Remarks as Prepared for Delivery on October 26, 2022

Thank you ISDA for the opportunity to speak to your members about cryptocurrency. I taught law students about cryptocurrency in my advanced securities regulation course at Georgetown Law School, and then a cryptocurrency regulation course at the University of Virginia Law School. Cryptocurrency was of natural interest given my decade as the Special Inspector General over TARP.

You see, Bitcoin, the first cryptocurrency, was borne of, or at least heavily influenced by, the 2008 financial crisis and bank bailouts. On Halloween October 31, 2008, the same month that Congress authorized TARP, Satoshi Nakamoto, the inventor of Bitcoin, published a whitepaper stating, “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” Later, the first 50 coins had the following embedded message, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

My experiences and that unique crypto origin confirm for me that one word should guide the federal government’s approach to crypto. That word is “risk.” I advocate for a “same risk, same regulatory outcome” approach, starting first with an assessment of risk, and in particular, financial stability risk.

With reportedly one in five Americans owning cryptocurrency, and growing interest by more traditional finance “Trad-Fi,” it is important for the United States to have a regulatory framework with effective guardrails to address crypto’s financial stability risks. The market’s ability to harness crypto’s promise to deliver more inclusive, cheaper, faster, and competitive financial services, should not come at the expense of financial stability.

Today, I will talk first about how crypto presents many similar financial stability risks as the traditional financial system, with parallel themes to 2008, and the potential for that risk to become systemic.

Second, novel risks can apply to these novel assets, increasing financial stability risks.

Finally, to bolster financial stability, we can look to post-crisis reforms that worked before to keep U.S. markets the strongest and safest in the world.
 

Crypto Markets Face Similar Financial Stability Risks as the Traditional Financial System, with Parallel Themes to 2008

Today, we are confronted by emerging financial stability risks in a market that did not exist in 2008 – the rapidly developing crypto market. Cryptocurrency was supposed to break from the traditional financial system, and all of its fragility and vulnerabilities. However, this spring, unregulated crypto markets revealed their vulnerabilities to similar financial stability risks as traditional finance, with parallel themes from the 2008 financial crisis.

In 2008, the financial crisis spiraled out of control due to unchecked risk-taking by financial institutions that were highly interconnected with each other. Innovative derivatives that were largely unregulated, complex and opaque connected one financial institution to another. Underlying assets that were not the high quality represented resulted in hidden exposures and vulnerabilities.

Significant interconnections caused contagion risk. The market lost confidence in any counterparty who looked to be on weak footing, leading to runs and withdrawals of financial support. Defaults led to cascading losses and deleveraging. Short-term liquidity dried up.

Redemption requests and fire sales resulted from a loss of market confidence. It is seared in my mind the day when I was counsel to the U.S. Securities and Exchange Commission Chairman when the presumably “stable” Reserve Primary Fund broke the buck due to fears of Lehman exposure.

In the 2008 crisis, regulators were caught unaware of the fragility of the financial system to unregulated and under-regulated financial institutions and products. The consequences fell hardest on American families. High unemployment. The loss of trillions in wealth. A housing crisis. A deep recession – the human toll of which is too often overlooked. Public trust in the financial system eroded.

Congress and financial regulators undertook reforms to promote financial stability. They limited vulnerabilities to contagion risk and run risk. They expanded regulatory authorities and increased transparency. By making the U.S. financial system more resilient to times of stress, the U.S. increased financial stability.

We are again confronted by emerging financial stability risks with an innovative asset class. Digital assets operate differently from the products in 2008, and with far more hype, celebrity endorsements, and novel technologies. However, there has not been a full assessment of the risks that they pose. Let me discuss some risks that I have observed based on my experiences. However, given the unregulated state of the market, I caution that the full risks are not known.

Digital assets have recently shown to have financial stability risks with similar themes as in 2008. In May, there was the collapse of TerraUSD, an algorithmic stablecoin, and related crypto-asset Luna which was critical to Terra’s peg. TerraUSD, the then-third largest stablecoin with an $18 billion market capitalization, broke the buck, triggering redemptions across the Terra ecosystem. Those controlling a Luna-related foundation may have liquidated as much as $3.5 billion of Bitcoin, placing downward pressure on Bitcoin, affecting all with exposure. Tether, the largest dollar-based stablecoin, also broke the buck, reducing its total market capitalization by almost $9 billion. This is what can happen with a lack of confidence, run risk, and contagion risk.

Contagion risk continued as the drop in Luna triggered a broad sell off in crypto and spread losses to institutions, including Three Arrows Capital (“3AC”). 3AC then defaulted on loans to Voyager Digital, who filed bankruptcy. 3AC also instigated financial distress for lenders Genesis, BlockFi and Blockchain.com, who liquidated positions and abruptly cut off lending, including for Celsius, which subsequently failed.

The vulnerabilities seen during this beginning of what some call the “Crypto Winter” warn of growing intra-market risks, with parallel themes seen in 2008. Opaque, complex, leveraged, and unregulated products. Underappreciated risk. A lack of confidence that underlying assets were stable or of high quality. Lots of connections between market participants. A market vulnerable to contagion risk, run risk, risk of defaults, cascading losses and a liquidity crisis. Customers, including many retail investors, saw redemptions halted, and a significant loss of wealth as their assets were frozen, tied up or lost. A reported $2 trillion in market capitalization was lost.

Just as regulators could not see the true exposures or risk in 2008 due to unregulated companies and products, we cannot see that today with unregulated crypto markets. The Financial Stability Oversight Council recently found that to the extent that the digital asset industry scales to a significant size, it could present systemic risk. Therefore, it is important to monitor intra-market risk and for regulators to understand possible spillover effects on the financial system or economy during times of stress. However, without additional authority, the CFTC is hampered in its ability to monitor these risks.

Growing interest in digital assets by the traditional financial system and the potential for systemic risk

The digital asset market remains relatively small, and contained from the level of systemic risk that would come with greater scale or interconnections with the traditional financial system.[1] But this may not be the case in the near future, particularly given growing interest by traditional finance. It is not lost on me that last week I spoke to managed funds and this week to international swap dealers, all with an interest of potentially expanding into cryptocurrency markets.

Financial stability risk will increase, and could rise to the level of systemic risk if in the future there are greater interconnections between the crypto industry and traditional finance players performing critical market functions. I caution that a full assessment of the risks has not been completed, and presents challenges without additional regulatory authority.

Stablecoins: Stablecoins, which are used to trade or lend crypto assets, are an area of growing interest by traditional finance. Financial stability risks are based on the stablecoin’s ability to remain stable. Algorithmic stablecoins present run risk, as seen with TerraUSD. There is also run risk with asset-backed stablecoins with fear that the underlying assets may not be as represented or of high quality. The CFTC brought an enforcement action against Tether, the largest dollar-backed stablecoin, for fraudulent misrepresentations related to its stability. A lack of creditworthiness of an affiliate could impede market confidence. A maturity mismatch caused by underlying assets with maturities that do not allow for immediate redemption could also increase run risk. In the case of significant redemptions, stablecoins may liquidate positions, which could bring contagion to U.S. Treasuries or other markets.

The credibility of stablecoins could be significantly bolstered by regular independent audits of the stabilization mechanism or quality of underlying assets. However, such audits are not the norm. Nor are comprehensive disclosures.

Pension funds, custody, and other indirect connections: I have significant concerns about the possibility of pensions and retirements funds investing in cryptocurrencies. Cryptocurrencies have not served as a hedge or to diversify traditional investment exposures, but instead have broadly correlated with equity markets. Crypto exposures thought to hedge against risk may unexpectedly amplify risk, heightening financial stability concerns.

There are indirect connections between crypto and traditional finance. The Bank of New York Mellon announced that it would begin to custody crypto. A small number of public companies hold significant crypto assets, indirectly exposing creditors and shareholders. Venture capital and hedge funds have raised billions of dollars for crypto-related trading and investments, in some cases with global financial institutions.

Monitoring and mitigating inter-market risk that could pose systemic risk will require a whole-of-government approach. This will remain a challenge for the CFTC without a regulatory window into the spot market, leaving much of the task of monitoring inter-market risk on prudential regulators within their supervisory authority. Financial institutions should keep their prudential regulators informed about their activities in this space. A financial institution’s assessment of risk should take into account traditional risks as well as novel risks that apply to crypto assets.
 

Novel Risks for Crypto Assets that Could Increase Financial Stability Risk

Novel technology brings novel risk. The anonymity that can be associated with crypto assets has led to the use of cryptocurrency for terrorist financing, money laundering, and dark-net illegal transactions. Fraudulent scams abound. Cyber hacks and thefts pose significant risk. Legitimate crypto-related exchanges and other companies well aware of this dark history say they want to be regulated. However, their business may be structured in a way that is different to what financial institutions are used to seeing, particularly if customer assets are not segregated, and there are unresolved conflicts of interest. Any financial institution interested in crypto should undertake substantial due diligence to determine vulnerabilities in the following areas, and even then, may find these novel risks difficult to assess.

Cyber Theft, Money Laundering, and Sanctions Evasion

Vulnerabilities to cyber hacks and theft are significant. This year alone saw an extraordinary number of hacks. Senator Debbie Stabenow said in a September hearing, “$1.9 billion of cryptocurrency was stolen in hacks in the first seven months of this year alone.”[2] A few weeks later, on October 7, 2022, Binance announced a $570 million hack that took place over a cross-chain bridge, which is a bridge that sits between two blockchains. That day, the CEO of Binance said on television that cross-chain bridges are used every day by people. He said that the industry has to learn from these mistakes and make their code more secure.[3] He said, “in the blockchain world, whenever there is a bug, it can result in large losses.”

In addition to cybersecurity concerns, the pseudo-anonymity of crypto can result in trading side-by-side with or lending to those with nefarious and illegal intentions or sanctioned individuals or companies. While companies may say that they have Anti-Money Laundering and Know Your Customer controls, there is an open question as to whether they meet the standards required of federal-regulated companies. I remind financial institutions of their own regulatory responsibilities to comply with U.S. sanctions, and rules to combat money laundering and terrorist financing.

Fraud, Scams and Manipulation

Earlier this year, the U.S. Federal Trade Commission reported that since January 2021, “more than 46,000 people have reported losing over $1 billion in crypto to scams—that’s one out of every four dollars reported lost [to fraud].”[4] The CFTC has experienced an uptick in crypto complaints – the main source for enforcement actions. Wash trades, rug pulls, pump and dump, and other fraudulent or manipulative schemes continue. I am proud of the CFTC’s Enforcement Division for its work protecting customers and markets from digital asset-related harm. In Fiscal Year 2022, the Commission brought 18 digital asset enforcement actions, which was more than 20% of our cases filed this year. Fraud, scams and manipulation will continue to serve as potential shocks to the market, and increase financial stability risk.

The Lack of Segregated Customer Assets

Segregation of customer assets from a company’s operating funds is a foundational customer protection in regulated entities that is not common for unregulated digital assets, nor is bankruptcy priority. There is not enough awareness or attention on this critical area where customer protections dovetail with financial stability risks. Customers may be left in a musical chairs’ dilemma. This increases run risk at the first sign of a company’s or counterparty’s weakness. In my conversations with Congressional members, their staff, and market participants, I remain focused on the need to segregate customer assets for purposes of financial stability and customer protection.

Conflicts of Interest

Crypto-related companies may serve multiple functions that are separated into different entities in traditional finance. An exchange may also be a market maker, clearinghouse, lender, and/or custodian. These conflicts present significant risk that in a regulated environment would be disclosed and resolved. In an unregulated environment, the full extent of these conflicts may not be disclosed or resolved, which could lead to cascading losses and contagion risk.
 

Addressing Financial Stability Risks Through a “Same Risk, Same Regulatory Outcome” Approach

The U.S. government should not wait until crypto assets or markets rise to the level of systemic risk before addressing financial stability risks. Similar to post-crisis reforms, Congress can address financial stability risks by providing additional authority to the CFTC. Additionally, the CFTC should continue to use its existing authority, following a “same risk, same regulatory outcome” approach. This starts with establishing the basic foundation of customer protections and guardrails that investors and customers are familiar with, and expect, from other regulated financial products and markets.

Crypto companies seeking to come within the CFTC-regulated derivatives markets should expect the application of our existing regulatory framework because it has a proven record of reducing financial stability risk. As companies seek bespoke treatment, I will be guided in my decisions by the twin pillars of financial stability and customer protection, in particular for retail investors. Crypto companies set up for an unregulated environment will need to change to look more like a regulated entity. On balance, regulators must be careful in allowing bespoke treatment that could increase financial stability risks – risks that are well in check with our existing framework.

The challenge faced by regulators is that cryptocurrency was designed to sit side-by-side with the traditional financial system – an alternative to, rather than a part of, Trad-Fi. This critical distinction is the reason why creating a regulatory framework for cryptocurrency, and digital assets more broadly, is complex and can take time.

We at the CFTC are continuing to assess risks to the best that we can without a window into the market that comes with regulatory authority. This includes risks that are both familiar from the 2008 financial crisis, and novel risks associated with novel technology. Strong and effective guardrails to limit financial stability risks and other risks are necessary to build resilience in times of stress. What is most important is that the U.S. does not rush, but instead develops a regulatory framework that is effective and can stand the test of time.

Thank you.

[1] Even at the November 2021 peak, digital asset markets comprised approximately one percent of global market capitalization across major asset classes. See, e.g., Exec. Order No. 14067, Ensuring Responsible Development of Digital Assets, 87 Fed. Reg. 14143 (Mar. 9, 2022). See, e.g., L. Brainard, Vice-Chair of the Board of Governors of the Federal Reserve System, Crypto-Assets and Decentralized Finance through a Financial Stability Lens (July 8, 2022).

[2] Opening Statement of Sen. Stabenow, Hearing to Review the Digital Commodities Consumer Protection Act, Before the U.S. Senate Committee on Agriculture, Nutrition, & Forestry (Sept. 15, 2022).

[3] CNBC, $570 million worth of Binance’s BNB token stolen in another major crypto hack, October 7, 2022, $570 million worth of Binance's BNB token stolen in another major crypto hack (cnbc.com).

[4] U.S. Federal Trade Commission, Consumer Protection: Data Spotlight, Reports show scammers cashing in on crypto craze (June 3, 2022).

I respectfully concur with the amendments to the CFTC’s Complaint originally filed on April 27, 2022, in the U.S. District Court for the Southern District of New York against Archegos Capital Management, LP and Patrick Halligan.[1]

This is an important CFTC enforcement action.  However, I concur because I note that the SEC has recently issued an FAQ on security-based swaps that states that, pursuant to the Securities Exchange Act of 1934, as amended by the Dodd-Frank Act, a swap based on the shares of an exchange-traded fund that tracks a broad-based securities index is a security-based swap.[2] 

The Commission has a fundamental responsibility to ensure the integrity of the derivatives markets and enforce the Commodity Exchange Act (CEA) against fraudulent schemes involving our markets and products.[3]  Among other things, it is critical that swap counterparties have accurate information for risk management and other requirements. 

Overall, this enforcement action is an appropriate exercise of the CFTC’s broad anti-fraud authority in order to reach alleged egregious misconduct constituting a fraudulent scheme in connection with swaps under the jurisdiction of the CFTC.  The Commission must pursue justice to the fullest extent possible under the CEA, and we have the tools to do so here. 

I support the issuance of no-action relief to Korea Exchange (“KRX”), a foreign board of trade (“FBOT”), with respect to two futures contracts on the KOSPI 200, a security index comprised of 200 Korean stocks (the “Contracts”).

This no-action relief will provide assurance to market participants while the Commission[1] considers KRX’s request for certification of the Contracts pursuant to CFTC Rule 30.13.[2]  That Rule provides that the Commission may certify that a futures contract on a broad-based security index trading on an FBOT conforms to the applicable requirements of the Commodity Exchange Act (“CEA”) to be offered or sold to persons located within the United States pursuant to the exclusive jurisdiction of the CFTC.[3]

If this no-action relief sounds familiar, it is because almost identical relief was issued with respect to the Contracts just under a year ago.[4] Last year, KRX requested no-action relief while the Commission considered its request for certification of the Contracts when the KOSPI 200 transitioned from a narrow-based to a broad-based security index – only to do so again now because the KOSPI 200 transitioned back to a narrow-based and then again to a broad-based security index this year.

I accept that an FBOT may submit multiple requests for certification of a futures contract on a security index.  This is due to the complicated allocation of jurisdiction between the CFTC and the SEC with respect to futures contracts on broad- and narrow-based security indexes under U.S. law.

But what I do not accept is CFTC staff having to devote resources to multiple requests for no-action relief accompanying such requests for certification – which seems to be a self-inflicted wound on our part.  The reason an FBOT such as KRX requests this no-action relief is because, under our rules, a lag may exist between the date that a security index underlying the FBOT’s futures contract is characterized as broad-based and the date on which the FBOT secures the Commission’s certification of its contract.   

The Commission should amend CFTC Rule 30.13, and/or issue appropriate guidance, to reduce (if not eliminate) the likelihood of FBOT requests for no-action relief to address such a time lag.  Unfortunately, though, I am not aware that the Commission has provided direction or resources to our staff to do either.

And I am disappointed that this is the third time in my short 6-month tenure as a Commissioner that I have felt compelled to press the Commission to fix its rules rather than rely on temporary band-aids and work-arounds such as repeated no-action letters where those rules have proved unworkable or, as here, extremely unwieldy.[5]

I commend the staff of our Division of Market Oversight for their high-quality analyses of the broad vs. narrow-based status of foreign security indexes and their diligent handling of FBOT requests for certification of futures contracts on such indexes.  However, it is the Commission’s responsibility to prioritize – and provide staff with the resources necessary for – fixing rules that experience demonstrates do not work, or do not work as efficiently as they should.

I urge the Commission to provide such direction and resources here.

[1]  This Statement will refer to the agency as the “CFTC” or “Commission.”

[2]  Commission Rule 30.13, 17 C.F.R. § 30.13.

[3]  See CEA Sections 2(a)(1)(C)(ii) and (iv), 7 U.S.C. §§ 2(a)(1)(C)(ii) and (iv).  Generally speaking, under the CEA and the federal securities laws:  i) futures contracts on broad-based security indexes trade subject to the exclusive jurisdiction of the CFTC; and ii) futures contracts on narrow-based security indexes are “security futures products” that trade subject to joint regulation by the CFTC and the Securities and Exchange Commission (“SEC”).

[4] > CFTC Letter No. 21-25 (Division of Market Oversight, November 23, 2021), available at CFTC Staff Provides No-Action Letter to Korea Exchange, Inc. Concerning the Offer or Sale of KOSPI and Mini KOSPI 200 Futures Contracts | CFTC.

[5]  See Statement of Commissioner Summer K. Mersinger Regarding Extension of No-Action Relief from Certain Position Aggregation Requirements under CFTC Regulation 150.4 (August 10, 2022), available at Statement of Commissioner Summer K. Mersinger Regarding Extension of No-Action Relief from Certain Position Aggregation Requirements under CFTC Regulation 150.4 | CFTC; and Statement of Commissioner Summer K. Mersinger on Order of Registration Regarding AEGIS SEF, LLC (July 20, 2022), available at Statement of Commissioner Summer K. Mersinger on Order of Registration Regarding AEGIS SEF, LLC | CFTC. 

I am grateful to the ABA Derivatives and Futures Law Committee and its members for giving me such a warm welcome over the last six months.  The last time I spoke to a room full of derivatives lawyers in April, some said that it was interesting to talk a bit about crypto, but they were most interested in my views about Commodity Futures Trading Commission’s (“CFTC”) regulation of established derivatives markets, the core of their work.  So here you go.

Today, I share my perspective as a Commissioner coming to the CFTC with a 20-year federal career, as a market regulator at the Securities and Exchange Commission (“SEC”) with an investor protection mandate, and at the Treasury Department as the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”), helping our government and nation build a stronger and safer financial system after the financial crisis in order to protect Main Street.  By Main Street, I mean those hardworking American families and small and mid-sized businesses who drive our nation’s economy.  Who support our communities.  Whose logos are on the backs of little league and soccer jerseys.

Having spent the last 12 years at Treasury, ensuring that our economy is financially stable for hardworking American families and small and mid-sized businesses is a guiding force for me.  Wall Street institutions regained financial stability by 2009 after taxpayers provided billions in TARP bailouts.  But it would take 10 years for American families and small and mid-sized businesses to recover from the crisis – truly an outsized impact from a crisis that they did not cause.

It is these hardworking families and little league-and-soccer-sponsoring businesses who will suffer again if Wall Street’s risk taking is unchecked, if regulators are kept in the dark, and risk is allowed to rise to systemic or sub-systemic levels.  Their voice informs my actions.  Those who often have no voice in the room.  No high-priced law firms or DC lobbyists.

These families and businesses depend on the CFTC, as a market regulator and member of the Financial Stability Oversight Council (“FSOC”), to responsibly monitor, identify, and respond to systemic risks and emerging threats to financial stability.  They depend on the CFTC to reign in risks seemingly removed from their day-to-day lives—but that can jeopardize their livelihoods.  This is why regulatory reporting is so critical – it brings transparency to risk previously hidden and promotes the CFTC’s ability to monitor and identify risk.  This summer, I supported the Commission, jointly with the SEC, in revisiting the reporting framework for private funds to understand evolving market risk.[1]  I also recently issued a public statement called “Systemic Swap Reporting Violations Harm Market Transparency and Integrity.”  I called out swap dealers and swap execution facilities with systemic violations of swap reporting laws.[2]  These are not “technical” violations, but serious illegal conduct that allows unchecked risky exposures to increase and evolve in the dark.  Some reporting failures also harm market transparency and integrity, imposing costs on the very families and businesses the derivatives markets are meant to serve.

Post-crisis reforms related to capital and central clearing also remain important for financial stability.  Regulators should require appropriate buffers to absorb shocks to our financial system.  I will continue to advocate for sufficient amounts of high-quality capital in our financial system, just as I have for more than a decade.[3]  Strengthening the resilience of clearing houses to risk will ensure that post-crisis reforms for central clearing can also achieve financial stability goals.[4]

With financial stability always top of mind, my highest priority at the CFTC is making sure that derivatives markets are working well for hardworking families, farmers like the Crumbaugh family, and small businesses like the Star of the West Milling Company in Frankenmuth, Michigan, both of whom I recently visited.  They told me how important derivatives markets are to hedge risk when they have extremely tight margins, and how important it is for the CFTC to root out manipulation or other wrongdoing.

It is families and small and mid-sized businesses who can suffer the most when markets are stressed with high prices and high volatility, as we have seen with the pandemic, supply chain disruptions, and Russia’s invasion of Ukraine.  It is these families and businesses who stand to lose everything from a catastrophic storm or other climate event, just as we saw with Hurricane Ian.[5]

With commodity markets under stress, the CFTC has an important responsibility to monitor commodity markets to ensure that derivatives markets are functioning well – fair, orderly, liquid, and driven by market fundamentals of supply and demand.  In June, I spoke to the Chicago Bar Association about how CFTC economists provide Commissioners daily information on the commodity markets, along with color.  I talked about how in some cases, CFTC staff conducts deep dives into particular market activity, and our role to have a deep understanding of market activity and the reason for that activity.[6]

I have been so impressed by CFTC staff’s monitoring of markets that I want to enhance it, formalize it, and share it with the public.  Last month, I proposed that the CFTC conduct deep dive studies in trading in commodity markets under stress – starting with oil, natural gas and wheat – to study whether prices are being determined by market fundamentals, and are not subject to manipulation, excessive speculation or other distortions.[7]  Public reporting on these studies would lead to greater public and market confidence.  These studies would prioritize the interests of farmers, ranchers and producers, and would ensure that American families and those small and mid-sized businesses sponsoring little league and soccer teams are not paying artificially increased prices.

The CFTC is uniquely positioned in its authority, data, and expertise to fulfill this important responsibility of monitoring commodity markets through deep dive studies as part of monitoring derivatives markets.  It’s the right thing to do, and the right time.  Most importantly, it’s at the core of the CFTC’s mission and the American economy.  So, thank you to derivatives lawyers for reminding me as a CFTC Commissioner about the Commission’s core responsibility.

Thank you, and I hope that you have an enjoyable conference.

The Commodity Futures Trading Commission (CFTC) today filed a complaint in the U.S. District Court for the Southern District of Florida charging Adam Todd and companies he controls (Digitex LLC, Digitex Limited, Digitex Software Limited, and Blockster Holdings Limited Corporation, collectively d/b/a Digitex Futures) with illegally offering digital asset futures, including bitcoin and ether futures, failing to register as a futures commission merchant (FCM) and comply with the Bank Secrecy Act, and manipulating and attempting to manipulate a digital asset token (DGTX) issued by Digitex Futures.

Todd created a platform for trading digital asset derivatives (the Exchange) through Digitex Futures.  Digitex Futures permitted users to trade digital asset derivatives on margin, with leverage up to 100:1, meaning that customers could trade a contract with a notional value of $100 dollars while only putting up $1 in collateral.

Section 4(a) of the Commodity Exchange Act (CEA) prohibits offering, executing, or confirming the execution of contracts for the purchase or sale of a commodity for future delivery, unless the transaction is conducted on a designated contract market.[1]

Soliciting and accepting customer orders for these contracts without first registering with the Commission caused Digitex Futures to run afoul of the requirement to register with the CFTC as an FCM, and to comply with the Bank Secrecy Act (BSA) by implementing know-your-client (KYC) procedures and a customer information program (CIP).  KYC procedures and a CIP are key requirements of the BSA that allow an FCM to identify those transacting through the broker—a vital element in preserving the integrity of our financial system.  By allowing customers to open accounts with only an anonymous email addresses and passwords and without requiring any additional identify verification, Digitex Futures undermined necessary efforts to detect and prevent money laundering and other conduct that may violate the BSA.

In addition, the Exchange required users to margin their trading activity using a token created by Digitex Futures, DGTX.  According to the Complaint, Todd attempted to manipulate the price of DGTX by engaging in non-economic trading activity with the intent to artificially inflate (or pump) the price of DGTX for his financial gain.

The mission of the CFTC is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.  In carrying out this mission, Congress authorizes the CFTC to promote responsible innovation and fair competition in our markets.  In the absence of registering with the CFTC and by failing to comply with appropriate identify verification regulations, Defendants undermined the CFTC’s ability to carry out its regulatory mission.

I would like to recognize the Division of Enforcement staff who worked on this matter:  Ansley Schrimpf, Joseph Platt, Joseph Patrick, Allison Passman, Scott R. Williamson, and Robert T. Howell.

Thank you for the kind introduction. And thank you to Kim and the rest of the NCVAA Board and membership for presenting me with the Cornerstone Award as the first Vietnamese-American woman nominated by the President and confirmed by the Senate to the executive branch: a lifetime achievement in advancement of Vietnamese American professionals and promotion of justice, equity, and opportunity for the Vietnamese American community.  It is truly humbling, and sometimes I have to remind myself that this is all real and really happening. And lastly, thank you to all of you here at tonight’s dinner for sharing in this special occasion.

It means so much to me and especially my family—my parents, who are here from California tonight, and to my two brothers.

I want to also recognize the Vietnamese American Bar Association of the Greater Washington, DC Metro Area (VABA-DC).  Twelve years ago, they awarded me a scholarship that allowed me to take an unpaid internship at the CFTC for former Commissioner Scott O’Malia, right after the Dodd-Frank Act had been passed. It was only the second year of their scholarship program.  That set me off on a career path that has led me here to this moment—to being a CFTC Commissioner myself.  I never, ever dreamed that I would find myself in this position one day, and I am eternally grateful to the members of VABA-DC for giving me that first opportunity as a law student.

I hope that I am living proof that diversity outreach and leadership development programs do work—they are the kind of structural reforms that build a talent pipeline that pays off, year after year, and has a powerful network effect.  I wouldn’t be here without all of my mentors and teachers and everyone who lifted me up, so that’s why I believe internships in my office is one way I can pay it forward.

In all of my work on diversity, equity, and inclusion, as a young woman of color in the legal and financial services professions—two fields that have had their share of challenges in this space—one thing that people have often told me is how meaningful it is to hear personal stories.  So I’d like to briefly tell you about my story, and I know many of you have similar stories as well.

My parents were airlifted by helicopter from the U.S. Embassy in Saigon on the last day of the Vietnam War, April 30, 1975.  Their journey took them to North Dakota; Michigan; Needles, California; New Jersey; and then finally to Modesto, California in the Central Valley where I was born and raised until I went to college.  Modesto is an agricultural area south of Sacramento, and when I grew up there in the 1980s and 1990s I don’t think there was a single other Vietnamese person in my classes.

The challenges I faced taught me the importance of strength and resilience.  In my professional career, it has given me the strength to walk into rooms where I’m still the only person that looks like me, to rise above my doubts, to speak up when others are silent, to challenge the status quo and groupthink, to not take “no” or “you can’t” for an answer, and to say “yes” and take risks in the unknown.

Thinking back to that VABA-DC scholarship dinner, I remember I said then that I felt like I was going to cry because I had never seen so many Vietnamese-American lawyers in one room.  And tonight, looking across all the tables, I’ll say it again. Just being here, with this community, is powerful and sends a strong message that inspires so many out there, especially young lawyers.

So more than ever, I am grateful for the community that the NCVAA fosters.  The impact of your support doesn’t stop at the people in this room.  The resources and the community that this network provides makes us all stronger parents, siblings, friends, and colleagues, even when we’re done practicing law and doing our jobs for the day.

Our future is built upon those who came before us, who laid the cornerstone and the foundation and set the stage for us all to succeed and reach ever greater achievements.

And so I’d like to end with one more thank you: to my parents.  Thank you for instilling me with a strong sense of pride in my heritage, to hold my head up high no matter what, and to take any setbacks and use that as motivation to try even harder.  Thank you for making sacrifices that gave me opportunities that brought me here today.  Thank you for your unconditional love and support, and I hope to be the kind of example for my daughter and so many other Vietnamese-Americans as you have been for me.

Swap reporting is fundamental to post-crisis financial regulation – a critical tool for promoting transparency and market integrity in swap markets that used to be opaque.  It has been a decade since the Commodity Futures Trading Commission (“CFTC”) implemented Dodd-Frank Act requirements for swap reporting.  However, in my six months of serving as a CFTC Commissioner, I have seen multiple enforcement cases involving swap reporting failures, which is troubling. 

As a market regulator, we must send a strong message that systemic swap reporting failures are unacceptable.  Swap Execution Facilities (“SEFs”) should have a culture of compliance.  I support the Commission’s enforcement action against BGC Derivative Markets, L.P., an affiliate of Cantor Fitzgerald, L.P. (“BGCD”) based on its systemic failure to report, or misreporting of, swap transactions.  But I do not support the provisions of the settlement.  I do not agree that the $1.9 million penalty combined with no admissions by BGCD in settlement is sufficient to deter future violations or provide accountability and transparency.  Therefore, I vote to concur, rather than fully support.

A higher penalty and defendant admissions to wrongdoing would serve as a stronger deterrent for BGCD and other SEFs.  Further, this case warrants the heightened accountability and transparency that comes with requiring the defendant to admit to its wrongdoing.[1] 

The CFTC should have required BGCD admissions because BGCD’s violations were egregious.  BGCD had systemic reporting problems for five years.  Because BGCD had inadequate processes and procedures for reporting swap transactions and identifying reporting issues as they arose, BGCD failed to report, or accurately report, over 16,000 swap transactions under CFTC rules intended to enhance transparency in swap markets.  BGCD took more than a year to implement a reconciliation process identified by its compliance department in March 2020 that would ensure that all transactions on the SEF were being reported. 

As the Commission’s proposed order states, “Reporting is at the heart of the Commission’s market and financial surveillance programs, which are critical to the Commission’s mission to protect market participants and promote market integrity.  Accurate swap data is essential to the effective fulfillment of the regulatory functions of the Commission, including meaningful surveillance and enforcement programs.” 

If reporting is at the heart of the Commission’s market surveillance and enforcement programs, we should take a hard stance when we find violations of our swap reporting rules. 

Good morning. It is a pleasure to join you at today’s MRAC meeting.

I would like to express my appreciation for Commissioner Johnson’s sponsorship of the MRAC and the hard work of Bruce Fekrat, the MRAC Designated Federal Officer. I would also like to thank the MRAC members for generously serving on the MRAC and sharing your experience and expertise with us on these important issues.

In the past the MRAC has tackled important issues. These have ranged from clearing, with the CCP Risk and Governance Subcommittee Recommendations on CCP Governance,[1] to the LIBOR transition, with the Interest Rate Benchmark Reform Subcommittee SOFR First Recommendation.[2] The MRAC has also recently been exploring climate issues.[3]

I’m pleased that we have a Market Risk Advisory Committee. As our markets change and we face new and emerging risks, I look forward to your hard work over the coming years.