81 - The Digital Commodity Explosion | Brian Quintenz

Brian Quintenz was a commissioner on the Commodity Futures Trading Commission from 2017 until April of this year. The CFTC serves to regulate the derivative markets, and Brian particularly worked to embrace innovative technologies and emphasize the power of free markets, even in a regulatory environment. He has been an advocate for the exploration and growth of the crypto space and is provides an insider’s perspective to deal with the question of crypto regulation. His sober and pragmatic takes are deeply insightful, and there is a clear alignment of values between Brian and the industry. This episode dives into the disruptive nature of cryptocurrencies, and how we can make sense of this Cambrian explosion of new assets. GET THIS EPISODE'S DEBRIEF: https://shows.banklesshq.com/p/exclusive-debrief-the-digital-commodity ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: 💰 GEMINI | FIAT & CRYPTO EXCHANGE https://bankless.cc/go-gemini 🔀 BALANCER | EXCHANGE & POOL ASSETS https://bankless.cc/balancer 👻 AAVE | LEND & BORROW ASSETS https://bankless.cc/aave 🦄 UNISWAP | DECENTRALIZED FUNDING http://bankless.cc/uniswap ------ 📣 SoRare | Collect and Play! https://bankless.cc/SoRare ------ Topics Covered: 0:00 Intro 7:00 Brian Quintenz 9:29 Does the US Hate Crypto? 14:10 Brian’s Take on Crypto 20:36 The CFTC 26:36 Congress is Great at 2 Things 31:14 Digital Farmers need Futures 38:05 Understand It Before You Attack 47:03 SEC vs CFTC 54:04 Crypto Commodities 1:03:35 Tokens Transcend Labels 1:10:00 The New Paradigm 1:17:54 An Explosion of Assets 1:25:14 Rights and Innovation 1:32:20 Good Regualation 1:39:00 Closing & Disclaimers ------ Resources: Brian on Twitter https://twitter.com/BrianQuintenz?s=20 Episode with Hester Peirce https://shows.banklesshq.com/p/-the-sec-and-defi-hester-peirce ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures

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

• 0:13Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. I'm Ryan John Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, fantastic episode. Brian Quintenz is a former commissioner at the CFTC, former, and he just resigned, actually, the day before we talked to him. This is a very candid conversation and what's going on in regulators' minds, particularly in the CFTC with respect to crypto. Just fantastic insights here.

• 0:48David Hoffman?

  This is definitely part of the Bankless series, where we try and explore the disposition or the nature of these agencies that regulate the financial world and are all kind of jostling for a position with how to deal with the crypto regulation question. It was actually really fortuitous that Brian had just resigned from the CFTC, so he was probably a little bit more capable of speaking freely. And so we were able to pick his brain about like, what's it like to take the perception and perspective of this CFTC as it relates to some of the big questions that we have about how crypto is ultimately going to be regulated by the nation-state, or even if it can at all. We also went through kind of just a background of the CFTC and how it came to be and what its role is, and then, of course,

• 1:32David Hoffman?

  extended that and extrapolated that to crypto, and then also just talked about the inherent problems, the nature of crypto, and how it might, you know, cause a big obstacle for not only the CFTC but for regulators at large. If you guys remember our episode with Josh Rosenthal, we talked about how everyone now has a printing press for assets. How is an agency going to deal with that? So questions like this were rampant throughout the episode, and I overall really enjoyed Brian's very sober and pragmatic responses to all the questions that we had.

• 2:02Ryan Sean Adams?

  Yeah, not only pragmatic, but also like values aligned. And this is just another reminder to people in crypto who think all regulators are evil and like bad and coming out to get us. Like, there are some fantastic people in the halls of our government and in the halls of regulators who want many of the same things that we want and value many of the same things. I think Brian is very much to me, we had Hester Purst, who's a commissioner of the SEC on Bankless Podcast a few months ago, and I think we were also surprised at how values aligned she was with the crypto industry. And so was Brian. And I was just amazed to hear that. Like, he had just fantastic insights that I think anybody in this space, for the reasons you listeners are in it, we are in this, to go bankless, to disintermediate financial

• 2:46Ryan Sean Adams?

  systems, to become more self-sovereign, more free, Brian sees all of that. And so he had some very candid insights into how these industries work, like the difference between the SEC and the CFTC. Is there a little beef there? I don't know. It was interesting to get his insights into the world of regulators, how they're reacting to crypto. And I think, big takeaway for me, David, was Brian thinks that there needs to be a balance restored, that we are too much on the side of saying no to everything. No, you can't do this. No, did you ask for permission? I'm sorry, you can't do this. We need to swing the pendulum back the other way, and specifically regulators, talking about America, but other countries as well, towards being a bit more like pro-innovation, like asking questions like, well, what if we did this?

• 3:31Ryan Sean Adams?

  Could we sandbox this? Could we let this experiment run? How can we focus on maybe prosecuting the fraud and the scammers directly, rather than creating blanket rules and unclear regulations that harm the entire industry as a whole? So, super aligned, I think, with our hopes and aspirations. You know, my only regret, David, is that Brian's still not a CFTC commissioner. Because we need people like him in our government bodies, fighting the fight that we're fighting only from the inside.

• 4:02David Hoffman?

  Yes, that is very true. It is a bummer that he is not having the regulatory power that he does have yet. I'm really excited to see what his future lies, because it sounds like he is. Is trying to work his way into the crypto industry. So I don't hate that either. Also, you're totally right. His take about how the permissionless and open nature of crypto as a response, a backlash to the permissioned nature of the alternative financial system, I thought was a really good take and I think was probably my favorite part in this conversation. So without further ado, I think we should just go ahead and get right into that conversation with Brian Quintenz. But first, before we get there, a moment to talk about some of these fantastic sponsors that make the show possible. Bankless is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure.

• 4:47David Hoffman?

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• 5:31David Hoffman?

  Do you have something of value to contribute to the Uniswap DAO? No matter how big or small your idea is, you can apply for a uni-grant at unigrants.org and help steer Uniswap in the direction that you think it should go. That's exactly what we did to get Uniswap to be a sponsor for Bankless and you can do the same for your project. Thank you, Uniswap, for sponsoring Bankless. Gemini is the world's most trusted cryptocurrency exchange. I've been a customer of Gemini since I first got into crypto in 2017 and it's been my main exchange of choice to make my crypto buys and sells. Gemini is available in all 50 states and in over 50 countries worldwide. And on Gemini, there are markets for over 30 various different crypto assets, including many of the hot DeFi tokens.

• 6:14David Hoffman?

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• 6:58David Hoffman?

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• 7:09Ryan Sean Adams?

  Bankless Nation, we are super excited to introduce you to our next guest. This is Brian Quintez. He is a very recently former commissioner at the CFTC, the Commodity and Future Exchange. He was nominated by both presidents, Obama and Trump, unanimously confirmed by the Senate for that position. Before being a commissioner, he used to run his own investment firm. He was an analyst during the banking sector. I think that was his trial by fire because there was a little banking crisis in between there. He ran a commodity hedge fund as well. So he's got an experience in Capitol Hill as well as in capital markets. Brian, it is fantastic to have you on Bankless. How are you doing, sir?

• 7:48Speaker 02

  Thanks, Brian. I'm doing great. It's great to be with you and excited to be doing this post-government.

• 7:55Ryan Sean Adams?

  Yeah, that's cool. So you just resigned recently then, is that the case?

• 7:58Speaker 02

  Yeah, that's the case. So as a commissioner, I and my colleagues are appointed to calendar date set terms. And it's a five-year term. And technically, mine actually expired last year. But I could stay on through the end of this year unless my replacement had been nominated and confirmed. That didn't happen, so I was basically given the choice of when I would want to choose to step down. And this felt like the right time. And I'm excited, having been at the commission for four years, four full years, I'm excited to take. The next step.

• 8:32Ryan Sean Adams?

  Well, this is super cool because I think you can give us some takes that are maybe not representative of the CFTC now. These are your own kind of personal takes that will be exploring this industry, but you have that breadth.

• 8:43Speaker 02

  I don't have to give my disclaimer anymore. You know, it took me.

• 8:44Ryan Sean Adams?

  Yeah, exactly.

• 8:46Speaker 02

  My disclaimer and now I.

• 8:47Ryan Sean Adams?

  I was waiting for it.

• 8:48Speaker 02

  So, uh, yeah.

• 8:49Ryan Sean Adams?

  Yeah.

• 8:50Speaker 02

  Happy to talk about my, my own, my own thinking, you know, free and clear from how it may affect, uh, you know, anyone's view of the agency.

• 8:58Ryan Sean Adams?

  We'll start here, like free and clear. I think what a lot of crypto people are wondering is, does the US government hate us? Does the US government hate crypto?

• 9:08Speaker 02

  I mean, you know, I think there's a, a short answer and a longer answer to that. The short answer is that, um, I think it depends on the time period and, uh, the people in positions of authority. Uh, I think the longer answer is that we've obviously seen a transition in, in, um, political dynamics in the power structures, uh, of the White House and Capitol Hill and in the regulatory community. And those power dynamics have philosophical impacts in terms of a regulatory, regulatory outcome. And, um, it, it seems to me like, uh, there's, uh, we're in an environment that's much more negative, I think.

• 9:53Speaker 02

  Um, I, I'm disappointed to say that and, and that's not necessarily to put value judgments or, um, uh, you know, negative connotations on anybody's, any particular person's motives. So I have, uh, plenty of, of friends that are colleagues that are, you know, um, in majority positions now and have been in minority positions. But I mean, you look at, um, as I know, you've talked about extensively, you look at, you know, what happened with the infrastructure bill. You look at what's coming out of, uh, you know, the SEC and, and, and some of the agencies. You look at, you know, the language that's being used on Capitol Hill, uh, by some very outspoken members of Congress. And, um, it's hard not to think that there's a little bit of a target on crypto's back right now.

• 10:37Ryan Sean Adams?

  We've been feeling that, Brian, to be honest. I think the infrastructure bill is a time in the crypto industry's history where we really felt that significantly. We've got lots of stuff to talk about, but let's park on this for a minute. I'm curious, why do you think this has skewed negative recently in the current zeitgeist across regulators, across all of government? Why is this regime maybe we're currently in a bit negative on crypto?

• 11:05Speaker 02

  So I think it's a few reasons. Number one, a lot of it is currently outside of the control of regulators, and that creates interesting dynamics. The first dynamic that it creates is that it competes against the regulated environment. And so, just from a fairness perspective, I think it's legitimate to kind of ask yourself, if you're in a position that's appointed, that is swearing to uphold the law, to look at what you regulate and what you can't or don't regulate, and ask yourself, am I creating fair competition? And I know one

• 11:50Speaker 02

  of my colleagues is kind of focused on that, my former colleagues has focused on that at the agency. But I think there's more to it than that. And I think more to it is when you're in a position like a regulator, you're used to having control, you're used to expressing some of your political philosophy or your regulatory philosophy through that control, and things that are outside of your control that are related to your space, I think, challenge that, and diminish your authority, and diminish your power, and diminish your

• 12:32Speaker 02

  reach. And I think some of this could be motivated by the need to do more, the want to create a new regulatory framework and structure that is some kind of legacy that is, could be self-serving for those in positions of authority. So I mean, I think there are a lot of dynamics that are going on right now, and there's kind of the traditional

• 13:04Speaker 02

  Fair competition, you know, discussion. And you can kind of err on the side of innovation and letting the market kind of evolve before you take a, you know, more of a stricter view. Or you can err on the side of, I need to enforce the law as it is currently written, you know, against anyone who should be caught up by it regardless of whether or not they fit into this box.

• 13:29Ryan Sean Adams?

  Innovation versus like very strict rule following, being sort of a stickler for this sort of thing. Before we get any farther, Brian, I'm actually interested in your personal take here. So like, what's your personal take on crypto? Is it a good thing? Is it something that the US government should kind of push away and relegate to the fringes of society? What's your take?

• 13:50Speaker 02

  Well, so, you know, maybe this represents ignorant thinking, you know, or old fashioned thinking. And, you know, the CFTC is a small agency and we have authority over a huge market. $400 trillion of derivatives, you know, are traded that is, that are within our jurisdiction.

• 14:07Ryan Sean Adams?

  And they have That's the biggest market by far.

• 14:09Speaker 02

  Biggest market by far. Of course, that's a notional value, you know, measurement. So it doesn't necessarily measure, you know, true risk in terms of dollars, you know, exposed to risk. But it's, but it is a huge market. It affects all areas of the economy for risk management purposes, you know, to ensure risk transfer functions and hedging activity of, of, of every sector. And we're 750 people or the agency is 700. I'm not there anymore, right? So the agency was, is 750 people. And so, you know, it's, there's a lot to handle. And so I think, you know, the, the, the agency during my time there worked hard at trying to keep on top of, of what's going on.

• 14:51Speaker 02

  And, you know, my, I've worked hard at trying to keep on top of what's going on, but, you know, it takes about two clicks, you know, through a thread on Twitter to realize that there's a lot of stuff going on that I still need to learn more about. So I say that, you know, as a little bit of a caveat to say, you know, maybe this is, is all our style thinking and we can, you know, talk more about it in real time, you know, if there's more to add. But, you know, I, I think about, you know, crypto is kind of how it evolved. I was, I, I felt I was very early in my role at the agency to defend the intrinsic inherent value of Bitcoin.

• 15:28Speaker 02

  Bitcoin was kind of Bitcoin and Ether and you know the Ethereum blockchain and Bitcoin blockchain were kind of the most prominent things in the space, you know, as I was coming into the agency and as I was, you know, nominated for this role and preparing to come into the role. And, you know, at that point, as there still are, there were a lot of value judgments being made, you know, on what this is, if it has value, whether or not it's a fraud. And, you know, I gave, I gave speeches in the United States, I gave a speech, you know, directed at the powers that be in Europe to say, look, you know, I don't know what

• 16:11Speaker 02

  the value of this is, but there is unquestionable value in it. And to dismiss it as something that, you know, is a fraud, or is worthless, or is Ponzi scheme, or a bubble, misses how I think 95% of the world is going to look at this. We can't look at it at that point through the lens of a reserve currency status of the United States, or of the Euro, or of some other major global currency. We need to look at it through the demand and accessibility with something that has a finite supply in terms, you know, Bitcoin specifically at that point, and understand that this is something that is going to grow in interest and likely

• 16:56Speaker 02

  value. And so, you know, I felt like I've been consistent about the fact that there is inherent value in what we've seen develop, you know, from a crypto token, crypto asset basis. And I've never felt like we needed to necessarily have, you know, new regulations for that, that, you know, those tokens, you know, were either securities or non-securities. And while we would all possibly like more clarity on what those things, on the status of that from the SEC, we didn't necessarily need new law, you know, to address some of that. I think it was more process as opposed to policy, if that makes some sense.

• 17:42Speaker 02

  But then, as we start getting into DeFi, I think the conversation shifts a little bit in terms of what the CFTC's purview is. Because there have been some protocols through smart contracts, native tokens, that have allowed for derivative-like contracts to be listed and traded. And that directly implicates the CFTC's jurisdiction. And I think that's where we can really talk about where I fall on the scale of strictly enforcing the law in real time, regardless of innovation or the progress of a certain

• 18:24Speaker 02

  space or a certain sector, and regardless of some of the features that that space has that doesn't exist in the traditional regulated financial system that solve for some of the problems which regulation was designed to address. Or taking what I view as more of a stand-back, wait-and-see approach to see how this space develops, to see how it can address some of these problems through transparency, through open access, how it can promote freedom, how it can promote wealth creation, how it can promote access to financial products.

• 19:06Speaker 02

  And then revisit the law and/or an agency's regulations if there is a need to address some flaw. And I don't know, I'm sure there are a few, but I don't know of a lot of, or a huge swath of investors in this space or owners in this space that are raising their hands and saying, "Hey, US government, please come and protect me. I need your help. I can't make my own decisions."

• 19:35Ryan Sean Adams?

  Yes, I agree.

• 19:36Speaker 02

  "Please make value judgments for me." I don't see that anywhere. And I think that that should be a direct response to anybody on Capitol Hill in agencies that are saying, you know, we care about investor protection and this area is ripe with fraud and you're at risk unless, you know, we're there to help.

• 19:57Ryan Sean Adams?

  Brian, we have so much to talk about and I want to get to this conversation of DeFi and so many things that you mentioned like feel like American values, you know, DeFi being a representation of American values. So we definitely want to get to that discussion in a little bit, but I'm wondering if you could provide for our listeners a quick primer on the CFTC as a regulatory agency. So you did that a little bit, 750 employees regulating this massive $400 trillion derivatives market and pretty incredible. And I noticed the mission of the CFTC, it says, is to promote the integrity, resilience, and vibrancy of the US derivatives market. Can you tell us maybe in some plain speak terms, like what

• 20:39Ryan Sean Adams?

  is the purpose and mission of the CFTC? Why are you guys there? How are you guys helping?

• 20:45Speaker 02

  Yeah, thanks. So I try to take a little bit of a walk back through time, not to bore anybody, but I think it's interesting and I think, you know, it actually speaks to some of the regulatory and the political environment of the agency and how we interact with Capitol Hill and what you may see going forward and why. But, you know, the US derivatives markets really began in Chicago in the 1850s. And, you know, that's where trading occurred, you know, for commodities, you know, for a future delivery at a specific point to allow farmers, transporters, producers, processors to manage their risk.

• 21:31Speaker 02

  To manage their risks, so prices going up, prices going down, you know, supply disruptions, weather events, all those kinds of things. And that was a federally unregulated, privately self-regulated marketplace through the 1930s. When ultimately, because of some price movements, there was a political call to create an agency at that point within the Department of Agriculture because of the birth of the futures markets from the agricultural sector in products like corn, wheat, soybeans. You know, to create a regulatory agency within the Department of Agriculture to oversee, you know, the futures exchanges.

• 22:15Speaker 02

  And that was in the 30s. And then fast forward in time, and in the 1970s, Congress passed the Commodity Exchange Act, which officially created the CFTC and gave this agency independent status, which meant it wasn't part of the administration. And it achieved a level of independence by virtue of having a bipartisan, multi-member board. So we have five appointed, presidentially nominated and appointed roles, Senate confirmed presidentially nominated appointed roles. And no one political party can have more than three members. So usually you have two Republicans, two Democrats, and the chair appointed by the president.

• 22:59Speaker 02

  So the president's party has, you know, governing control over the agency. So that's how the agency was originally created. You know, through the 80s and 90s, you had the invention, the innovative development of financial futures. You know, futures contracts on treasuries, futures contracts on stock indexes, which significantly expanded the agency's jurisdiction from both a number of contracts traded and the markets and what was underlying those markets. Then because there were futures on stocks, there was an agreement between the SEC and

• 23:40Speaker 02

  the CFTC about narrow-based, you know, security futures contracts and, you know, single-name security futures, narrow-based security index futures, and broad-based security index futures. That's just a little bit of an aside, but it can be relevant going forward.

• 23:57Speaker 02

  Then, as we got through the financial crisis, and in my view, a very tiny corner of the swaps market played a role in that through credit default swaps on mortgage-backed securities. If we're talking about hundreds of trillions of dollars of market, I don't know what the numbers are off the top of my head. I'd say probably 2 trillion, 3 trillion, something like that. A big number, but tiny fraction of the swaps market. But Congress responded to that financial crisis with a whole new regulatory regime for swaps, and that was implemented through the Dodd-Frank Act. So then that gave the CFDC jurisdiction over interest rate swaps, credit default swaps,

• 24:42Speaker 02

  equity swaps, commodity swaps, foreign exchange swaps. That rule writing occurred at the agency mostly in the first four years of the 2010s, although we have recently wrapped up a number of very important rules that were left unfinished on things like swap dealer capital, our cross-border view of swap dealing activity, a position limits regime that expanded position limits to new commodity futures contracts. And that brings us front and center to today when I was being nominated for this role and I was preparing to talk about all things Dodd-Frank and the implementation of new swaps market rules.

• 25:26Speaker 02

  And within two months of joining the agency and deciding to sponsor our technology advisory committee, Bitcoin futures get listed by two exchanges and put the agency front and center in the crypto debate. And we haven't looked back since. And I certainly haven't looked back. And I was thrilled to be a part of the agency when that was happening. And I can't wait to see where it goes and how I can be involved.

• 25:52Ryan Sean Adams?

  It seems like there's one trend, Brian, which is like, new financial product is created, something bad happens, Congress reacts, CFDC gets more jurisdiction to come fix it. But it seems to oftentimes start with some bad thing happening in a new financial market, some sort of fraud that's out there. Is this the recipe that's repeating?

• 26:18Speaker 02

  When I first joined Capitol Hill as a policy staffer, you know, young, right out of college, opening the mail, giving tours of the Capitol Building, you know, great stuff, a lot of fun, you know, but, but very introductory. I remember someone coming into the office who, you know, you know, was well-known in the office. And, and they just said, you know, Brian, I just want you to remember two things, you know, or I want you to remember something. Congress is great at doing two things, nothing and overreact.

• 26:50Speaker 02

  And I didn't say that. I'm quoting someone that did say it. So, you know, no one can say that it's my view, but, but I would.

• 26:56Ryan Sean Adams?

  I'm sure he was quoting someone else, too.

• 26:59Speaker 02

  But, but I would, I would expand upon that or actually rationalize it to say, you know, that, you know, at some level, that's what it's supposed to do. You know, I also went to a, a class on procedure and process at the Library of Congress, my first, you know, couple of weeks at, you know, on Capitol Hill. And, you know, one of the experts in congressional procedure and the rules that are structured to consider bills said, you know, a lot of people get frustrated because they think Congress was created to enact laws. When if you really read the Constitution and think about what the founding fathers had in mind,

• 27:37Speaker 02

  Congress was created to try to make it as hard as possible to have bad ideas become law. And, you know, we can debate about how successful they were, you know, over the course of time and what's developed. But it is very hard for Congress because of checks and balances, because of, you know, the consensus that's needed, because of how much is on their plate, and, and how much time it takes to consider just the normal business that they have to do of funding the government every year. It is very difficult to pass new legislation and usually there is only, you know,

• 28:15Speaker 02

  Momentum necessary to focus the time and the resources and the rule writing and get support for a product if it's responding to a crisis. And in that kind of scenario, in my view, you're never going to end up with a rationalized, right-sized, scalpel-like or flexible kind of approach, or one that distinguishes well between things that didn't have anything to do with the crisis, or why the crisis happened to begin with. So you're right.

• 28:55Speaker 02

  And if a crisis happens, Congress usually responds, and depending on who's in power and what their political views are, you could get a result that's very punitive. Luckily, I think, for the most part, the rule writing that the CFTC did, certainly while I was there in the last four years, to rethink and recalibrate a number of rules that were written in response to the crisis, have been done in a way that really respect risk, respect the market, and respect the public. But who knows if a crisis hits the crypto space, what Congress is going to do, who's

• 29:39Speaker 02

  going to get a new authority, who's going to be at that agency when that authority is given, and what those rules end up looking like.

• 29:44David Hoffman?

  Brian, you just went through and gave us a historical context for the establishment and growth of the CFTC. And I just want to add a little bit more color upon that, because in the crypto world, we often talk about how we are speedrunning the evolution of money and finance, and the commodities and the financialization of commodities are just a part of that history as everything else. And you talked about how the futures contracts came out to help people, help farmers, manage risk, and help ensure that they can perpetuate their farm into the future without having the whims of the market dictate whether their farm can survive. And so for the people who are crypto-native and want to gain a map for how this relates to our industry, like Bitcoin miners are a new age farm. This is our new age yield with like new age crops. We call these ASICs.

• 30:29David Hoffman?

  They're producing digital commodities rather than physical commodities. And also, we also have this term in DeFi called yield farming. And like that term is appropriate, like these are people with like, you know, digital crops and digital yields that will need financial tooling that we have already created in the physical world. And now crypto is going to overlay these things, these instruments that we've had and had before that the CFTC has a jurisdiction over. We're going to overlay them onto all these things that we're creating in DeFi. And so that's really where this conversation between crypto and CFTC really begins. We've seen this before, but now we are putting it onto a digital paradigm. And we all have to come to terms with like what that means and what the similarities are and what the differences are.

• 31:14David Hoffman?

  I just wanted to add that color and see if you have any thoughts on that.

• 31:17Speaker 02

  Yeah, you know, it should have been really self evident to me to think about, you know, mining as the new farming. And, you know, given that, you know, some of those terms are being used, you know, in the space. And I think it's, it's a great way to think about it. And I think it directly applies to, you know, our legacy space and what we're going to see in the future. You know, the, the most successful businesses are the ones that successfully risk manage. And, and they do that through a combination of, you know, of tactics. But derivative use is a part of that. And I think, you know, one of the most irresponsible things I have ever heard someone say about the derivatives markets is that they're weapons of mass destruction. You know, they are the reason why we have had economic growth

• 32:01Speaker 02

  that we have had for the last 30 to 40 years, period. You know, and anyone saying something like that is trying to sell you something. And, and, and, you know, it's, it's really unfortunate that that kind of view, you know, was aired and, and painted with, you know, whole cloth, the entire space. But derivatives are crucial to risk management. I think the agency has done a very good job of, of regulating the risk involved. Although, you know, the, the reason that we have the regulatory system that we do, you know, for futures and swaps contracts is because, you know,

• 32:42Speaker 02

  the, one, one philosophical take on the agency's goal is to protect the integrity of a transaction. You know, that, you know, because of the use of margin, you know, which, which is, which is, you know, viewed as, as basically kind of like a performance bond, you know, it's not, it's not a down payment. It's kind of viewed as a performance bond that you will, you know, make good on the need to pay up if the contract moves against you. That does, that creates leverage, but it's necessary because no one's going to put up all of the money for, you know, a product because otherwise it's a pre-sale, you know, or a pre-purchase. So

• 33:25Speaker 02

  that's not really a risk. It is a risk management tool, but it's not the same kind of risk management tool. So, you know, derivatives hedging naturally involves leverage. Leverage creates risks. It creates risks of default by a customer, which can create the risk, you know, to a clearing entity that is designed to stand in the middle of each trade and, and break that trade apart and face each side so that something diversifies the risk of customer defaults by aggregating it together. You know, clearinghouses don't reduce risk. They, they try to diversify it through aggregation. And you have clearing members, which are the financial firms that are the brokers of derivatives contracts. We call them future

• 34:10Speaker 02

  commission merchants, FCMs. But you can see a scenario where a, you know, customer through a very adverse market event can't make good, goes bankrupt, that the size of that position is big enough that it affects the FCM. The FCM can't make good on its obligations, the clearinghouse. Maybe a few FCMs are caught in this and all of a sudden there's a massive problem at the clearinghouse and everything everyone has been using for risk management purposes is gone. You know, I mean, that's, that's a debacle. Now, I don't think that...

• 34:47Speaker 02

  There's a lot of stress testing that we do of clearinghouses. They are incredibly resilient, incredibly resilient. I mean, we're talking multiples of a Lehman-style event, multiples of a COVID-style market move, you know, that could even start to approach some of the reserve resources they have. I mean, very resilient.

• 35:08Speaker 02

  But in my view, you know, you're not going to threaten a clearinghouse unless there is broad financial economic chaos. And, you know, that may be one of the lesser problems that you have in that kind of scenario. But, you know, I say all of that to describe the rationale for why we regulate the way we have, why the CFTC has regulated the way it does. And it's to protect the integrity of the transaction because of leverage and because of how that leverage can flow through the system. Now, when you have a new financial paradigm that's been, you know, rapidly and wonderfully developed in, you know, the last two, three, four, five years of DeFi, you know, you have kind of a whole different approach to that. You have a different approach to risk

• 35:51Speaker 02

  management. You have a different view of of counterparty exposure. You have a different view of what you need to, you know, what what deserves protecting from a from a risk management perspective and whether or not, you know, protocols that have more open source code that can be viewed and are actually probably much more transparent than, you know, the changing margining process of the legacy clearinghouses. You know, that's just a completely different dynamic. And, you know, right now, the law in our rule set says if you trade a futures contract, it has to be done on a registered exchange and cleared through a clearinghouse. Well, you know, maybe before we start, you know, punitively going after, you know,

• 36:35Speaker 02

  DeFi developers and and market participants that aren't complaining about anything, we should think whether or not that's the right approach, you know, for this kind of market. And again, I think there are some very thoughtful people, even even, you know, that may take a different view of me from, you know, the innovation to the fair competition landscape. Very thoughtful people that I think have the best intentions. But I think we need to, my view is, and my view was in that role before. We need to be thoughtful about what's different.

• 37:10Ryan Sean Adams?

  Yeah, totally agree. And no question about DeFi bringing an entirely new paradigm, a more disintermediated paradigm to the entire legislative, like, set of laws and set of regulations that are on the books.

• 37:23Speaker 02

  You know, and Ryan, let me pick up on that if I could for a second.

• 37:25Ryan Sean Adams?

  Go. Yeah, go for it.

• 37:26Speaker 02

  Because, you know, I was listening to your podcast, Ryan Selkis, and was talking about the, you know, the political dynamic that we've.

• 37:38Ryan Sean Adams?

  Yeah, he's fired up, isn't he?

• 37:39Speaker 02

  He is fired up. And I spoke with him recently, and it was a great conversation. And, you know, I think he provided, you know, a lot of clarity, you know, in some of his comments. Some of them I disagreed with. But, but I think, you know, as I think about the, the progress that the crypto space has seen in political advocacy, you know, the voice that it has, the, the, you know, unification around an idea of, you know, no, understand this before you attack it. And, you know, hey, we're good. We might not need your protection.

• 38:19Speaker 02

  To me, you know, those, those kinds of, you know, the unity around those ideas, you know, it might be coming from the fact that the space is disintermediated, that there isn't, there aren't very large intermediaries that can create a conflict between, you know, cust- with their customers, you know, where customers can feel taken advantage of, or can feel powerless. I mean, you compare it to the traditional banking system. I mean, you know, the, the customers of some of the banks are the, you know, give them the worst reviews, but yet they don't change banks. You know, I mean, customer satisfaction is very, very low in the traditional banking space. And that, to me, creates.

• 39:03Speaker 02

  A fractured political dynamic where you can try to promote economies of scale and a capitalist system and the benefits there, while also the risk of adversarial customer base that really does want someone to take it out of the entities that they feel are abusing them. And there are receptive audiences to both of those perspectives on Capitol Hill. And that creates a dynamic of, well, which one are we going to listen to?

• 39:43Speaker 02

  And which philosophy is in power at what point to create a laissez-faire regime versus a more customer protection and control regime? But in this space, you don't necessarily have that kind of conflict. And you have, again, more of a sense of self-responsibility, self-direction, self-education, individual freedom, individual liberty, taking ownership for your decision-making. And it's basically saying, hey, we're good. We don't need you. And I think that's an incredibly powerful thing to try to preserve going forward.

• 40:26Ryan Sean Adams?

  125% agree with you on this, Brian. And I've never heard somebody coming out of the regulatory world frame it in that way. But that's exactly what crypto is saying. You know how you were saying earlier, Congress does two things, either nothing or overreacts?

• 40:42Speaker 02

  I quoted someone.

• 40:43Ryan Sean Adams?

  We were talking about this.

• 40:44Speaker 02

  I didn't say it.

• 40:45Ryan Sean Adams?

  You quoted someone. Excuse me. You quoted someone who quoted someone. And we were talking earlier about this pattern of your kind of regulation, how there's new financial product, there's a crisis, Congress responds, and then it overreacts, and lots of things happen. What crypto is saying is like, hey, guys, we haven't had a crisis, right? Like, you're attacking us. And there's nothing wrong here. We're actually building something that's incredibly cool. It's too trillion And some of the biggest crypto companies and organizations and employers behind this movement are actually US-based. And so like, shouldn't America be supporting something that A, aligns with American values?

• 41:27Ryan Sean Adams?

  And like, B, helps to propagate and, you know, increase the pie of the American economy and employ more people? Like, come on, take a look at this industry, we're not causing a crisis here. In fact, when you peer into the, all the weirdness of the code and the memes, everything that goes on Twitter, you'll find some pretty robust financial products. And by the way, if you don't believe us, it's all transparent and open. So go check the blockchain, right? Like, um, this is kind of what we're saying, and I think you're saying the same thing.

• 41:56Speaker 02

  Yeah, I totally am. And I think, you know, it's a great conversation that leads to, you know, my view of how, you know, aspects of DeFi really represent the founding principles of this country, which is individual liberty and freedom. And, you know, Chris Giancarlo, uh, you know, a previous chairman of the CFTC with whom I am very close and was a wonderful chair and has been doing wonderful things in this space.

• 42:23Ryan Sean Adams?

  The original crypto dad.

• 42:25Speaker 02

  Yeah, crypto dad, that's right. It was great to be at the commission while all that was going on. You know, uh, he had to turn off his phone as his Twitter followers, you know, went from basically 100 to 50,000. But, you know, well deserved, and he's a very thoughtful person. I mean, he, he said in a speech, the freedom to transact in the financial marketplace is part of freedom itself. And, you know, I think we need to take a step back in this country and ask ourselves, you know,

• 42:56Speaker 02

  how much freedom are we really giving up? And is it for the right purpose? Is it for the right benefit? You know, the, I'm a big believer in balance. You know, I think, I think, um, you know, there are rational arguments on both sides of a spectrum between, um, you know, ensuring things, you know, aren't used illicitly versus ensuring that people can do what they want and are free to transact with privacy. But I believe that the pendulum has swung very far, you know, in one direction of anti-privacy and pro-surveillance, that we need to have a reset and a rethink of that conversation. And I think, you know, the only way to do it, and you kind of see, you know, in an ecosystem,

• 43:41Speaker 02

  when it gets out of balance, it's usually something that's in the other extreme that comes along that resets. You know, to me, that's DeFi. You know, that's crypto. You know, that's some aspects of what we've seen, is it's innovation that is responding to something getting way out of balance. And I think no one's going to argue that we don't want terrorists to be using, you know, things that could cause harm to people. But, you know, that doesn't mean that the government should be able to see every single transaction idea.

• 44:23Speaker 02

  And that crypto shouldn't be viewed more along the lines of physical cash. And even with, you know, AML and terrorist financing concerns, you know, I would think that it's in the US's, you know, geopolitical, you know, national strategic interest to allow citizens of foreign countries where some terrorist organizations are based to be transacting in these things to try to create more independence from those regimes. And so walling those, you know, those countries off from, you know, the innovation and the

• 45:08Speaker 02

  wealth creation, you know, of these things, you know, just for the sake of, you know, a justified fear, you know, of how some may use it, you know, could be doing plenty of harm that needs to be considered in, you know, how we view the progress that people around the world can make to escape. Authoritarian dictatorships. And that's the foreign policy aspect. I mean, there's the domestic aspect. I think it just requires, it's going to require a new conversation. And I think the laws on the books are the laws on the books and the interpretations are the interpretations.

• 45:50Speaker 02

  But we need to do a better job of swinging the pendulum back.

• 45:55Ryan Sean Adams?

  Totally agree with that. Brian, I want to ask you about kind of some differences that might be in the mind of a listener as they're thinking about the CFTC jurisdiction and kind of SEC. And both organizations, regulators have played a role in that. Recently, there've been sort of a new SEC Chair Gary Gensler taking charge. And he's communicated some things that the crypto industry is just kind of like unsure of. The clarity still hasn't come out of the SEC with respect to its position on basic things like what's a security versus what's a commodity. You tweeted this out on August 4th. Just so we're all clear here, the SEC has no authority over pure commodities

• 46:39Ryan Sean Adams?

  or their trading venues, whether those commodities are wheat, gold, oil, dot, dot, dot, or crypto assets. I'm curious about this. What in crypto is clearly a commodity versus what is clearly a security? Like, we still don't have a solid answer to that. Is Bitcoin a commodity? I think the CFTC has said yes. Is Ether a commodity? I think the CFTC has said yes. I don't know if you can confirm that. And then like, what about all of these other assets? Because we have now hundreds of thousands of them. And we don't know what regulatory regime they even fall under. Can you shed some light on this?

• 47:23Speaker 02

  Yeah, I can try. And let me just say that the tweet that you showed was in response to a speech that Chairman Gensler gave at the Aspen Security Forum, where he characterized crypto as the Wild West with rampant fraud that needed protection oversight. And he was going to use as many authorities as he could to provide that, as well as asking Congress for new authorities to do it.

• 47:53Ryan Sean Adams?

  I recall the speech.

• 47:55Speaker 02

  I was very disappointed in some of the reporting of that speech, as well as, in my view, the purposeful lack of clarity or omission of certain facts, given Chairman Gensler's chairmanship over the CFTC during and after Dodd-Frank, when the CFTC was given new authority over fraud and manipulation issues in spot market commodity transactions. Spot market commodity transactions are just cash for commodity, going to the store, buying something, spot market commodity transactions.

• 48:40Speaker 02

  And that is authority that the CFTC has had, and reporters know it, and the leadership of the SEC knows it, and a lot of people in the space know it. It's authority we've used, that the agency has used. I think we've brought 25 to 30 cases over the last couple of years prosecuting fraudsters who are offering exposure to crypto or a new crypto token and just abscond with people's money. We have fined, received civil penalties, disgorgement, and other financial-related penalties to the tunes of, I think, over $100 million, maybe $200-ish million.

• 49:24Speaker 02

  So the CFTC has been very active in this space. And again, within a small agency, 750 people, full-time, that are charged with protecting and overseeing and promoting the integrity, resilience of the entire derivatives markets. And I was disappointed that our role in promoting that market integrity and holding fraudsters accountable was not raised, either in that speech or in the press.

• 49:57Speaker 02

  And I was disappointed that there wasn't more subtlety to what current authorities, you know, the limitations of current authorities are around pure commodity transactions wherever they are traded versus, you know, what Congress may or may not choose to do. And if they choose to do something, who should be the correct, you know, agency to try to implement that regime? And so, you know, it's, I think there's, I think this is part of a longer story. And again, my view is that there isn't, you know, a groundswell of support in the crypto

• 50:40Speaker 02

  space for, you know, needing the protection of the government. People are taking individual responsibility and doing their own research and expressing, in my view, you know, their, their rights to freedom of financial market transactions in this space. But I think, you know, to your point, it is not the CFTC that determines if something is a security. Under our statute, under the Commodity Exchange Act, basically, anything that can be bought and sold in interstate commerce that has some level of fungibility is a commodity.

• 51:17Speaker 02

  So we don't, as an agency, we don't have to make really, you know, an affirmative declaration that this is a commodity. Basically, you should assume that, that basically everything's a commodity. So, so then the question is, is that commodity also a security? You know, does that commodity also, you know, represent a security? And if so, it goes into the SEC's purview.

• 51:45Ryan Sean Adams?

  Okay. So from the CFTC's perspective, you're saying all crypto assets that are out there are commodities? And it's outside of your jurisdiction?

• 51:55Speaker 02

  I just wanted to clarify that real quick. I think it's a little strange when you start talking about NFTs because...

• 52:00Ryan Sean Adams?

  Okay, I was gonna ask, like, what's an NFT? Is that, what is that?

• 52:03Speaker 02

  I think it depends on, on how many of a, of a similar kind of, you know, of NFT are created. But if they are, you know, if they are somewhat unique and that they're highly limited, or there is a lack of fungibility, you know, you know, true fungibility from one to the next, then, then that wouldn't necessarily mean that they are a commodity. So that could be an exception.

• 52:25Ryan Sean Adams?

  Some NFTs may not be commodities, some probably are, but anything that is fungible, so any ERC20 token, from the CFTC's perspective, that's a commodity. Now, whether it's also a security or not, that's beyond the jurisdiction of the CFTC, and that starts to fall into SEC territory. And then they have their own tests that they apply with limited clarity, I would say, on whether something is also a security. And so we kind of know that Bitcoin and ETH are commodities. At least, I think we know that because Ether is on the CME right now, CME Futures, correct?

• 53:04Speaker 02

  So, okay, so this is an important point.

• 53:09Speaker 02

  The SEC is going to be the agency that declares, or through a court challenge,

• 53:22Speaker 02

  prevails in classifying something as a security commodity. Okay? And if they do that, that security product, in my language, is spot commodity. But that security product has to be traded on an SEC-regulated exchange or ATS, Alternative Trading System, right? Which was a huge registration regime.

• 53:52Speaker 02

  If something is not a security, if it's just a commodity, it can be freely traded because there is no federal registration regime for spot commodity trading venues. There are some state regimes around money transmission, right? Which I think you're probably familiar with, with the discussion over the last three to four or five years. But where the CFTC becomes involved is if a registered exchange seeks to list a derivative on a crypto asset.

• 54:28Speaker 02

  And if that crypto asset is viewed as a security by the SEC, then that futures contract actually has some joint jurisdiction between the agencies.

• 54:41Speaker 02

  If there isn't a view at that point or, you know, going forward, that the underlying product, the underlying asset, that crypto token, isn't a security, then that futures contract is solely within the CFTC's purview. So the fact that you have Bitcoin futures contracts and Ether futures contracts trading within, solely within the CFTC's purview, means that at least up until now, the SEC has not viewed or declared those to be securities. In my view, that's absolutely appropriate.

• 55:24Speaker 02

  And I said, I think in March of 2018, that echoed a lot of prior thinking, including then Chairman Chris Giancarlo, that at that point Bitcoin was clearly a non-security commodity. And recently Chairman Heath Tarbert, former Chairman Heath Tarbert of the CFTC, declared Ether to be a commodity itself. And he didn't necessarily say a non-security commodity, but my view from within the agency and, and looking back on that, was that he wouldn't have made that declaration, you know, without, you know, some level of communication or awareness

• 56:06Speaker 02

  of how the SEC looked at that. So, you know, then the question is, well, you know, should you, should exchanges try to list a lot of futures contracts on a lot of these products to clarify what their status is? You know, I mean, at least that's, that's, you know, kind of, you know, some idea. And in that circumstance, I think you have to be careful what you wish for. Because there wouldn't be anything to prevent the SEC and, and you know, this is their jurisdiction. These are decisions that they make on a regular basis and they, you know, they are, they have a lot

• 56:47Speaker 02

  of institutional knowledge in applying securities laws, you know, and if, if they do that too aggressively, hopefully, you know, someone sees through a court case to its completion and allows a judge to decide as opposing to, you know, enter into a settlement that doesn't necessarily add a lot of clarity to the space. But, you know, if, if there were a flood of futures contracts on a number of crypto tokens, there's nothing that would prevent the SEC from saying, we think all of those are securities. And then that creates a broader implication of, well, does that mean anyone, you know, that's running a, you know, crypto, spot crypto exchange is violating the

• 57:31Speaker 02

  law because they're listing these products that the SEC now have used as securities. But then you can, you can take that a step further and say to yourself, well, what if we have, you know, two kind of, you know, competing spot crypto exchanges that each apply, you know, for, or maybe, you know, where one applies for, you know, derivatives license with the CFTC. And what if it tried to list a futures contract on its competitors, you know, native token or rewards token?

• 58:11Speaker 02

  And then all of a sudden, you know, it's basically using an anti-competition tactic, you know, through, you know, forcing, you know, a regulatory agency to potentially, you know, classify something that's in, you know, their competitive interest just by virtue of, you know, the regulatory process. And I go through all of that to say, where I think we're at a point where these decisions need more transparency.

• 58:41Speaker 02

  There is a bill that was authored and sponsored by Congressman McHenry of North Carolina in the House, it passed the House, that called to create a working group between the SEC and the CFTC and private market participants to discuss and try to clarify the status of a number of these tokens. I think that's an interesting step. If it were to come to fruition, I don't know what the result would be. I think that the SEC may just do a lot of listening and say, "Thanks, we'll let you know what we think." And as is now,

• 59:19Speaker 02

  I think they're right, and within their regulatory jurisdiction. But I think it speaks volumes. First of all, having served in the House of Representatives for seven years, the House is run purely on a majority basis, and it is a highly political chamber of Congress. The majority and the power of the Speaker is pretty unparalleled. And I'm not making a value judgment on any Speaker, or the current Speaker, or any prior Speaker. That is just

• 59:56Speaker 02

  institutionally how the House of Representatives is run. And to have a bill, in my view, that directly implicates or challenges or acknowledges the lack of transparency around these decisions, and calls for a new process, either out of frustration, or to some degree indictment of that process, of that lack of clarity, to have a bill passed from a minority member

• 1:00:39Speaker 02

  who has a prominent role as the ranking member of the House Financial Services Committee, passed in a Democrat-controlled House, to me speaks fairly significantly to a view within at least one chamber that this is unacceptable, that this needs to change. And I don't necessarily know, if it's not that bill, what the right approach is. You know, I think, I think the, the dialogue between the agencies around the status of something, if there's a futures contract or drutus contract, you know, listed on it, you know,

• 1:01:20Speaker 02

  I think that deserves more transparency. I don't, you know, in having served in this role, I'm also selfishly a little bit of a defender of the deliberative privilege, you know, a lot of my internal communications are protected by deliberative privilege because it's me forming opinions within my own staff. And I think that, you know, there's, there is the need to try to have free and open communications in a, you know, a small, close knit, you know, office so that exchanges of views can be heard and you don't necessarily, you know, overly weaken yourself, you know, in trying to make a decision and then having conviction. But to the extent that

• 1:02:03Speaker 02

  there are two agencies that have views about a product that have widespread implications, you know, I don't believe that those communications necessarily should be outside of the public sphere, regardless of whether or not they weaken one agency or the other in terms of potential, you know, legal challenges to what they do.

• 1:02:24David Hoffman?

  Brian, there's a lot to like parse apart with this and what you've been saying has been, I think illustrative of what a lot of people in the crypto world kind of just want to turn off, right? There's a lot of things to pay attention to and we have all these agencies that are like trying to find the line between these two things. And one of the reasons why we like tokens in the world of Ethereum and on DeFi is that these tokens themselves transcend all like previous categories and boundaries that we've been able to establish from the pre crypto world. We have tokens that can literally be anything and so they will be everything and all agencies will want to have their sort of like jurisdiction imposed upon these things. And so like because

• 1:03:08David Hoffman?

  there's this lack of classification on tokens, it leaves a lot of interpretation as to like what the responsibilities and roles of these different regulators actually are. But it kind of also leaves a power vacuum, right? Because there is no classification. And so one thing that we're worried about or pessimistic on from the world of crypto is that All agencies that have any sort of relevant jurisdiction is are going to like claim territory. And this is kind of like the libertarian versus like the statist approach, right? Like, people, especially Bitcoiners, love this narrative is that like all governmental organizations are incentivized to grow their jurisdiction and to grow their organization. And so ultimately, that comes to envelop everything around it. And then

• 1:03:53David Hoffman?

  all of a sudden, we've lost the freedoms that we also value in the crypto world. So my question to you is, is there actually a fight for jurisdiction over stuff like this? And do you see that the butting heads of the CFTC versus the SEC, and now also the Treasury, do you see that as like them trying to jostle for position to have more power and control and to perhaps even straight up increase the funding towards their own organization?

• 1:04:16Speaker 02

  So, I mean, yes and no. You know, I think if, you know, if you approach your role within government, you know, either from a, you know, a government employee perspective, or a leadership perspective, or even an appointed perspective, you do owe some allegiance, a significant allegiance, you know, to the law. You know, it's a hard thing to look at the law, and if it says X, to say, I don't care, you know, when you're in that kind of role, you know, it's just, it's, there's a lot of irresponsibility, you know,

• 1:04:53Speaker 02

  that that that that view could could generate. Yeah, so I think if there are things that feel to, you know, an institutionalist, you know, an agency representative who has expertise, that yes, this is clearly in our jurisdiction. And if we didn't express that view, we wouldn't be applying the law, you know, fairly and equally.

• 1:05:21Speaker 02

  You know, I think that I think that that's, you know, to some degree, you know, what, you know, what what some of this activity is. Uh, you know, on behalf of of all kind of, you know, counterparts uh, and and agencies, you know, looking at this space. I think there's a different conversation about, you know, things that may not be within their jurisdiction, within any agency's jurisdiction, that they either, again, view as a threat to their own powers and their own control, either through um taxation, through uh money supply,

• 1:06:01Speaker 02

  uh, through um, you know, quote unquote, investor protection issues, that then they are trying to find flexibilities in their authorities to bring them into their jurisdiction, or they are asking Congress, or hoping that Congress, you know, creates a new regime to give them that jurisdiction. And I believe that's a high bar. I think that that there needs to be a high bar to Congress creating a new regulatory apparatus out of whole cloth that it has not done before. I mean, we do not have a federal oversight regime over purely spot commodity transactions.

• 1:06:42Speaker 02

  You know, we don't have, we don't register, you know, cattle auctions in Texas and Oklahoma. You know, we don't, we don't have a federal regulator over eBay, right? In terms of an exchange, you know, the money transmission aspect probably. But why is this so different? And why does it need this kind of attention? To me, that's, there's a high bar to justifying, you know, new public policy for any regulator, and I have not seen anyone convincingly state that, uh, including all of the speeches and dialogue that has so far been presented.

• 1:07:20David Hoffman?

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• 1:08:05David Hoffman?

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• 1:08:49David Hoffman?

  AVE version 2 has a ton of cool features that makes using the AVE protocol even more powerful. With AVE, you can leverage the full power of DeFi money legos, yield, and composability all in one application. On AVE, there are a ton of assets that you can supply to the protocol in order to gain yield, and all of those same assets can also be borrowed from the protocol if you have supplied collateral. One of my favorite AVE features is the ability to select a stable interest rate. Once I've selected a stable interest rate, I'm protected against any interest rate volatility that may happen in DeFi, and allows me to plan my DeFi finances for the long term. V2 also features the ability for users to swap collateral without having to withdraw your assets, trade them on Uniswap, and then deposit them back into AVE.

• 1:09:33David Hoffman?

  With AVE, users can do this in one seamless transaction, saving you time and gas costs. Check out the power of AVE at ave. That's A A V E dot com.

• 1:09:44Ryan Sean Adams?

  Brian, I want to spend the rest of our time here talking about this new paradigm that we may be introduced earlier in this conversation, that is DeFi, right? So we talked about this world that I think the current financial regulatory apparatus is set up for is a world full of intermediaries. But DeFi sort of disintermediates the intermediaries. So instead of institutions that, you know, take funds, we have code that actually takes funds and that's open and transparent on chain. And I want to maybe contrast, let's kick off this discussion to ask you about kind of the, you know, the CFTC and how it sees things and maybe other broader parties in government, right? So the CFTC brought some action against BitMEX recently, right?

• 1:10:28Ryan Sean Adams?

  And so not to zone in on that action specifically, but this is the example of what on the bank list we call kind of a crypto bank. This is a centralized exchange and intermediary, sort of an institution you'd find in traditional finance. And I feel like from my perspective, it's just like, okay, it checks all the boxes. This is just another institution that we regulate like all of the others. Okay, the CFTC knows what to do that here. Are they breaking laws? Are they not? If they are, then we have to prevent fraud. So, okay, I get that. But now we've got this thing which is DeFi and it is permissionless. It is global. It is open. There are no counterparties. There's no BitMEX. It's executed by code, not humans.

• 1:11:09Ryan Sean Adams?

  And I guess my question to you is, when we talk about DeFi, does the CFTC, do you think, and do other regulators see the distinction between those things? Because we've got crypto through crypto banks and intermediaries, but then we have DeFi, which is executed by code, and these are completely different worlds. And I'm not sure how many people understand the subtleties of this difference, but it's massively important.

• 1:11:33Speaker 02

  You know, and again, I mean, I'm not sure I understand all the subtleties. I think there are a lot of subtleties to it and it's in a very fast and evolving space.

• 1:11:43Speaker 02

  But there are enough differences that I do understand to feel a lot of conviction in saying the old model probably doesn't work. And if the old model doesn't work, you know, why should we be trying to apply it and rope someone into it because they published code or because they chose to use something? You know, again, but you know, as, as I've said before, in a different discussion, just as a matter of fact, not because it's a view that I love, but you know, the CEA, the Comai Exchange Act, the law says it is illegal to offer or enter into an off-exchange futures contract.

• 1:12:26Speaker 02

  And I mean, that's the law. And so, you know, if, if-

• 1:12:30Ryan Sean Adams?

  And just to be clear, Brian, whether that's a, the law says, as like just the black and white words of the law, is whether that's a centralized intermediary or a smart contract executing that futures contract. It's just a law that pertains to the contract itself, is what you're saying.

• 1:12:47Speaker 02

  Well, so, so, I mean, I think that, you know, I'm not a lawyer and I'm, I'm very glad I'm not a lawyer. You know, the A C had plenty of lawyers and they do great work, but I'm glad that my voice was a little bit differentiated from others. And I'm glad that, you know, not being a lawyer, sometimes I, I felt like I could take, you know, a, a higher level view and ask questions that, you know, maybe someone more focused on the details wouldn't have asked. And so, you know, I, I say that to say that, you know, this isn't legal advice, since I'm not a lawyer, thank goodness. But, you know, I guess you could look at the operative words in that statute as, as being, you know, to offer or to enter into, which, you know, could mean, you know, some

• 1:13:32Speaker 02

  entity offering something. So it could be, you know, a centralized entity or it could be something else that may be hard to hold accountable for something. But then the other, you know, word is enter into, which actually creates liability for an individual, you know.

• 1:13:52Speaker 02

  Taking responsibility and, you know, and again, exercising, you know, financial market freedom by, you know, entering into a transaction. And, and I think that's, that's an unfortunate and dangerous concept. And one of my points on that was, look, let's take, let's take the CFTC out of it. Let's say the CFTC just refused to enforce that, that part of the law. You know, large financial institutions are not going to engage in activity that they know is illegal. And so, you know, if the DeFi community, if, if, if the DeFi space and certain, you know, protocols and their smart contracts, you know, are hoping for more institutional engagement

• 1:14:36Speaker 02

  and there are, you know, derivatives being traded and, and there's, there's a hope or a wish that, you know, institutional money or resources come into that, you know, that's a, that's going to, that's a problem that's going to need to be solved. You know, either by changing the law, you know, creating a different kind of framework that can recognize, you know, the status of a non-entity, you know, code, you know, as a exchange, you know, or some other kind of solution. So there is a real world implication to what the law says, even if the CFTC decides to do nothing. And, and I think that's important to understand.

• 1:15:17Speaker 02

  But, you know, but also, you know, to your more fundamental question, Ryan,

• 1:15:26Speaker 02

  you know, I, I think that, you know, there could be a view by some at the agency. I haven't heard about it directly, but I can understand if some have this view, that they saw activity occurring that they believed is illegal and they're going to find someone to hold accountable for.

• 1:15:47Speaker 02

  You know, I wouldn't agree with that. And that's not something that I would necessarily, you know, overtly kind of support if I had, you know, if I was in my prior role. But, you know, people could take that view, you know, within, within, you know, within the regulator.

• 1:16:04David Hoffman?

  Brian, I want to jump on that point and ask another question that's related to that.

• 1:16:07Speaker 02

  Yeah.

• 1:16:08David Hoffman?

  When I got into crypto, I was, how old was I? I was young. I was like 24, 25 or something. And I had a, I had a psych degree, right? I didn't have a business degree, didn't have a finance degree. I paid my taxes with TurboTax, whatever, just like input my W2, called it good. And so many people are coming into crypto with that background, right? Like not really understanding finance, not really understanding, not even understanding commodities or securities or anything. You just, you got a ledger, you live at your parents' house, you find this Ethereum thing, and then you start pressing some buttons. And so like one of those buttons might be to mint a commodity or a derivative token or something that falls under the regulation of the CFTC.

• 1:16:50David Hoffman?

  Now, if it's not going to be a centralized intermediary, because these individuals are playing around in DeFi, and the reporting requirements or the regulation requirements actually don't fall upon everyone, does that mean that it actually falls upon the individual to understand the rules and regulations coming out of the CFTC? And do you think that the CFTC will actually start to have a jurisdiction over the individual, right? Like, no, you actually can't touch that contract because of the laws? Is that like a future that you see, or is that just too, too crazy?

• 1:17:24Speaker 02

  I don't see that future. And I think that would be very irresponsible of the agency to take that view. You know, technically, could there be liability there? Yes. But I don't view it as credible or as responsible. I mean, I think you really see the agency, you know, only going after individual traders who are, you know, committing massive manipulation, you know, in important markets that are bread and butter to the CFTC jurisdiction. And those cases take a lot of research and a lot of time to bring and win. And, you know, I don't, I don't see that as, as a, again, this isn't legal advice,

• 1:18:09Speaker 02

  but I don't see that as a, as a likely outcome in this space. And it wouldn't be something that I individually would be concerned about, me personally. You know, I think

• 1:18:23Speaker 02

  it's, I mean, we're just, we're just gonna have to see how, how, how the space evolves. I, I think that, you know, there is an understanding that, you know, publishing code is a First Amendment right, and it is, it is part of freedom of speech. And there are a lot of court cases, you know, that, that, that back up the ability to publish something that could be used by, you know, any, you know, recipient, you know, in a, in a negative, hostile, violent, you know, right breaking way, but it is not the publishing, you know, of that material

• 1:19:06Speaker 02

  that is violative of the law. It is the use of it, you know, for that illicit purpose.

• 1:19:13Speaker 02

  And I think the more that, you know, that DeFi stays or, or, or furthers itself as decentralized,

• 1:19:26Speaker 02

  the, the, the, the safer, you know, the ecosystem is because it basically just becomes individual actors interacting with freely published code.

• 1:19:39David Hoffman?

  I definitely appreciate that take, too.

• 1:19:41Speaker 02

  I think that represents a lot of hallmarks, you know, and again, that, you know, some of the foundational principles of the country.

• 1:19:46David Hoffman?

  Yeah, that's, that's a really, really good thing to hear. And I also want to ask, because the other obstacle that I see coming towards the way of regulators, and especially the CFTCs, you know, earlier we talked about NFTs and how like, you know, NFTs could not be synthetic assets or commodities or anything. But the thing about DeFi is that we have all these financial tools that plug into each other. And so we actually just yesterday, a new project came out that talked about creating perpetuals, perpetual contracts. Upon a price of the floor price of NFTs, which just means like the aggregate price of NFTs. All of a sudden, we can now make perpetual contracts based off of any NFT like set, anything that has sufficient amount of liquidity. In the last two weeks, we have seen a thousand NFT projects like blossom and created out of thin air over the last two weeks.

• 1:20:31David Hoffman?

  And I actually kind of think like over the next year, we're going to see like 10,000 more. And that means that there's going to be like room for like tens of thousands, hundreds of thousands of perpetual contracts, synthetic assets, derivatives that are all coming out of NFTs. And that's not even talking about the DeFi tokens, which also have these same potential properties. And so like I see a world of 10,000 synthetic assets, 10,000 like derivative contracts coming into DeFi. And so like, is the CFTC equipped to handle just a Cambrian explosion of assets that kind of fall under the purview of commodities?

• 1:21:08Speaker 02

  No, I don't think that it needs to be concerned about that. You know, even if it, you know, technically implicates its jurisdiction, you know, the agency has very important authorities over, you know, critical components of the economy that it doesn't need to be using its scarce resources to, you know, go after, you know, a new blossoming space, you know, that that could implicate its, you know, potential jurisdiction. But let me answer that also in a different way, which is that I had said before,

• 1:21:48Speaker 02

  the CFTC has anti-fraud and anti-manipulation authority over spot commodity transactions. You know, not, not some overarching trading registration regime, you know, regulatory regime, but pure anti-fraud, anti-manipulation, you know, civil authority, you know, to prosecute. You know, if the agency is considering getting involved in the DeFi space at all, maybe it should start there. I mean, technically that would mean that the agency has some level of prosecutorial authority over flash loan attacks, for instance.

• 1:22:32Speaker 02

  You know, over outright fraud and theft through, you know, you know, chatroom schemes.

• 1:22:40Speaker 02

  And if there aren't criminal authorities that are helping to prosecute that activity, and if the agency is starting to dip its toe into the DeFi waters, you know, let's actually just go after the bad actors who are stealing things.

• 1:22:59Ryan Sean Adams?

  Oh, my God. Can I just pull my hand up and say that's exactly what we want? That's exactly what crypto wants. I mean, there are bad actors. There are people who perpetuate fraud. Not a day goes by that I don't get a DM or somebody on Discord message me and try to get me to do something in crypto that's essentially going to steal all of my money, right? These are the kind of bad actors that we would hope our regulators would help us with, the clear frauds, right? The Bitconnects of the world. I mean, good job SCC for going after that case, right? Or if there's a centralized exchange that is defrauding their customers, like, please, help with that. What we worry about, I guess, Brian, is, editor for Bankless, we have a newsletter too,

• 1:23:43Ryan Sean Adams?

  and we try to go to various products in the US. One of my favorite products is called DYDX, doing really cool things. It's a perpetuals product. It's not available if you live in the US, right? So it's like geo-blocked. You live in the US, you can't access it. And I'm like, Lucas, why can't I access this? And he's like, he always goes, because we live in a financial prison, Ryan. That's why, right? And he's kind of joking, but like it also...

• 1:24:06Speaker 02

  He's referring to the CFTC's authorities and the statute that exists.

• 1:24:10Ryan Sean Adams?

  It kind of stings. So if I'm in Europe, I get access to these markets and these products. If I'm in another place, I'm like, why can't Americans have this?

• 1:24:18Speaker 02

  I think the regulatory environment in Europe is different. I think it's changing. It could be changing very rapidly. And, you know, sometimes, you know, a lack of clarity could be better than clarity, and we'll see how it evolves in Europe, because, you know, the clarity may not be as beneficial as, you know, anyone could hope.

• 1:24:35Ryan Sean Adams?

  What I just worry about is like, is there the real case that America could fall behind? We have some of the best talent in this space. Silicon Valley came, you know, from the US. That's a US creation. And like, how can government not lose sight of... Of let's not miss the next internet, guys. This is like a financial, this is a huge movement. Doesn't the US government want it to be centered here? Don't they want their citizens to have access to this? And I worry that we're missing something along the way. And this is not a criticism on you in particular. Like, I think you're doing fantastic work.

• 1:25:07Speaker 02

  I try to mind being criticized. You know, I believe that, you know, in my prior role, accountability is part of the job. And that can come through criticism, feedback, whatever. So, you know, I appreciate any and all of that at all points, as I hope my colleagues do, and I think they do.

• 1:25:25Speaker 02

  But I wanted to bring up two issues that you raised. One was kind of the geofinancing. You know, I believe it's a disgrace that regulators are forcing through a potential enforcement action, you know, entities to take away what, in my view, is a First Amendment right to privacy of market participants, you know, in our country. You know, we talked about balance and the pendulum. And I understand that there are ways to get around rules and get around regulations. You know, but to me, there is a very strong First Amendment argument to be made to the ability to use, you know,

• 1:26:10Speaker 02

  VPNs and access points that are, you know, less traceable to the government. Maybe, I don't know that much about VPNs, but a lot of the conversation from a regulatory basis has been around detecting those uses and trying to prevent that from, you know, those kinds of access points. And I don't, I don't view that positively. You know, I think that an exchange or an entity can meet its obligations by having reasonable standards in place that doesn't necessarily preclude people from exercising some right to privacy. And it's the government's job to find those things out, not to force, you know, other entities to do its work for them.

• 1:26:54Speaker 02

  And we've gotten to a point in the regulatory state where, you know, regulators are forcing entities to do a lot of their own work. And I don't view that necessarily positively for freedom or for, you know, the standards of privacy of the individual consumer. And that conversation can go directly into big tech if you wanted to, but I mean, we don't, we won't go there today. The issue to me is still around, you know, the ability to transact freely in the financial marketplace. And it's a regulator's job to try to understand what's going on, whether or not frameworks can apply, and if they aren't, how they can be.

• 1:27:36Speaker 02

  So, you know, that's, that's one of, that's one of my points of view there. You talked about, you know, innovation and entrepreneurialism and wealth creation. And, you know, in my view, one of the fascinating things about DeFi in its true form is that it is the ultimate, and maybe, in my view, the ultimate expression of the beneficial power of a free market.

• 1:28:09Speaker 02

  From a access, innovation, transparency, you know, reward, competition, virtuous cycle. You know, you don't have a lot of that, a lot of those characteristics in the existing financial system. You know, it's hard to compete against the incumbent, you know, top 50 banks, let alone top three, right? It's hard to compete against the, the top three derivatives exchanges. It's hard to compete against the top two or three stock exchanges.

• 1:28:51Speaker 02

  But here we have an environment where, you know, things can be innovated at a very low cost by almost anybody, have instantaneous and widespread accessibility to create a network effect that generates value and wealth that then can be competed against and, you know, re-provoke, you know, innovation, growth, wealth, everything that we want.

• 1:29:18Speaker 02

  Why would we unduly inhibit that? It's beyond me in the name of increasing a regulator's power, increasing someone's potential legacy, or in the name of, you know, applying the law as it's currently written. You know, again, I talked about balance, and I think ultimately, things have to come back into balance. But I think, you know, DeFi needs to run as far as it can, as fast as it can, to make sure that we get that pendulum swinging back more towards the middle.

• 1:29:49Ryan Sean Adams?

  Well, we are running fast and we are running hard right now, Brian. And as we start to bring this to a close, I want to ask you a question about like projecting into the future. So you've talked so much during this discussion, I think one of the major themes has been kind of this balance. Another theme is, we need some additional regulatory clarity coming from our legislators, from Congress, for some of these agencies too. So I'm wondering if you could maybe, we're in sort of a negative trough, I guess, it seems like a negative regime, but can you tell us maybe where you think this ends up? And paint the happier picture of how you think America can move forward and other countries, America maybe partially serves as a model for other countries, how they move forward

• 1:30:33Ryan Sean Adams?

  with some sensible regulation for crypto that doesn't kill innovation, but actually supports it, clears out fraud. How do you think this is going to play out in maybe a good way?

• 1:30:43Speaker 02

  So I think, you know, again, I'll try to separate what I see in terms of the innovation and evolution of DeFi versus, you know, more of the well-known, large market cap, you know, crypto, you know, products, assets, and their trading environment. You know, I think, you know, in any...

• 1:31:08Speaker 02

  In any economic environment, you know, service providers are going to come to exist and grow in order to increase access and, you know, ease of use of new products. And we've seen that with, you know, the growth of exponential growth of, you know, crypto trading venues, you know, exchanges. I think exchanges, you know, there's a sense in the government that the word exchange connotes a, you know, a registration status with the government. So I kind of refer to them as, you know, crypto trading venues, but, you know, people refer to them as exchanges and that's fine.

• 1:31:48Speaker 02

  You know, highly centralized entities providing a valuable service, you know, being compensated for that service, you know, outside of a, you know, more traditional financial regulatory regime because they're, you know, in the spot commodity market for the most place, depending on what the SEC may or may not decide on the status of any product. I do see the potential, you know, for a regulatory regime to develop around those because of their size, their scale, their customer base. I wouldn't necessarily advocate for it. If one's going to be developed, I think the CFTC needs to be front and center in the conversation. There was a bill that was introduced in the last Congress called the Digital Commodity

• 1:32:32Speaker 02

  Exchange Act that would allow the CFTC to create a voluntary registration regime for spot crypto trading venues. And then through registration would basically grandfather in as non-security commodities, the tokens that were being traded there or that had enough liquidity to justify, you know, commoditization, right? To solve a couple of issues at the same time. And I think if something's going to happen, that's a good approach for a few reasons. One is that it's voluntary.

• 1:33:12Speaker 02

  So that it doesn't just force, you know, large, successful, you know, service providers that have increased access to these products into something that may not fit them or may destroy value. It allows an agency that has, you know, some level of expertise in the commodity markets to develop, you know, a regime that should hopefully become attractive enough for, you know, voluntary registration. But it also creates an incentive, you know, through more certainty of the legal status of the products that are being traded. You know, that is an approach that I could appreciate. And it is in the House Agriculture Committee.

• 1:33:57Speaker 02

  The Agriculture Committees, getting back to our first conversation, are the committees of jurisdiction of the CFTC. You know, it's not the Financial Services Committee, it's the Agriculture Committee because of the history of futures contracts originating with the agricultural markets. And I would say that it's very important that those are our committees of jurisdiction because farmers have a strong voice there and it forces the members of Congress sitting on those committees to pay attention to the effect that our regulations have on end users, on the people who need the products we regulate to manage and run their businesses. You know, and I think that that's a very important dynamic that I actually really appreciate.

• 1:34:41Speaker 02

  So it may sound odd, but I think there's a lot of public good there. And so that's in the House Agriculture Committee. I don't know what the status will be of that bill going forward, but I would hope that in any discussion about, you know, a centralized crypto trading venue registration regime, that the members of Congress on Capitol Hill that have jurisdiction of the CFTC are front and center in that conversation. You know, moving along to DFY.

• 1:35:13Speaker 02

  You know, I don't think there is the bandwidth, the understanding, or even the capability possibly at this point to create or craft legislation that would be able to effectively target that space. I think we're going to have to see how. So I think it's going to be more of a regulator-led discussion of how any regulator wants to apply its existing authorities if it decides to take action and then against whom, for what. And, you know, we may, we may see court cases develop out of that. And again, as I said, with regards to, you know, challenging any regulator's, you know,

• 1:35:57Speaker 02

  decision-making, hopefully if, if any regulator takes a view that's too aggressive, that's too broad, or that isn't well substantiated, you know, a judge ends up making, you know, a ruling on it to either limit, you know, or negate that kind of decision, you know, or hear it for its merits and embrace it under certain circumstances, you know, in that scenario.

• 1:36:23Ryan Sean Adams?

  Brian, this has been absolutely fantastic to walk through some of these issues with you. I really appreciate it. I hope the Bankless Nation heard that it all starts with agriculture, all starts with farming, is what Brian Quintenz is telling us. This has really been a pleasure. Thank you so much for spending some time with us.

• 1:36:39Speaker 02

  Thanks, Ryan. Thanks, David. It's great to be with you. I wish you all the best and hope to stay in touch as, as things move forward.

• 1:36:47Ryan Sean Adams?

  Well, can I ask you this? You've got some extra time on your hands these days. What are you going to be doing? And part of me kind of wishes you were still at the CFTC now that I've heard your, your, your voice and your values. So I'm kind of regretting that, but like, what are you going to spend your time on?

• 1:37:01Speaker 02

  Well, thanks for that, Ryan. I do appreciate that. I was going to have to leave by the end of the year anyway, and it was the right time to move on. I don't have anything lined up yet. I'm hoping to have some announcement in the next few days, maybe within a week. As I said in my resignation communication, I want to keep crypto and DeFi very relevant to my career. And I think at least one of my announcements in the near future will do that. And I'm hoping to do a number of things that can embrace this space, this innovation, and the freedom and opportunity that exist

• 1:37:46Speaker 02

  in it and help move it forward.

• 1:37:47David Hoffman?

  Well, Brian, as bullish as I am on crypto, I am also as bullish on your career and seeing what you do in this space. So I'm looking forward to following that story. In the words of a great meme, we will follow your career with great interest.

• 1:38:00Speaker 02

  Thank you.

• 1:38:01Ryan Sean Adams?

  Yes, we will.

• 1:38:02Speaker 02

  Thank you.

• 1:38:03Ryan Sean Adams?

  Bankless Nation, we hope you enjoyed that. Brian Quintenz joining us for this incredible conversation. Some action items for you today. I guess maybe a sister episode to this. Go tune into our episode with Hester Peirce that we did a few months ago. She is a commissioner on the SEC. That's a good reference. So you get the SEC's take. Now we have sort of a former CFTC commissioner's take on it. It'll round out the picture of what's going on in DC. You can also listen to the episode with Ryan Selkis we did, also Jake Chervinsky. Fantastic discussions there. Also, we've released a new show, at least David has. He's been busy on it, coming out every Tuesday. It's called Layer Zero. This tracks the social element of crypto, the stories of individual people and what they are doing in the space.

• 1:38:46Ryan Sean Adams?

  David, I think our next one, every Tuesday this comes on, is the next one with Justin Drake.

• 1:38:51David Hoffman?

  Justin Drake, Justin Drake. Yeah, last week was with Eric Connor, which was already one of my favorite conversations. Next week, the one coming out tomorrow, if Lizards are listening to this on Monday, is with Justin Drake. So definitely do not miss that. And also, if you appreciate all the shows that we are doing and the conversations that we are having, please go ahead and give us those five star reviews wherever you listen to podcasts.

• 1:39:09Ryan Sean Adams?

  There, David fit in two action items in one. Awesome, man. All right. Risks and disclaimers, guys. Crypto is risky. DeFi is risky. Eth is risky. So is Bitcoin. You could lose what you put in, but we are headed This is The Frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.