are other agencies able to look, you know, to prevent fraud in these in these places where we really don't have a business regulating, you know, sometimes I will say to our enforcement team, isn't this the FTC, the Federal Trade Commission? Maybe they've got statutes that apply, you know, if there's there's something fraudulent

• 18:20Speaker 00

  going on in a market, maybe they're the right regulator. Maybe it's the state attorney general's office. There, we're not the only regulator in town, and we don't have to cover every market. And so I think we do have to be careful because we could head in that direction. That was, this was an argument I made a lot when we started talking about NFTs, and whether or not, you know, that would be an area of regulation for us. And that was my thing. I'm like, we started down that path, and we will definitely be regulating Roblox, and I don't want to do that. So I think it is a, you know, it's kind of a slippery slope joke, argument, but I don't think it's that far out of like, where do you, where do you end this?

• 19:02David Hoffman?

  I want to open up the conversation around the idea of a digital commodity. Because as I was learning about the world of commodities, I understood commodities to be things like resources that are found growing somewhere, or just like mined somewhere that are physical on the planet, like gold, clearly a commodity, coffee beans, wheat. These are kind of like the things that we use to describe what a commodity is, even energy. And then this like weird thing Bitcoin comes around and blows everyone's minds about like, what is possible here? And then like this idea of like, oh, it's a digital commodity starts to be like thrown around the industry. And then, but there's a line that is crossed there because Bitcoin, even though it has very like a lot of commodity like properties,

• 19:46David Hoffman?

  it being software and human created from inception is just weird. At least when you compare it to like the other commodities that I mentioned, you know, coffee, wheat, energy. So like, So like one example, one possible conversation is like, whoa, the CFTC has been set up in a way that is like ideologically pure in a way that like even though Bitcoin's so new, it still fits into our regulatory framework because a commodity is a commodity and things can fit and cannot fit. Or it's like, well, the CFTC is just looking to regulate things that it just wants to regulate and Bitcoin is close enough. So let's lump it in there. Can you talk about that chasm of like hopping over a digital commodity and what like maybe the conversations in the CFTC are like when it comes to regulating whatever

• 20:30David Hoffman?

  the hell digital commodities are?

• 20:32Speaker 00

  Right. No, and I think this has been a struggle internally and certainly we do a lot of work with congressional offices and the committees on as they try to create legislation and how do you define a digital commodity has been difficult to kind of narrow that. And you know, I think part of it is we have to remember that you can put a lot of things on blockchain or however, in distributed ledger, any kind of asset, is that then a digital commodity? And are we suddenly taking that out of some other regulatory sphere and saying, whether we're looking at legislation or whatever, are we putting it in the CFTC

• 21:14Speaker 00

  when that really doesn't make sense? So it's a conversation that's ongoing and something that we're trying to understand. As far as like, you know, when you look at Bitcoin, theoretically or in practice, and we do this, we do have enough authority through our broad enforcement authority to go after any kind of, if there was fraud and manipulation in the underlying Bitcoin market, I think that is pretty impossible to do. But if there was, we could go after that with our enforcement authority. But as far as regulating Bitcoin broadly, we really don't have any authority to do that. Where we do have authority is

• 21:56Speaker 00

  if somebody is trading Bitcoin or any kind of crypto or digital commodity and they're not delivering it within a certain amount of time. I think we've got a 28 day. Kind of threshold. And at that point, then we say, well, then that's a future. And you know, now you've gone from like moving a commodity back and forth. You've now created a future because you haven't delivered it within a certain amount of time. And so that's kind of the standard that we're using right now as far as, you know, when somebody would have to come in and, and, um, you know, become some sort of market category

• 22:36Speaker 00

  um, at our, at our agency uh, to be regulated. But otherwise, you know, the idea is if there's some kind of, you know, manipulation fraud going on that we see and we have some markets trading on that, then, you know, we'll probably go in with our enforcement team.

• 22:54Ryan Sean Adams?

  As we talked about earlier, um, like by default, everything kind of digitally would be a commodity unless the SEC somehow like declares jurisdiction over a set of digital assets. Right. Which kind of implies there's this interplay between the CFTC and the SEC with respect to digital assets. I'm wondering if it's like there's been consensus clarity because to the CFTC, all the digital assets basically are commodities, right? Starts as a commodity unless told otherwise, or you know, some consensus outside of the CFTC determines otherwise. Right? Okay. So what have been consensus uh, items, tokens, assets that are commodities that like maybe all agencies agree upon? Certainly has to

• 23:36Ryan Sean Adams?

  be Bitcoin because now we have ETFs, I think. And also Ethereum maybe also has crossed that, that threshold. Can you talk about those assets? And are there any other assets that have crossed the threshold of like, from the US government regulator, finance regulator perspective, these are clearly commodities?

• 23:55Speaker 00

  Bitcoin, I think, has not been in, in debate at all. You know, that is, that is clearly falls in commodity category. It doesn't have the um, characteristics of a security. And the SEC has never argued that. ETH was that way up until recently. And then there seemed to be this question, especially after they changed, um, going from, you know, to change kind of their underlying proof system. But I think we've finally got that back on track where, you know, that is, that is not a security and that's not being treated such. Then you get into a lot of additional coins where we're going kind of one by one. And where this comes up, unfortunately, is in enforcement cases.

• 24:38Speaker 00

  So, you know, whether you're going after an FTX or somebody like that, we're literally trying to divide this up with the SEC enforcement team, saying, okay, which one do you guys think is a security? So you charge that and then we'll charge the others. And sometimes we don't agree. And the problem becomes if they bring in their case and they'll say the judge says, yeah, this isn't a security. And we haven't brought that up as part of our case. You know, you're missing sometimes a big part of, you know, charging in a fraud case. So it is tough to kind of be in that position

• 25:19Speaker 00

  where you are constantly going back and forth with every single token out there. I can't think of another one where we have said definitively, everybody agrees, this isn't a security. You know, maybe we feel that way, but I certainly don't think I've heard, you know, the SEC say anything other than Bitcoin and Ether fall into that category.

• 25:43Ryan Sean Adams?

  What's the solution to this? Is it legislation that just has clear definitions? Is that what we're lacking? Or is it impossible to have clear definitions for what's a commodity versus what's a security and thresholds?

• 25:55Speaker 00

  No, I think we can do it. As much as I hate saying that we should have more laws, that's not my kind of philosophy in government. Here's one place where we do need, we need legislation. And it's not necessarily that they're going to give us this clarity upfront in the written legislation, but giving us some kind of authority and almost a demand that the SEC and the CFTC work together to create a framework. So it's very clear when you're bringing something to market or anything that's already. You know, on the market that there's a clear line that says, you know, here, here's what meets the security and becomes a security. Here's what does not.

• 26:38Speaker 00

  And we kind of had to do that after Dodd-Frank and we were able to figure it out. It's not fun to do joint rulemaking, but we can do it. And I think that's what needs to happen here is we need Congress to give us, you know, the authority and then also direct us to sit down and do joint rulemaking so that we have a clear framework for these tokens.

• 26:58David Hoffman?

  Is this kind of just how it goes with the SEC and the CFTC? I'm getting like the vibe of like, there's this like ancient rivalry between the CFTC and the SEC. Like, like, you know, Army versus Navy, you know, Duke versus Yale. And like, so first, like, there's this new thing that has to be like contended with. And the CFTC and the SEC do their respective, sometimes incompatible, rulemaking. You guys just like jostle it out for a little bit. And then finally, pretty late to the show, but eventually legislation passes and hopefully we get it right. And that's just kind of how this whole thing works?

• 27:34Speaker 00

  I think it depends on who's in leadership. I did work at the CFTC under Chairman Heath Tarbert, and he had a great relationship with Chairman Jake Clayton. And everything was very well coordinated and a lot of communication back and forth between the leadership, you know, the chairman level. So I think it depends on who's in charge. Certainly, the narrative, I think, kind of creeps in. And the reason for that is really unusual. It's because of our committees of jurisdiction in Congress. So we are actually under the Senate and House Agriculture Committees. And there's been a longstanding kind of feud between the Agriculture Committees

• 28:18Speaker 00

  and the Senate Banking and the Senate Financial Services Committee over jurisdiction of the CFTC, because we have moved so far from just agricultural. You know, markets to a much broader range of markets. And so there's been this thought of like, well, maybe the egg committees are not the right place for jurisdiction over the CFTC. And so I was, I worked in Congress for most of my career. And so I kind of grew up around that distinction or that kind of fight of who had, who should have jurisdiction here. And I think it's really just kind of played out too at the agencies a little bit. And but I really do think, and sometimes, you know, in Congress, most people talk about

• 29:03Speaker 00

  Democrats versus Republicans, but sometimes committee jurisdictions can be just as big of a fight when you start, when you get down to it. And this is the one that's been out there for a long time. And it's just kind of a perennial issue that we are always, you know, they're always debating who should have the jurisdiction here.

• 29:20David Hoffman?

  You use the word feud, all of this, is this a feature? Or is this a bug? Like, are we wasting time in government with too much bureaucracy, like fighting with a lot of energy over just like things that could just be fixed better, more easily with a better mechanism? Or is this just how our country works? And this is part of just the process? Like, is this a feature or a bug? How do you think about this?

• 29:43Speaker 00

  I think it's a feature because I think if it was too easy, then we would just have too much regulation. You know, I think if, if there weren't these kind of natural, the natural friction, you know, between the various branches of government, but also the different agencies, you know, you could see one agency kind of just run and take all the jurisdiction and pass way too many regulations. And so I think it's good to have that friction because it does slow down those people who want to go too far, who want to overregulate. And so I always think it's good. It's healthy to have that debate. It's healthy to have that disagreement.

• 30:26Speaker 00

  And I think it's actually a feature of our system.

• 30:29Ryan Sean Adams?

  This term overregulate, I want to get to that because that has been kind of the criticism coming out of like the crypto industry to some of our regulatory bodies in particular. I'm sure you've witnessed it, like the crypto industry, the Bankless Podcast. We welcome Chair Gary Gensler on the podcast, of course, but we've been very critical, let's say, of some of his activities with respect to crypto. And the worry here and the concern is overregulation. I want to make a distinction between the SEC and the CFTC because I think like you guys, your different regulatory agencies sort of have different views of the world, right? So the SEC in its purest form is certainly about markets, but it's mostly about providing disclosure to like investors in markets, right?

• 31:14Ryan Sean Adams?

  And that's fair because for securities, there's all sorts of information that investors can't see in the open market, right? And so you get good disclosure programs with like quarterly earnings reports and annual earnings reports. You could see kind of executive compensation. All of these things are very important for centrally managed assets where that information just isn't available to investors. And so transparency and disclosure is like pretty critical. Whereas the commodities exchange, the CFTC, is much more used to asset classes that are already fully disclosed, right? I mean, like what more information do you need about a barrel of oil? It's a barrel of oil, right? Or like one cow versus another cow.

• 31:59Ryan Sean Adams?

  I mean, like they're both cows, right? They're very, I guess, you know, fungible types of objects. And in addition, all of the information is kind of already disclosed. I mean, like we, you can view some of the elements on the periodic table of elements, right? I mean, these are what commodities like iron are like are there for. And so I think that's why the CFTC has sort of approached crypto thus far with, with kind of a lighter touch is because it recognizes in these assets that all of the information is kind of like publicly available. Like it's all on chain. You want to go audit the supply of Bitcoin or Ether, the asset? You could just run a node and you could see it. Or if you want to look at the properties of a decentralized finance protocol,

• 32:42Ryan Sean Adams?

  like you can open source the code and you can like view what's in it, which has made the CFTC have kind of like a lighter touch thus far to crypto. I'm wondering if you can kind of comment on that, like just general view of the world? And if you think that sort of impacts the way you look at digital assets? Because from the SEC, they're like, you know, there's something that we need more disclosures. We need to kind of look at it. We need to control it. We need to enforce certain regulatory properties. Whereas to the CFTC, everything is kind of like already disclosed in crypto, because Bitcoin is similar to cattle in that way.

• 33:17Speaker 00

  Yeah, and you know, one thing I always emphasize with people, because the lighter touch, that doesn't mean hands off. You know, we do know what's going on in our markets. We do make sure that the people who are in our markets know where their money's going. And, you know, they know that, especially with a lot of these products, you could lose a lot of money. I'm not saying in crypto, but these are in some of the other markets that we regulate. You know, you put a lot of money at risk. And so making sure people know that. But yeah, to your point, you know, there's what's interesting about a lot of our futures products, futures, options, and even swaps is there's a regulator regulating the underlying market.

• 33:59Speaker 00

  So again, I go back to cattle all the time because it's so easy and it's so easy to visualize. USDA is regulating these auction houses where the cattle are bought and sold. They're deciding, you know, is this, is this, you know, calf, does it meet these standards that it's saying it meets to sell into this market? So we have that kind of assurance when we are looking at our markets that there's somebody already looking at this underlying market. And for the most part, you know, there's not too many things where that doesn't take place. I mean, you get into some of the metals, there's some question around, you know, who's really kind of looking at, you know, the buying and selling of some of these metals. But you know, same thing with oil, you know, you know exactly what kind of oil is

• 34:44Speaker 00

  you're buying and selling in these contracts. And there's someone else that is verifying that.

• 34:51Speaker 00

  And so I think that's because of that, we've been able to be a little bit more, like you said, lighter touch, not as heavy handed, not as demanding. And, you know, letting the markets, you know, offer the products that their investors want. And just making sure that the rules of the road are clear and that people are abiding by them. And I think that's why, you know, people tend to think we would be the better regulator of crypto, because we're not going to be heavy handed in that, you know, underlying, what is, what is this asset, you know, it's more, listen, if you buying and selling in this market, you know, just making sure the rules are abided by

• 35:34Speaker 00

  and that people know what they're buying and selling and that it's clear, you know, whether it's, you know, you know, all that's disclosed, you know, making sure that people have access to that information. And then we can really let the markets do their thing without coming in and stepping on top of them and, and, you know, slowing things down. I think the other piece we have, because I mentioned the self regulatory function, we have something that's called, you know, self certification. And so if you are an exchange, you can say, I'm going to bring this product to market. I think it, it meets all the regulatory requirements. I'm telling you right now, CFTC, that tomorrow I'm going to list this product. And they can list it. And very rarely do we put a stay on that.

• 36:18Speaker 00

  So the idea that you can move that quickly and offer a new product is really unique to the CFTC. And I think it's something that would, you know, really help or it would be a feature that would work well with, with digital assets because you could quickly, you know, innovate and bring new products to market without having to wait for however long, you know, for someone to, to approve it. I mean, just ask those who are waiting for their EFTs to be approved by the SEC.

• 36:50Ryan Sean Adams?

  It was a decade.

• 36:51Speaker 00

  So it's, it's kind of a unique feature on how we, our markets operate. But that's because we really want our markets to. Be able to bring the products that their investors want and not those products that government says, okay, we're okay with this now.

• 37:10Ryan Sean Adams?

  Yeah, and there's certainly room for improvement. I mean, we felt that, I mean, the SEC currently has like some sort of Wells notice or enforcement action against like six US crypto companies that are just like fantastic companies with fantastic projects. And it's hard to find a way forward for that under the current regulatory regime. But, and so you mentioned the CFTC may be a better home for some of these assets. You said better, but that doesn't necessarily mean perfect. So let's talk about this recent Uniswap case, which I think like raised my eyebrows a little bit. This happened last week, I believe. So I'll just, you give some context for what this case is for those who are not familiar with it. So on September 4th, Uniswap actually settled with the CFTC and there was a press release

• 37:53Ryan Sean Adams?

  on the CFTC website under the title of "Offering Illegal Digital Asset Derivatives Trading." And forgive me if I mess up some of the details, but I think the gist of it was, and maybe I'll read some of the sentences here, "In order to facilitate access to the protocol, Uniswap Labs," so distinction from Uniswap the Protocol and the company that is associated with building tooling for the Uniswap Protocol that's called Uniswap Labs, "they developed and maintained a web interface that made it available to users. Through the interface, users could trade in hundreds of liquidity pools on the protocol. Among the digital assets traded on the protocol and through the interface were a limited number of leveraged tokens." So there were leveraged tokens on the Uniswap interface, which provided users leverage exposure to digital assets such as Ether and Bitcoin.

• 38:38Ryan Sean Adams?

  So Bankless listeners can like imagine some sort of asset that's listed on the Uniswap interface that provides you to leverage like upside downside for something like Bitcoin or something like Ether, like a, you know, a 2X Ether pair. So like, you know, there's DGENs among the audience and like you want some additional leverage volatility, you could like buy a token into that on the Uniswap interface. And so the order finds that these leveraged tokens are leveraged or margin commodity transactions that did not result in actual delivery of the 28 days. So this is a thing 28- Day delivery, something that the CFTC enforces on the on the future side of things. And the net of it was basically Uniswap Labs stopped listing these tokens.

• 39:21Ryan Sean Adams?

  I think Uniswap Labs settled and so took these tokens from their interface, paid a fee, modest in comparison to SEC fees, so 175K, I believe. Modest but annoying. Modest but annoying, I would say. And this was, of course, enforcement action, right? So it was, you know, it was not rulemaking, it was not legislation. Anyway, did I get any of the details wrong? And what was kind of like your understanding of, let's say, the CFTC's reasons? Full context, Commissioner Mercier here dissented on this. But before we get to the dissent, let's, let's, let's talk about what, what were the CFTC's reasons for this enforcement action?

• 40:02Speaker 00

  Yeah, the idea is if you're going to offer these leveraged tokens that, that are now margined futures products, you need to be registered. And if you're not registered, then you are illegally offering these products. And that was their, their take. Now, what's interesting is, you know, as you mentioned, they, they pulled these, these tokens from their platform. That was actually done before we came in the door. So we had another DeFi, we call them, we call them DeFi sweeps because I think that gives our enforcement team an easy title for their press release, even if some of these cases are not exactly the same. But we had another, we charged these particular tokens with another DeFi protocol.

• 40:47Speaker 00

  And once Uniswap saw that, they actually pulled these tokens from, from their, their platform. So they, I, I think that was probably my biggest problem here is they did the right thing. And it was almost like we, we saw them, you know, we're, we're like, oh, hey, they were offering it too, let's go get them. And that's what it felt like to me in reading this. And so while I don't disagree that if people are offering leveraged margined futures products, you know, there, there's a question of, you know, do you register with the CFTC? But to do this through enforcement and for a settlement, that's, that's not how we would do that.

• 41:29Speaker 00

  If, if that is our position and we want to put that out there and tell people, you're going to have to come in and register if you're going to offer these leveraged tokens. We need to do role making to make that clear and explain how a decentralized platform could even be a registered exchange. So it's unfortunate on so many levels. You know, we were punishing someone from doing the right thing. We are telling everyone they can't do this, but we're not giving them any kind of guidance or ways to do things that we would view as, you know, appropriate. And then we just settle these cases and put this information out there.

• 42:10Speaker 00

  And that's supposed to be the clarity that others, you know, can use to do the right thing. Well, we haven't provided anything. And yeah, to your point about the $175,000 settlement, annoying for sure. That is, it's an unheard of amount to see that. Anytime we see a case where there's a civil monetary penalty that it's that low, I immediately think, did these guys even do anything wrong? Because that is, that is just, you know, even anything under like 500,000 is always a little bit surprising, but $175,000 was a shockingly low penalty.

• 42:51Speaker 00

  And to me, it kind of said, well, maybe, maybe they didn't do much wrong, but you know, we got them to settle. We got them to give us $175,000. So hey, let's, let's do this. Pulling it up. And that, yeah, it just, that, that's not right either. So it's kind of like, you know, you write a check, like, here's your check, go away. So I, that's not how we should operate either.

• 43:14David Hoffman?

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• 43:59David Hoffman?

  Uniswap Wallet is officially the preferred wallet of bankless, and it's the one we use anytime when we want to transact on-chain. Whether you're on your browser or on the go, Uniswap Wallet makes it easier than ever to swap anytime, anywhere. Use your wallet to transfer funds directly from a top centralized exchange and tapping thousands of tokens across Ethereum and over 10 other chains like Base, Arbitrum, and Optimism. Uniswap Wallet delivers deep liquidity, fast execution, and reliable quotes with zero gas swaps through Uniswap X. And when it comes to security, you can rest easy knowing it's backed by Uniswap Labs, one of the most trusted teams in DeFi. Their code is open source and independently reviewed, so you know it's protected. So why wait? Download the Uniswap Wallet today on Chrome, iOS, and Android, and don't forget to claim your free uni.eth username directly in the mobile wallet. Start swapping smarter with Uniswap. Launching a token?

• 44:44David Hoffman?

  Don't let complex legal and tax issues slow you down. Toku provides specialized support to optimize your launch and ensure that you as a founder, and your team, and your investors, get the most tax-efficient outcomes. The Toku team understands the crypto space inside and out, and will ensure your token launch is fully compliant while maximizing tax efficiency. Toku can connect you with the best attorneys if you need them to make sure that you have the best advice, and Toku can help optimize your taxes so you pay the least possible amount of taxes while still maintaining legal compliance. With Toku's guidance, you can concentrate on building your company while Toku handles the logistics. Token launches don't have to be complicated. Talk to Toku today to get a free initial token valuation. I think there's a lot being loaded up in this term "offering", and I think maybe this is also where the differences

• 45:27David Hoffman?

  between like a Web3 crypto protocol context is kind of clashing with any sort of traditional commodity structure. Uniswap, the protocol, offers any token that's on Ethereum that has a pool inside of Uniswap by default. So any token that has a contract address, you can just plop into Uniswap and it will spit you back out a pool if it has one. And so the Uniswap front-end, www.uniswap.app or .com or whatever it is, it actually, you have to opt out of having tokens. They never actually add tokens. They only remove tokens because of the nature of like a protocol. And so like, is Uniswap Labs actually offering this to customers?

• 46:14David Hoffman?

  Is that kind of a more of an open question because they're not actually doing anything. They actually have to do something to not offer it. Like they actually, it's an action to not offer something more than it is an action to offer something. And I don't think that's ever been, that like standard has never been really seen before because, you know, typical product, certain like offerings from any other sort of financial institution has to be like offered. But it's, but things are inverted here. How, how does this like change some of the calculus here?

• 46:43Speaker 00

  Yeah, that is, it's tough because then what you see is, you know, our enforcement team coming, going after the easy target, right? So that idea of just saying, well, Uniswap offered these tokens, you know, that's not fundamentally correct. But, you know, who, who else could they bring in so that they brought in the easiest kind of target here? But I think that's part of the reason why we need to go through a process of, of rulemaking. And in rulemaking has to start with discussion and, and talking amongst staff and commissioners about, how would this even work? Could we, you can't regulate a protocol, you can't regulate code. So what are we, what are we doing here?

• 47:27Speaker 00

  And, you know, are we saying to, to the market like, hey, you just need to change and become centralized and so that you can regulate with us and we can, you know, oversee this, these offerings? And that doesn't feel like the right answer either. But right now, we're not even having those discussions. And I think we have to start somewhere and, you know, and, and bring people in who can explain it to us. Because we, you know, we're, we're not the smartest people when it comes to these, to these protocols, to the way this is set up, to, you know, how these. Tokens come to market through a protocol. You know, we don't, we're not the experts here.

• 48:10Speaker 00

  So we need to bring in the experts to educate us. And then we need to have a discussion about what should happen in these, in these markets. And we just, we're not doing that. And unfortunately, because we're not doing that, the only thing we have are enforcement cases, which are really sending the wrong message.

• 48:29Ryan Sean Adams?

  Can I just say, Commissioner, thank you for saying that. Like, we appreciate hearing you say that, hearing a Commissioner saying it. Because like, the thing that you're saying is the thing that we, we keep echoing in crypto as like users of these, these protocols is just like, you can't take the existing paradigm of there being an intermediary into decentralized finance. It's just different. And so to your point of like, we can't regulate a protocol, right? You like, the question is, what is the, the CFTC or any regulator in the US actually trying to accomplish with its level of regulation? If you go back to kind of like the founding principles, which is like, you know, for the SEC is like orderly and efficient markets, that kind of thing. For the CFTC, it's probably something similar.

• 49:12Ryan Sean Adams?

  It's like you're trying to prevent, you know, like fraud and abuse of different market activity. And these, you know, decentralized protocols kind of exist. And so like, what is the purpose of the regulation? Like, asking that question.

• 49:27Speaker 00

  Yeah.

• 49:27Ryan Sean Adams?

  I, I know you dissented with the Uniswap case, and we'll get into some more details there, but I, I want to ask kind of the fundamental question, because like, the rule on the books is basically like, if you have some sort of a leveraged asset, like sort of a futures type of asset. So there's a token out there and it's doing a 2X leverage on Bitcoin or Ether, or 5X leverage on Bitcoin or Ether. Well, there has to be a process for registration with the CFTC for this, right? And to your point, it's unclear what that process actually is, how it works, like, there's like, no way to do it, so there's no, no, no solid path for that. And so in the absence of that, what it feels like the CFTC is doing, even in, in this case, is basically saying, well, if you're in the US, you just can't, you don't have access to these products.

• 50:12Speaker 00

  Right.

• 50:13Ryan Sean Adams?

  And so what, what's actually happening is The founders of decentralized derivatives futures protocols, they just can't operate in the United States. They can either do this in a centralized way, or they can like go to Europe or go to a different place and like spin up their interfaces there. And so what happens is basically, I mean, David and I have joked before that like sometimes it feels like in the US, at least with respect to crypto, we live in a financial prison. Because I go and I see a different set of assets.

• 50:43David Hoffman?

  My European friends laugh at me. Yeah, they always in Argentina, they laugh at us for like how restrictive like we our own products are.

• 50:50Ryan Sean Adams?

  Right, because like we can't, they have access to these, you know, 2X, 5X leverage Ether tokens. And like our interfaces don't, like we can't access it unless what? Unless we turn on a VPN and like pretend we're from another country. Okay, so it's like, what are we actually trying to accomplish? Because the net of it feels like we are just excluding US citizens and US entrepreneurs and builders from actually building these products here. And like, why do we, this is the United States of America. Like, why are we doing that sort of activity? So I'm glad you're asking the question of why. But like even this, is it the case that American citizens shouldn't have access to these leveraged tokens?

• 51:30Ryan Sean Adams?

  Or like, what is the purpose of the CFTC sort of registration of these things in the first place?

• 51:36Speaker 00

  Yeah, I mean, I think the idea is, you know, playing kind of devil's advocate here. It's this idea of, you know, if you're gonna, if you're, if you are handling other people's money, you know, that comes with some responsibilities. And that's always been how we've looked at it, at least in financial services broadly. But, you know, I think this is a little bit different here. And we maybe need to take a little bit different view of, you know, why are people in these markets? What are they trying to accomplish? And, you know, why does traditional regulation maybe not fit here? And, you know, I think part of the discussion should be, do we want to regulate this space?

• 52:19Speaker 00

  You know, is there something where we could say, okay, if you are clearly decentralized and you meet all this criteria for you to say, completely decentralized, nobody's controlling this, everybody who is, you know, on these platforms, trading in these assets, you know, they are, they are 100% in a decentralized, you know, kind of environment.

• 52:44Speaker 00

  You know, maybe that is an area where we don't need regulation. I I don't know, but we've never had that conversation to know. And so it tends to be that we just jump to a conclusion and say, we're gonna do this. We're gonna regulate without understanding, you know, what we are regulating or why. To your point, you know, it we should be focusing on what the outcome is. What do we want to accomplish here? And all we're doing right now is running, driving this offshore. Um, I think it's naive if we believe that people aren't accessing these markets. If, you know, American citizens aren't accessing it. I think people know how to get to them if they really want to.

• 53:24Speaker 00

  And to me, you know, there's danger in US dollars going offshore constantly. And I think that's another thing we have to be mindful of. If if we run everything out of the country and regulation says you can't operate here and it goes offshore. But people want to be in these markets. You know, that creates a whole new set of problems for us. So I think it's just, it's a matter of like sitting down and understanding what we want to accomplish, what we want to see and

• 53:56Speaker 00

  understanding the underlying technology and kind of the motivations of DeFi and, you know, the protocols that they put in place in the markets um, that that are, you know, operating on decentralized finance. And we just haven't done that.

• 54:12Ryan Sean Adams?

  Yeah, and I think that the conversation on the crypto side can sound like to regulators in the US, like crypto doesn't want any really regulation, like stay out of our, like stay out of our zone and stay out of our business. And I don't think that's the case. Like what we want is a regulation that makes sense. And we actually think that decentralized protocols can be like a regulator's best friend. Like if we figure this out, uh, you guys might start to prefer DeFi assets versus traditional assets. Why? Because you can audit it all on chain. So think of the CFTC sort of regulating a crypto market in these leveraged tokens by like, uh,

• 54:54Ryan Sean Adams?

  Analyzing the code and creating a dashboard of which assets are actually backed by what collateral sources and how they're backed and provide us sort of like an index of a safety for these various assets. And if it meets the threshold, then it's, you know, CFTC approved, you can audit it on chain and there's a CFTC slash, you know, .gov slash, you know, DeFi dashboard and you could like, these assets give you unprecedented access to transparency as regulators. And I think there are ways to marshal that and move that forward. Let's get back to the, to the Uniswap case really quick because I'm getting into futures there and you'd have to hire some smart programmers in order to set that up and that might be a few years down the road. Okay, so what do you think

• 55:39Ryan Sean Adams?

  should have been done in the Uniswap case, like specifically and, you know, versus what was actually done with this enforcement action?

• 55:47Speaker 00

  We should have recognized that, you know, they did what we wanted them to do, which whether or not that was, you know, what they had to do by removing those tokens, but they did proactively. So when we went in, you know, when our enforcement team went in to talk to them and they said, hey, we've taken, we've removed those tokens. They're no longer, you know, on the, on the protocol. We should have said, okay, thank you. Thank you for doing that and walked out the door. We, we had no business continuing down this line and getting it to a point where we had to settle with them. I say that sometimes to our enforcement team. It's okay to say, you know what, you did follow

• 56:29Speaker 00

  the law. Thank you. You know, it, sometimes I feel like we go in there and it's like, well, we've already started something, so we can't back out. And it's, it's also okay if you look at something and you say, well, you were doing something wrong, but you corrected it and you did, you know, you mitigated the problem. It's okay to say that is the right outcome and we're not going to charge penalties because you did the right thing. That is never the way this works. So I honestly think, you know, one, I don't think they should have even spent their time doing this. We have so much other fraud and it is fraud. It's not, you know, people like to call it crypto fraud. It's just fraud. People are just taking people's money and said they're, they're just,

• 57:14Speaker 00

  because they say they're buying crypto, we call it crypto fraud. I'm like, that's just the same old fraud we've seen. It's just fraud. Yeah, exactly. And so let's concentrate on that where people are are literally like losing their retirement in some of these pig bird training schemes and stuff. Let's focus on that, not Uniswap and getting $175,000 penalty, you know, from from Uniswap for essentially doing the right thing. So I just think sometimes we we get caught up in these, you know, what's going to get us headlines. And that doesn't seem to be, it's it's just

• 57:56Speaker 00

  a waste of our resources when we have plenty of other fraud to to go after.

• 58:01Ryan Sean Adams?

  So thank you for writing that dissent. And for Bankless listeners, we will include a link to the full dissent. I encourage you guys to go listen to it. And I think this makes a meta point of how different regulatory bodies in the US are like actually work, right? Which is at the CFTC, are there five commissioners at the CFTC in the same way there are with the SEC? Yeah, five commissioners?

• 58:23Speaker 00

  Yeah.

• 58:24Ryan Sean Adams?

  And there is the ability to dissent. So it's not a monolithic organization. So you obviously feel the freedom to dissent with some sort of sort of action the CFTC is taking. What gives you that ability? I mean, people are, you know, used to working in corporations where if like you dissent with your boss, I mean, that's a good track to kind of like get fired. That is not how the CFTC or even the SEC is structured, right? Commissioners can dissent all of the time. And you feel the freedom to do this? How can you give us some insight into how this governing body actually works?

• 59:00Speaker 00

  It's interesting because we are a five person commissioner with the chairman, who is a member of the president's party. And then there the majority. So there's always three commissioners that are members of the president's party, and then two minority commissioners. So in this case, Commissioner Pham, Carolyn Pham and myself were the two Republican commissioners. She also wrote an excellent dissent on on Uniswap as well. But so naturally, there was a little bit of that kind of, you know, democratic approach to our decisions and our votes, you know, where the majority rules. So, you know, we can dissent, we can do it very publicly.

• 59:41Speaker 00

  And sometimes you can convince fellow commissioners who may not be in your same party that, you know, what our actions are, you know, headed in the wrong direction. And so that's part of our discussion. You know, we, we do have rules where we can't all talk at once unless we're in either a public meeting or we have deemed it to be such that we need to keep it closed. So a lot of times our enforcement cases are discussed in closed meetings. But when we deliberate, we have to have some kind of formal procedure with a record. But individually, we can have discussions and talk about, you know, here's my problem with this case, or if it's rulemaking, here's where I need to see changes. So it is a pretty democratic process.

• 1:00:25Speaker 00

  Now, I will say with enforcement, it's tough because by the time it comes to us for a vote, it is far down the line. So, you know, Uniswap's a great example. That came to us with every, the papers all signed. Uniswap signed the papers, we've signed the papers, we're just voting on whether or not to file those papers at that point. So we don't have as much kind of control when it comes to enforcement. And that's where you'll see more dissent is on the enforcement side because we really can't change the course once it gets to us, which is unfortunate.

• 1:00:57Ryan Sean Adams?

  Well, how, how does the machine decide what to, the CFDC machine decide what to enforce? Like if it's not kind of like the commissioners via vote?

• 1:01:06Speaker 00

  A lot of times that is set kind of the agenda. I don't want to say agenda because enforcement is not an agenda, but you know, it's an outcome of who's in control, the kind of position of the chair. And usually each chairman will bring in their own head of the enforcement division. And that really, you, you see the types of cases and, and kind of the approach, a lot of times based on, you know, that interaction and that individual. So. You know, a few years back, we had a lot of cases around the spoofing activity, putting in false orders and pulling them once the markets reacted. And that was really initiative of the current chairman at the time and as enforcement director.

• 1:01:48Speaker 00

  So it is a bit of a, you know, comes from the top as far as here's what we want to do. And Chairman Benham has been very focused on what he calls crypto fraud. Again, I'll go back to the fact that it is rarely crypto fraud.

• 1:02:02David Hoffman?

  Those are his words?

• 1:02:03Speaker 00

  Just fraud.

• 1:02:03David Hoffman?

  He calls it crypto fraud?

• 1:02:05Speaker 00

  He calls it crypto fraud. And you'll see in my dissent, I actually quoted him back from his hearings before Congress about, you know, how we need more resources because we have to go after all this crypto fraud. Again, I still, I don't think those numbers are real, but my point was then why are we going after Uniswap if we had such, you know, limited resources? Why are we spending our time here when we have all this other fraud to go after? So he has been very focused on trying to be tough in, you know, crypto broadly and kind of all that comes with it. So I think that's why, you know, you've seen these DeFi cases lately.

• 1:02:50David Hoffman?

  Commissioner Mersinger, there's a growing elephant in the room, I think, between our crypto industry and the CFTC, which is the growing significance of prediction markets.

• 1:03:00David Hoffman?

  Or what, I don't know if you guys call them prediction markets or if there's a different technical term that you guys have.

• 1:03:05Speaker 00

  Binary options, but prediction markets is so much more like just

• 1:03:09David Hoffman?

  User friendly.

• 1:03:10Speaker 00

  You know, self explanatory, right? Binary options, what does that mean?

• 1:03:14David Hoffman?

  Excuse me, binary options markets. I'll hold my pinky up as I say that. We think that prediction markets are one of the coolest things to come out of the crypto industry. And I think I can speak on behalf of the industry here, probably like a top 10 use case that I think we've ever created. I think generally the industry by and large is wholly excited about the potential here. And there's a lot of people like going back and forth on like how this can impact culture, impacts society that uses a robust set of prediction markets. I'm wondering, maybe you can speak from the perspective of the CFTC. When the CFTC looks at prediction markets, what does the CFTC see?

• 1:03:54Speaker 00

  So, and cut me off if I get too long-winded here because this is an area that I get Excited about because it's where legislation really hits regulation. And so because I had the career in legislation, you know, and interpreting what Congress wrote is, I'm like, I'm not good at everything, but I'm pretty good at looking at a statute and saying, I think I know what Congress meant here. And this is a, this is the struggle we're having where, you know, Congress put a provision in Dodd-Frank. We've always had binary options and we've always had kind of these forecasting contracts, mostly around weather and stuff.

• 1:04:32Speaker 00

  But Congress put in a provision in Dodd-Frank that gave us a little more jurisdiction on limiting the types of these contracts that may come to market. And they listed out, you know, it's like assassination, war, terrorism, anything against state law and federal law, gaming. These are, and anything that we decide is contrary to the public interest. And so we were given a pretty clear, actually, I think, pretty clear statutory authority of how to handle this.

• 1:05:05Speaker 00

  The agency historically has not liked election prediction markets.

• 1:05:12Speaker 00

  Some of that comes from Congress, actually. Congress hasn't historically liked it. In fact, you know, it's, that's part of the reason we had kind of were given more jurisdiction over this area. But I also think Congress didn't say to us, you should be on election markets. That they could have put that in the statute. They did not. So what we have done is we have decided that they're somehow gaming and they fall into this gaming category that's in the statute. It gives us a lot of flexibility to say, you know, this could be gaming. You're playing a game.

• 1:05:47Ryan Sean Adams?

  And by the way, when you say gaming, you're talking more like gambling, casinos, that sort of thing. That's what you mean by gaming. We're not talking about like, you know, video games here.

• 1:05:55Speaker 00

  Right, exactly, exactly. The traditional gambling, you know, things that, and to, I think the reason Congress did that is because they didn't want. You know, kind of futures markets on, you know, what would be sports, you know, gaming, you know, gambling, you know, sports betting. At that time, it was it was against federal law to, you know, that's that's part of the reason why. But we've used that and tried to wrap in election contracts. And it has created this, what I have called many times, kind of this framework of of chaos within the agency where we are in these court cases now.

• 1:06:38Speaker 00

  We have a rulemaking that we literally just are approaching the rulemaking. A federal judge just said that we can't use that approach. And we have made it very difficult for these these markets, even somebody who is a registered market, to offer these products in the United States. And again, we are pushing things offshore and saying that, hey, you know, US US people can't, you know, be on these platforms. So we've just created the situation where I don't know how we get out of it. I don't know how we I don't know how we get back to a place where we recognize like,

• 1:07:18Speaker 00

  you know, if you're a registered market under the CFTC and you are offering these products, we've got the right regulatory regime in place, we can make sure that those markets are operating as as they should and that, you know, they're not subject to fraud and manipulation, there's no insider trading, those sorts of things. Then then let's let's do that. Let's not kind of try to make the statute say something it doesn't or use it in a way that's most convenient for us just to say no. And that's where we are with these markets right now. And it's it's messy. And I think we have not recognized their use case that I I think a lot of people are

• 1:08:00Speaker 00

  now understanding why, especially around elections, why these markets are so popular because they do actually provide a pretty good prediction model that traditional polling has maybe not been able to do within the last 10 years. So. Just at the end of the day, the agency has not loved election contracts and that has created a real problem for prediction markets broadly.

• 1:08:30David Hoffman?

  One of the reasons why I called this the elephant in the room is because I actually think this issue around prediction markets is going to only get larger. And it's actually not just because I think prediction markets are going to grow in popularity, which I think that they do. Just to put some numbers on it, the top two prediction markets on Polly Market, number one, the presidential election winner of 2024, is at $923 million of volume, just that one election, almost a billion dollars. And then the second one has 206 million. So the top two come into 1.1 billion dollars. And those are just the top two. But if you live in the US, you can't use them, by the way. Yeah. You should specify.

• 1:09:11David Hoffman?

  But that, but these are like kind of the blue chips of like prediction markets. These are just the big ones. And one thing that we recently saw with the most recent presidential debate is like these long tail markets of people gambling on whether or not like Donald Trump is going to say a specific word or a specific phrase. And this turned into like this kind of viral, even though there wasn't that much volume on them, there was still like a pretty good, there's over a million dollars. And people were like, you know, this was a phenomenon. People were making content about this. And that also just happens to be about politics because that's where a lot of the volume is on Polly Market. But also just we're seeing some deals in the venture space on what I kind of would call like long tail prediction market like things that's not about politics.

• 1:09:56David Hoffman?

  It's actually more about events happening in like video game streamers' streams, like will this streamer win or lose on this one thing? And these are micro markets that are markets. And like you said at the introduction to this podcast, what does the CFTC do? The CFTC regulates markets. And so I remember talking to Ryan two, three years ago, as Gary Gensler was stepping into his role as the SEC. And I wrote an article called "DDossing the SEC", which is how crypto is going to make so many tokens and so many NFTs that is inherently like unregulatable, ungovernable by the SEC because of just the sheer quantity of them.

• 1:10:38David Hoffman?

  And then Ryan, Ryan like put on the Steel Man argument and he's like, well, what if, David, Gary Gensler doesn't blink and he says, yes, we do want to regulate all of those. Every single one of those things is actually like under the domain of the SEC. And so one thing I think is might happen in the world of like the prediction markets is that we are actually on day one of a 10 year long growth story of prediction market like markets. And the number of these things is going to have some sort of Cambrian explosion. And all of a sudden, the CFTC is governing over this thing that is just absolutely massive. And it's doing weird stuff like what is this weird niche event going to do on this like streaming, like game, video game streaming platform, or I don't know, weather in Argentina

• 1:11:23David Hoffman?

  somewhere? Like, is that what the CFTC wants to govern? Like, how do you think about the, just the growth of this, the responsibility over this like emerging market?

• 1:11:32Speaker 00

  Well, I think that's part of the reason that our, our kind of staff and there's this legacy, you know, kind of dislike of, you know, I say election markets, but I also think there's a bit of a dislike of these prediction markets because it is hard. It is hard to, to, you know, say, how are these meeting all of our principles that we expect a product to meet? You know, when you start talking about insider trading, you know, we will, there's a lot of these where it's like, how would you ever prevent? How would you even know if somebody was, had inside information into one of these events? And it's trading on it. It's really difficult to do that. And so our rules are not necessarily fit for purpose here.

• 1:12:15Speaker 00

  And this is another thing that we've been dealing with is this idea of, okay, you know, we have this statute, the, the markets are growing exponentially. And even if we brought everybody in and they were all able to register, and this is an area where we actually do have kind of the, the framework to register. How do we police these markets? How do we make sure that, you know, people aren't being, manipulating them? And I think that, that is not, there's not an easy answer. I think we could probably look at taking a step back and maybe considering, do we need to create a new registration category and look at these products differently than we do

• 1:13:00Speaker 00

  our other markets? Commissioner Pham has made this point a number of times that maybe we do need to consider that there needs to be a new registration category where we, you know, for binary options or predictions. The other piece to this is the market structure tends to be different than our traditional markets. Again, to your point that we really like traditional markets, but here's another area where, you know, intermediation doesn't make sense. Why, if you're a retail participant, you know, putting a dollar down on a prediction market, why would you need an intermediary there? And so then it's that question of, okay, well, if you take the intermediary out, do you go directly to a clearinghouse then?

• 1:13:45Speaker 00

  Well, that's not quite right either because the clearinghouses don't have the same rules where you'd have to check for, you know, KYC and AML. So we, it just doesn't, the market structure doesn't fit right. And a lot of these markets also have kind of affiliated market makers where they have their own, you know, kind of affiliate taking the other side of some of these markets or kind of propping up some of these markets. So that has been a challenge for us and it doesn't really fit into our current regulatory structure. So I do think at some point we're going to have to take a step back, look at these markets

• 1:14:25Speaker 00

  on their own, not try to fit them in with all the other markets that we have and maybe come up with some new rules of the road. Also, you know, how are we going to review all these products? I think that's the other piece to it is like, you know, they can self-certify. Normally our exchanges, they don't, they're self-certifying, you know, a few products a quarter, if that. These are like daily new contracts coming online and we're supposed to look at what they've certified and make sure that we don't have any concerns. It's nearly impossible. So I just think we're going to have to take a step back at some point and, and kind of come up with a new framework.

• 1:15:08Speaker 00

  The great thing is we can do that under our, under the commodity exchange app. We did that with retail foreign exchange. We created a Retail foreign exchange kind of category for registration. So we can do that under our current statute. And it's something I think we're going to have to do because to your point like we can't keep track of all of this. We can't, we can't regulate all of this the way we regulate everything else. And there's probably going to be some things that we don't need to regulate. We don't need to regulate prediction markets on, you know, a game or streaming, you know, whatever games are streamed. I could ask my son, he would tell me exactly what's being streamed right now.

• 1:15:51Speaker 00

  You know, that's not how we should be using our regulatory capacity either.

• 1:15:56Ryan Sean Adams?

  Yeah, I mean, that makes sense from, from our perspective. I, I, I think that kind of like when we recognize that a lot of this activity is happening outside of the U.S., that definitely represents a failure mode in our legislation and our regulatory process. And the fact that it's so interesting to me is like the example of polymarket. I know that the current cases like CFTC versus Kalashi, which is like a, not a crypto organization, but it's still prediction markets in general. But when you see a polymarket on CNN, you know, as an information source, like what's going to happen in the next presidential debate? Who's going to win? And you see CNN anchors referring to polymarket. You see polymarket being integrated into Bloomberg right now as an information source

• 1:16:40Ryan Sean Adams?

  for financial analysts. You see the value of this information set and then you go to the, you know, polymarket. And as a citizen of the United States, unless you change your VPN status, you can't like actually access any of these markets. That to me represents a failure mode and like appreciate you kind of thinking about this and working through it. And this brings maybe to the last question. You've been very generous with your time, Commissioner, and just like thank you for the engagement. This is what gives me personally hope in our regulatory agency, that these are not, you know, faceless people inside of like, you know, closed door meetings that we can't access, that there are regulators that are willing and able and happy to engage with the industry and their constituents and those that they, they represent in government.

• 1:17:25Ryan Sean Adams?

  So we appreciate you doing this. So maybe as we close out, the last question for you. What do you think that we, the crypto industry, the crypto community can do and together with the CFTC to get like a better, more productive future going on for this? What type of engagement would you like to see? What do you want to see from our side? And then what do you think that regulators should be doing on the CFTC side?

• 1:17:47Speaker 00

  Yeah, I always say come in the door and have a conversation with us. You know, we are different in the fact that like we're not known for having a conversation and then turn around and, you know, issuing you a subpoena. That doesn't normally happen at the CFTC. So it's still a safe place to come and talk.

• 1:18:05Ryan Sean Adams?

  The words "come in the door" are kind of like triggering.

• 1:18:11Speaker 00

  Yeah, no, and I grew up, I grew up in an area where it was very much, you know, fear of the federal government. So this idea of why would you ever go and ask the federal government for their, you know, don't engage was kind of always what I was taught growing up. But this is one where we need the education and we can't get it internally. We, we, we need people to come and help us understand. And, you know, so sometimes it's okay to come to us without a real ask, just to come in and say, you know, we want to tell you what we're, what we're doing or what we're seeing in the, in, in this space. And, you know, maybe it's, maybe you have some kind of vested interest, maybe you don't. But it's more just coming in and helping us understand what we're, what we're looking

• 1:18:55Speaker 00

  at and kind of, you know, consequences of, of, you know, what we're doing or what we're thinking about doing or what you're hearing. And that's always really helpful. And, you know, I think crypto has gotten, I don't want to put crypto in, but you're kind of the digital asset space. They maybe started out at this very much like, we don't want to interact with the federal government at all, stay out of our business. I think having that narrative change a little bit to, you know what, we're better off if we go in and educate them and we're better off if we go in and explain what we're doing, why it's important. That's really changed a lot of the narrative. I've seen that over the years in Congress for sure.

• 1:19:38Speaker 00

  I think before, everyone was afraid to talk to their elected officials. And now there's, you know, almost a united voice. And it is, it's changing the tide on the Hill. I mean, even just three or four years ago, you had members of Congress saying, this is all, this is all fake, it's all money laundering, it's all criminals. To you, you, maybe there's a few that still say that, but, but very few. And people are recognizing that this is legit, this is legitimate market. These are important markets and that we need to make sure we're, we're not, you know, pushing all of this activity offshore. And that really came from, um, you know, whether it's interest groups or, you know,

• 1:20:19Speaker 00

  individuals coming up and, and talking to Congress, talking to the regulators and, and, and speaking out publicly too, making your views known. That's, I mean, it's the best way to, to engage in, in our, in our government here is, is speaking out publicly and letting other people, you know, hear your thoughts and, and why what you're doing is important.

• 1:20:40Ryan Sean Adams?

  Yeah, I think that's absolutely right. And I, I'm reminded of that old quote, uh, just because, um, you're not interested in politics doesn't mean politics is not interested in you. And I think the crypto industry has, has learned that recently. And that is what we need to do is continue the engagement, continue the conversation. So thank you for coming on Bankless Commissioner and continuing that conversation with us here today. It's been great.

• 1:21:00Speaker 00

  Yeah, thanks for having me.

• 1:21:02Ryan Sean Adams?

  Bankless Nation, we will include a link to, uh, the Commissioner's dissent in the show notes, so go read this. Of course, none of this has been financial advice. Uh, maybe it was a little bit of regulatory advice, but of course crypto is risky. You could lose what you put in. We are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.