Keynote Address of Commissioner Summer K. Mersinger: An Appropriate Regulatory Regime for Evolving Markets
September 14, 2022
(As prepared for delivery at the American University Web3 Summit)
Thank you so much to American University and the Global Blockchain Business Council for inviting me to speak on such an important topic today.
I am excited to discuss the regulatory implications of Web3 and blockchain, interested to hear the thoughts and perspectives of so many industry leaders, and am particularly looking forward to staying on for our panel discussion on the “New Era of Finance.”
Before I begin, I need to provide a standard disclaimer that the views I share today are my own and do not represent the views of the Commission or my fellow commissioners.
I want to begin with a short history lesson about the Commodity Futures Trading Commission (CFTC or the Commission).
The CFTC is an independent agency led by a five-person commission, all of whom are nominated by the President and confirmed by the Senate. I am one of those five commissioners. Our agency regulates futures and derivatives markets, which simply means our markets are forward-looking, secondary markets mostly used for price discovery and hedging, or risk management, purposes.
The CFTC’s predecessor, which was part of the Department of Agriculture, was founded almost 100 years ago. In fact, next week, September 21st will be our 100th Anniversary.
At that time, almost all commodity futures trading was done through “open outcry.” This meant that men—the first woman to trade futures didn’t do so until the 1960s—would trade by literally yelling (hence the term open outcry) and gesturing wildly, and to consummate the trade, they would write them down on slips of paper. The pits were hot, loud, and chaotic, but for decades, this is how most CFTC-regulated products were traded—and if you wanted to trade commodity futures, this was the only way those products traded.
Today, we have electronic markets. Legislative and regulatory changes a little over 20 years ago allowed electronic markets to develop alongside open outcry markets and compete. At first, the incumbent scheme was dominant, then the two ways of trading coexisted, and finally the more efficient technology gained widespread adoption.
The CFTC is a technology neutral regulator. What that means in practice is that we don’t view any one technology—even one as potentially groundbreaking as Web3—as better than any other technology.
In fact, a big part of our job is to make sure that all existing and emerging technologies can compete together on a level playing field. Our governing statute, the Commodity Exchange Act (CEA), specifically identifies one of its purposes as being to “promote responsible innovation and fair competition” —and we take that mission seriously.
A technology that is decentralized and permission-less—like Web3—presents amazing opportunities for consumers and businesses alike, but it presents some very interesting challenges to regulators like the CFTC.
Technologies like Web3 and blockchain are innovative and groundbreaking. As regulators, we are sometimes skeptical of the new and unknown. But we simply need to look back at our history to see that we have successfully allowed technological innovations in the past, which over time have made markets safer and more efficient.
And I can assure you that we are carefully considering new technologies, like Web3, blockchain, and digital assets, as they enter our regulated markets. But the CFTC is a little different than our peer regulators. Unlike almost every other regulator, we are not a spot market regulator.
This means that, for example, we regulate cattle futures, but unless it affects a CFTC-regulated derivatives market, what happens at a sale barn is solely within the jurisdiction of the Department of Agriculture.
This nuance in our regulatory authority leads to some very complicated questions around jurisdiction that I won’t get into today. But what it does mean and what I would like to explore more fully, is that the CFTC has a great deal of expertise when it comes to overseeing and regulating markets.
In addition, our enforcement division has vast experience in identifying fraud and manipulation in the markets, whether it occurs in a spot bitcoin market or a crude oil futures market. Reviewing massive amounts of market data and determining where bad behavior has occurred is one of the CFTC’s bread-and-butter functions.
And I believe that is why Congress is considering expanding the CFTC’s jurisdiction to include spot cryptocurrency markets. Regardless of the ultimate form that any legislation may take, I think we as an agency have an opportunity to apply our market expertise to this emerging technology.
Additionally, our enabling statute, the CEA, requires us to be a principles-based regulator, rather than a more prescriptive regulator. Historically, the CFTC’s substantial experience as a principles-based regulator means, in practice, that we are outcome-focused. It is this focus that allows our agency to regulate regardless of the underlying technology used in the market.
Our principles-based approach is applied through what we refer to as core principles, which are set out by Congress through the CEA. The CFTC allows regulated entities to satisfy the core principles in a manner that is tailored to, and makes the most sense for, their particular operations—rather than forcing them to comply with detailed and prescriptive rules written on a one-size-fits-all basis.
Because of our principles-based approach, the CFTC is also a nimble regulator, able to adapt our regulatory regime to evolving market dynamics—including innovations in technology—while assuring that customer protection and other public interest objectives are satisfied.
As the CFTC is thinking about Web3 and blockchain, we’re very much considering how we can take that successful regulatory formula and apply it to markets that utilize these new technologies. I think we will see an opportunity for the CFTC to take common-sense, core principles—like assuring that products are not readily susceptible to manipulation—and apply them to Web3.
For potential entrepreneurs and market participants in that area, this would provide three main benefits:
First, you have the benefit of clear rules of the road, coupled with an opportunity to engage in an iterative conversation with the CFTC. As a principles-based regulator, our job is to establish a clear and comprehensible regulatory framework, while retaining flexibility for new entrants who have questions about future product offerings or the use of new technology.
Currently, CFTC-regulated entities work closely with the Commission to determine whether or not a prospective product or market model meets the core principles, and I think any expansion of our regulatory remit should retain those same features.
At the CFTC, we understand that compliance should never be a simple box-checking exercise. We want our regulated entities to understand our expectations and not be afraid to come in and work cooperatively with the Commission.
Second, the core principles are technology neutral. We are not tied to specific formats, procedures, or business models. As long as a regulated company and a regulated product satisfy the core principles that are in place, the CFTC has no view on the technology platform that delivers the product to consumers and market participants.
Third, we have an unsurpassed level of expertise in market surveillance and research. Over the past several decades, the CFTC has developed the tools to effectively police a wide variety of markets under a wide variety of economic conditions. That expertise allows the CFTC to be smart about using its enforcement authority to root-out bad behavior.
As a former Senate staffer, I would never presume to predict what Congress is going to do and when they are going to do it. However, I do know that as long as we have adequate resources, the CFTC is more than up to the task of effectively regulating and policing spot cryptocurrency markets.
And should the opportunity arise, I am confident that the CFTC can set clear rules of the road while promoting responsible innovation, and help consumers understand these markets to make sure their money and investments are safeguarded from bad actors.
That has been the CFTC’s job from its inception. Although we started out protecting agricultural producers who traded through brokers on exchanges physically located in cities like Chicago, Minneapolis, and Kansas City, as technology and markets changed, we continued to perform our role as the participants and products on those exchanges increased exponentially and those trades moved to cyberspace.
I am confident that we will continue to effectively protect and regulate markets as we move towards another moment of technological innovation, as we see new product and market change, and as a new group of exchange participants enters the scene.
Again, thank you to the Global Blockchain Business Council and American University for hosting this event today. I am looking forward to seeing the opportunities Web3 will create for all of us, and I am honored to share my voice as a regulator in this important discussion.