Overview

Today the Commission is called upon to consider novel and complex questions about how our governing statute, the Commodity Exchange Act (CEA), applies in a world of digital assets, blockchain technology, and decentralized autonomous organizations (DAOs) —technology that did not exist when the statute was enacted in 1974, and that has just started to develop since Congress last amended the statute as part of the Dodd-Frank Act in 2010.

Unfortunately, I cannot support the Commission’s approach to this particular matter.[1]  While I do not condone individuals or entities blatantly violating the CEA or our rules, we cannot arbitrarily decide who is accountable for those violations based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing.  For these reasons, I am respectfully dissenting in this matter.

As I mentioned, I do not approve of or excuse activity that violates the CEA or those who direct others to participate in unlawful activity.  Thus, there are parts of the Commission’s two related enforcement actions in this matter that I support:

First, the Commission is issuing a settlement Order finding that bZeroX, LLC, a limited liability company, violated exchange-trading and registration requirements in the CEA and the CFTC’s anti-money laundering rules with respect to a blockchain-based software protocol that accepted orders for, and facilitated, margined and leveraged retail commodity transactions.  The settlement Order further finds that Tom Bean and Kyle Kistner, co-founders and co-owners of bZeroX, LLC, are liable for those violations pursuant to the provisions in Section 13(b) of the CEA regarding control person liability for violations by a corporate entity.[2]  There is nothing particularly new or unusual about these charges, and I would vote to approve this settlement if it were based solely on those findings.

Second, because Bean and Kistner transferred control of the protocol to the Ooki DAO, and the protocol continues to operate in the same illegal manner, the Commission also is filing an injunctive enforcement action through a Complaint charging the same violations by Ooki DAO as an unincorporated association.  Certainly, I agree that conduct illegal under the CEA and CFTC rules, is not acceptable whether done by a corporation or an unincorporated association.

However, in its settlement Order and Complaint, the Commission defines the Ooki DAO unincorporated association as those holders of Ooki tokens that have voted on governance proposals with respect to running the business.  Because Bean and Kistner fall into that category, the settlement Order also finds them liable for violations of the CEA and CFTC rules by the Ooki DAO based solely on their status as members of the Ooki DAO unincorporated association—relying on a State-law doctrine that members of a for-profit unincorporated association are jointly and severally liable for the debts of that association.

I cannot agree with the Commission’s approach of determining liability for DAO token holders based on their participation in governance voting for a number of reasons.

1. First, not only does this approach fail to rely on any legal authority in the CEA, it also does not rely on any case law relevant to this type of action.  Instead, the Commission’s approach imposes governmental sanctions for violations of the CEA and CFTC rules based on an inapplicable State-law legal theory developed for contract and tort disputes between private parties;
2. Additionally, this approach arbitrarily defines the Ooki DAO unincorporated association in a manner that unfairly picks winners and losers, and undermines the public interest by disincentivizing good governance in this new crypto environment;
3. This approach constitutes blatant “regulation by enforcement” by setting policy based on new definitions and standards never before articulated by the Commission or its staff, nor put out for public comment; and
4. Finally, the Commission ignores an alternative, well-established basis for imposing liability for the Ooki DAO’s violations of the CEA and CFTC rules in this case – i.e., aiding and abetting liability—that is specifically authorized by Congress and that would solve all of these problems.

Although there are no allegations of any fraud having occurred here, we all are mindful of the need to protect customers who are participating in the largely unregulated crypto space.  But those good intentions do not entitle the Commission to act through enforcement without proper legal authority, notice, or public input. 

Absence of Applicable Legal Authority

There is no provision in the CEA that holds members of a for-profit unincorporated association personally liable for violations of the CEA or CFTC rules committed by the association based solely on their status as members of that association.  Yes, the CEA applies to an association.  The distinction here is that the Commission is attempting to determine who is, and who is not, liable for violations of the CEA and CFTC rules by the association.[3]

The CEA sets out three legal theories that the Commission can rely upon to support charging a person for violations of the CEA or CFTC rules committed by another:  i) principal-agent liability;[4] ii) aiding-and-abetting liability;[5] and iii) control person liability.[6]  The Commission’s settlement Order does not cite a single provision of the CEA, or of Federal common law,[7] to support the notion that the Commission can impose liability for the violations of another if none of these three legal theories set out in the CEA applies (or, worse, if the Commission thinks that establishing the CEA legal theories would be hard to do). 

Yet, the settlement Order holds Bean and Kistner personally liable for violations of the CEA and CFTC rules by Ooki DAO based on their status as voting token holders of the Ooki DAO.  In doing so, the Commission relies solely on two contract disputes and one tort case – all between private parties and all decided under State law – which stand for the proposition that individual members of a for-profit unincorporated association are personally liable for the debts of the association.[8]

But the Commission here is not simply collecting an unpaid contractual debt of Ooki DAO.  Rather, it is imposing sanctions that only the Government can impose – civil monetary penalties ($250,000), a cease-and-desist order, and a prohibition on future participation in the activities of the Ooki DAO – against Bean and Kistner (and, potentially, in the future against others who have voted Ooki Tokens on governance questions) based solely on their status as voting token holders of the Ooki DAO.

I am skeptical of any Federal or State governmental agency wielding its power to sanction in this manner, i.e., based on a legal theory from State common law contract and tort cases between private parties.  Nor have I seen any indication that Congress intended the CFTC to do so—rather than relying on the principal-agent, aiding-and-abetting, and control person liability provisions that it specifically set out for the CFTC in the CEA.

An Arbitrary, Unfair, and Misguided Definition of the Unincorporated Association

As previously discussed, the Commission’s settlement Order and Complaint arbitrarily define the Ooki DAO unincorporated association as comprising those who vote their Ooki tokens.[9]  It is natural to suspect that the Commission chose this definition of the Ooki DAO unincorporated association because this definition likely is the best position for an enforcement action against the Ooki DAO.  But that choice has consequences.  From a broader policy and societal perspective, the Commission has drawn the definitional line in a place that leads to inequitable results and undermines the public interest.

Defining the Ooki DAO unincorporated association as those who have voted their tokens inherently creates inequitable distinctions between token holders.  For example, suppose that during the period in which token holders A and B hold voteable DAO tokens:  i) there is a single vote on a governance proposal, which has nothing to do with compliance with the CEA or CFTC rules; and ii) token holder A votes on it, but token holder B does not.  Under the Commission’s definition, token holder A has now become a member of the unincorporated association and (possibly unknowingly) assumed personal liability and is subject to CFTC sanctions for any violations of the CEA by the Ooki DAO—whereas token holder B, by the happenstance of not voting on this random governance proposal, has not.

The Commission’s approach thus picks winners and losers, in an unfair manner.  What is more, it affirmatively disincentivizes voting participation in DAO governance generally—and particularly those who may want to vote in a manner that effectuates change to comply with the law.  The Commission’s approach will have a chilling effect that discourages voting, thereby hindering good governance and the development of a culture of compliance in this setting.  The unmistakable take-away from the Commission’s definitional approach in these enforcement actions is that those in a DAO community should not vote, even if the governance vote encourages following the law.

Simply put:  By insisting on drawing a line with respect to who is in and who is out of a DAO unincorporated association, the line the Commission has chosen in its definition of the Ooki DAO unincorporated association inevitably leads to inequitable results and undermines the public interest in good governance.

Regulation by Enforcement

But even more fundamentally problematic is the Commission drawing that line in the context of an enforcement action in the first place.  As demonstrated above, the Commission’s approach in these actions will have public policy implications that extend far beyond this particular settlement and lawsuit.  Yet, the Commission has made this consequential decision with no public notice or input whatsoever.  It is regulation by enforcement, plain and simple.

True, the CEA does not provide the Commission with authority to regulate the Ooki DAO.[10]  However, I am aware of no reason why the Commission could not undertake a public notice-and-comment rulemaking to adopt rules addressing the novel and difficult public policy questions that are raised here.  Specifically:  i) who is a member of a DAO that is an unincorporated association; and ii) within the bounds of the statutory authority granted by Congress in the CEA, who will the Commission hold personally liable for a DAO’s violations of the CEA and CFTC rules, and under what circumstances?

Proceeding by rulemaking would benefit the Commission by providing us with information, views, and public input from interested parties.  Such public input could, for example:  i) address the potential consequences for the developing ecosystem of decentralized finance from the approach the Commission has adopted here; ii) highlight possible consequences of the Commission’s approach for unincorporated associations other than DAOs; and iii) provide alternative approaches that we might conclude would better achieve our mission as set forth in the CEA.  We benefit from public input on a wide variety of rulemakings relating to our administration of the CEA – surely these questions are of sufficient importance for us to seek such input here as well.

Equally important, a rulemaking proceeding would provide notice to the public about the way in which the Commission is thinking about these important questions.  Such notice is obviously absent before proceeding with this Order.  One can scour the records of the CFTC and not find a single statement of the Commission, a Chair of the Commission, a Director of one of the Commission’s Divisions or Offices, or the staff of the Commission informing the public that:  i) based on State-law contract and tort cases between private parties, the CFTC believes that a member of an unincorporated association, without more, is personally liable for violations of the CEA or CFTC rules by that association; or ii) the CFTC considers anybody voting a DAO’s governance token to be a member of that DAO and thus subject to personal liability and sanctions for violations by the DAO.  If for some reason there is a reluctance to engage in rulemaking, nevertheless, the Commission has many other means at its disposal to shine a light on these important policy issues.[11]

In short:  The Commission should not be shrouding its views on these policy issues in obscurity—to be revealed only through enforcement actions.  Nor should it be delegating its policymaking responsibility to federal judges hearing those enforcement actions.  Rather, the Commission should communicate to, and engage with, the public in a transparent manner and seek out the input of those with expertise to share.

It Didn’t Have to Be this Way

I am disappointed that the Commission has decided to proceed in this manner since there is a better path available.  The Commission could have decided to proceed in a manner that:  i) is appropriately based on a person’s culpability rather than status; ii) is grounded squarely in the authorities granted to the CFTC by the CEA; and iii) would avoid all the concerns that I have expressed above.  That is, the Commission could have found Bean and Kistner personally liable for Ooki DAO’s violations based on the aiding-and-abetting provisions of Section 13(a) of the CEA.[12]

Bean and Kistner set in motion Ooki DAO’s violations of the CEA and CFTC rules by setting it up to operate a protocol just like the one that they had operated through bZeroX, LLC—and which operated in violation of the CEA and CFTC rules.  They then publicly announced that they were transitioning to a structure that they believed would insulate that activity from any requirement to comply with US law.[13]  Further, the settlement Order finds that Bean and Kistner continued to market and solicit members of the public to trade on the protocol after transferring control to the Ooki DAO.

I believe this compelling evidence demonstrates that Bean and Kistner met the standard for aiding-and-abetting liability under the CEA.  And that finding would make them liable for Ooki DAO’s violations of the CEA and CFTC rules.

Thus, utilizing the CEA’s well-established aiding-and-abetting standard would have—

1. Achieved the same result with respect to holding Bean and Kistner personally liable for violations committed by the Ooki DAO; 
2. Enabled the Commission to make its point – with which I agree – that a decentralized organization is not immune from the legal requirements of the CEA and CFTC rules; and
3. Addressed the concerns about legal authority, inequitable results, disincentivizing good governance, lack of public notice, and regulation by enforcement set out above.

Concluding Thoughts

The principles that guide our enforcement of the law were intended to be technology neutral.  Regardless of the underlying technology, our enforcement principles remain the same:  i) adherence to the authority that Congress has granted us in the CEA; ii) not picking winners and losers; iii) incentivizing behavior calculated to enhance compliance with the law; iv) soliciting public input on significant policy issues before us; and v) transparency with respect to who we will hold accountable and for what.

These principles have served the Commission well throughout its 45-plus year history, including periods of incredible technological innovation such as the transformation of futures trading from open outcry to electronic trading.  Yet, today’s actions abandon these principles.  Accordingly, I respectfully dissent.

Good morning. I would like to thank Commissioner Mersinger for the kind invitation to join this meeting of EEMAC – the inaugural meeting of this advisory committee under your leadership. I also want to extend my gratitude to the members of this committee. These are volunteer roles and I understand well that you have very demanding day jobs. Thank you for your service and your sacrifice. We value your input greatly. Thank you to Oklahoma State University (OSU) for hosting this important meeting.

I am sad to miss being there with you today but very excited that one of my fellow Commissioners had the great insight to host a meeting in a place where I have many friends and neighbors. From my family’s house in Dallas, you can hop on interstate 35 and if you drive north for a couple of hours, you’ll arrive in Stillwater, Oklahoma. I have had the good fortune to attend many a football game at OSU.

While I have attended many college football games, I have never played on a football team. As a Commissioner, however, I am learning the significance and salience of contributing to a winning team. We are five individuals who may vigorously debate questions and issues – the “how” – meaning the path that we will adopt to achieve common goals. We are, however, undivided, unified in our understanding of “why” or the reason that we serve. Our preeminent commodity and derivatives markets are esteemed by many around the world. Our task is to maintain and improve the integrity of our financial markets. We can vigorously debate “how”, but we must never lose sight of “why” we work to achieve this goal.

For many sectors of our economy, value is based on the production of real goods and services that travel through the stream of commerce to every corner of our nation and the four corners of the earth. To that end, investments are critical to maintaining and improving energy infrastructure. Investments in energy infrastructure are critical to our economy.

President Biden recently signed the bipartisan infrastructure bill.[1]  Among other investments, the law allocates $65 billion to upgrade the electric transmission grid infrastructure to improve system reliability and resiliency, and to facilitate the expansion of renewables and clean energy. [2] Funding will be distributed to harden the transmission grid to reduce risks caused by wildfires, hurricanes, and other disruptive events, and to build out thousands of miles of new transmission lines.[3] The bill represents the most significant government commitment to infrastructure since the building of the US highway system after WWII. That includes that 1,500 mile stretch of highway rising from Laredo, TX and passing through my hometown, through where you are, and reaching up to Duluth, Minnesota.  Last month, I spent a week traveling through north, central and south Texas visiting with energy producers, traders, and family ranchers who have been in the business for generations. This expenditure is part of or legacy – one that we leave for future generations.

Investing to create long-lived assets that are supposed to last for decades is difficult if one cannot predict the cost to build, maintain, and replace infrastructure resources. The complexity of planning for capital expenditures associated with energy production cannot be overstated. Price volatility, particularly inflationary volatility, may engender challenges for commodity producers.[4] When derivatives markets work well, they offer an essential mechanism to mitigate or transfer risk and manage pricing. This, I would point out, is an element of the reason “why” we serve.

During today’s meeting, you are also planning to discuss the role of the metals market as components in transitional energy sources as well as the potential impact on financial markets regulated by the CFTC. Here, it is important to note that our markets are global. Geopolitical events in Europe, specifically, the invasion of Ukraine has led to remarkable disruptions in energy and agriculture markets.

Have we successfully identified transitional energy sources? Do we have access to these resources or the components that will make it possible to power our farms, schools, churches, universities, and businesses?

For many of the issues that you will discuss, the solution may be elusive and even difficult to identify or define. If the solutions were easy to find, by now, we might have identified and implemented them. Yet, this is the right time to begin asking hard questions and facing difficult truths and preparing for the future that we want to build. Again, we may not agree immediately on the path or “how,” but we can agree today on the reasons “why.”

Thank you again for allowing me to join you. I look forward to the thoughtful dialogue and discussion of today’s meeting.

Good morning.  I am excited to be attending my first EEMAC meeting as a CFTC Commissioner.  I am sorry that I couldn’t be with you in Oklahoma today as I had originally planned.  In fact, one of my earliest assignments as an intern at the CFTC was to research Cushing, and I had hoped to finally see it with my own eyes and see if I got it right.

I would like to thank Commissioner Mersinger for her sponsorship of this Committee and the EEMAC members for their service.  I am thrilled that the EEMAC will have the benefit of Commissioner Mersinger’s sponsorship and leadership.  The EEMAC hits close to home because energy and commodity markets impact our everyday lives. Without efficient and effective markets, we feel the impact in just about every aspect of our daily lives, from the moment we turn on the lights, to sitting down to dinner.  Commissioner Mersinger’s focus on ensuring that the CFTC pursues policies that promote reliable energy supplies and stable prices for all Americans is more important than ever.

The pain of energy costs this summer has been well-documented: everyone was impacted, whether with gas prices on road trips[1] or electricity bills for air conditioning.[2]  Overseas, policymakers are grappling with the fallout from the Russian pipeline shutdown, proposing to curb energy consumption in response.[3]  More drastic measures reportedly considered included price caps on wholesale power and gas,[4] as well as suspending derivatives trading,[5] and imposing bands for futures trading.[6]

The CFTC is a regulator with decades of experience in volatile energy markets under stress[7] and has shown global leadership in developing appropriate policy responses.  We, as CFTC Commissioners, need to consider the vital role our markets play in the current conditions.  It is critical to have this advisory forum for expert input from the public, and I look forward to the EEMAC’s consideration of these and other issues in the coming years.

Good morning.  I’m pleased to join you today for this meeting of the Energy and Environmental Markets Advisory Committee (EEMAC).  I want to thank Commissioner Mersinger, her staff, and Lauren Fulks, for coordinating this event.  I also appreciate my meetings with committee members to discuss the challenges that they face.  I look forward to hearing more today about the important, and very timely, topics on the agenda.

1. The CFTC plays a critical role in the whole-of-government approach to addressing continuing challenges for U.S. and global energy infrastructure.

There have been sobering reminders recently - across the country, and around the world—of how crucial it is to have reliable, resilient energy infrastructure.

Just a few weeks ago in California, the power grid was strained when a historic heatwave pushed electricity use well beyond expected levels.  Millions of residents received cellphone alerts, urging them to reduce their power to avoid blackouts.  In 2021, the grid in Texas ended up failing during a record-breaking winter storm, costing more than 200 lives and leaving more than 4 million homes and businesses without power.

What happened with power grids in California and Texas, and other states, demonstrates that climate change is straining U.S. energy infrastructure.  Much of our energy infrastructure was built decades ago, and was not designed to withstand the frequent, extreme weather events that we are now experiencing.  This infrastructure also was not built to accommodate energy requirements of new technologies, like the transaction validation processes for some cryptocurrencies that demand a significant amount of power.[1]

In this new digital world, our energy infrastructure also faces threats from cyberattacks.  Last year, a ransomware attack on Colonial Pipeline—which operates the largest U.S. pipeline system for refined oil products—caused a multi-day shutdown that disrupted supply chains and triggered widespread gasoline shortages.  Ensuring the cybersecurity of our energy infrastructure should take on special urgency as a national security priority.  And it is also critical to protect America’s families from the economic stresses that often follow cyberattacks.

Domestically and globally, the issue of energy security has also taken center stage, as leaders rush to make sure that they have the energy supplies needed to keep families warm this winter.  This is not a question just of supply—but of adequate supply.  Without an adequate supply of energy, inevitably skyrocketing prices will raise costs for families, forcing many to choose between life’s essentials, like food and medicine, and keeping their families warm through the winter.

Recent events make clear the effect that disruptions or vulnerabilities in energy infrastructure can have on prices.  Prices for electricity and natural gas surged during the grid crisis in Texas last year.  The Colonial Pipeline disruption brought gasoline prices to levels that had not been seen in seven years, but we’ve seen prices that are much higher than that since Russia’s invasion of Ukraine.  By the end of the first quarter of 2022, prices had doubled for crude oil, tripled for coal, and increased more than five times for natural gas, as compared to early 2021.[2]  Price increases and volatility have a real, direct impact on American families and businesses who have to make hard choices about how to spend limited earnings.

A whole-of-government approach is required to address the continuing challenges for U.S. and global energy infrastructure.  For its part, the CFTC plays a critical role to ensure that the markets for key energy commodities are not distorted through fraud or manipulation and that the derivatives markets are fair and orderly, performing their essential price discovery and risk management functions. 

2. The CFTC should support and protect the integrity of the markets for commodity components essential to the transition to renewable energy sources.

A related challenge is the U.S.’s transition to an economy powered by more renewable energy sources.  As the U.S. continues its transition towards more renewable energy sources, we must be mindful of the need for reliability.  Renewable sources of energy like wind and solar require storage technology, because the amount of power that they produce—over a day, or a week, or a season—may not be consistent.  Storage technology, in turn, depends on reliable access to key commodity components, like lithium, copper, and nickel, that serve as inputs to battery production.  Reliable access to these components will help companies scale battery production to support the U.S. and global transition to renewable energy sources.

It is important for the CFTC to understand vulnerabilities in the markets for the commodity components that are essential to battery production.  The CFTC must police those commodity markets to ensure that they are not distorted by fraud and manipulation.  Recent dramatic increases in battery component prices highlight the need to ensure the integrity of derivatives markets and their critical risk management and price discovery functions.

As our nation continues to develop storage technology and innovations to harness and transmit renewables at scale, we will likely need to look to a combination of renewable and traditional energy sources to meet our needs.  Even so, we must continue to prioritize—and create incentives for—the transition to green energy.  A cornerstone of that effort will be protecting our infrastructure and key commodities and derivatives markets to ensure we have the capacity and resilience to support the transition and to provide reliable access to affordable, clean energy to Americans across the country.[3]

3. The CFTC must ensure that excessive speculation does not distort, and worsen challenges in, agricultural, energy, and metals commodity markets.

Unfortunately, the challenges for hardworking families extend well beyond those presented by the energy markets.  In the last two years, commodities prices have broadly skyrocketed.  From 2020 lows, food prices have soared 84 percent, fertilizer prices have risen an astonishing 220 percent, and, as I have discussed, energy prices have climbed sharply and in some cases, reached all-time highs.[4]  American families face increasingly painful choices when they go to the grocery store to feed their families, when they fill up their car and make decisions on how far they will drive (although there has been some recent relief as gas prices have been dropping), and when they determine how much energy they can use in their homes.  In sharp contrast, according to a recent study by Vali Analytics, Wall Street’s biggest banks, commodity trading houses, and commodity-focused hedge funds are making record profits on commodities trading this year.[5]

Our nation’s farmers and producers are also bearing this burden.  In August, I went on a listening tour, visiting farmers and producers in Michigan and Arkansas.  A consistent theme was that our farmers have to make hard choices.  Farmers talked about trying to limit their fertilizer use as the cost of natural gas reached historical highs, and how this will lead to reduced crop production—crops that feed the world.  Producers told me that some farmers cannot afford the fuel costs to drive long distances to reach those that buy their crops.  Universally, I heard from farmers and producers that they expected the CFTC to fulfill its core mission—to protect the integrity of the commodity futures markets, to ensure that prices reflect the legitimate forces of supply and demand, and to combat excess speculation and manipulation.

The CFTC has an impressive surveillance program and an equally impressive cadre of commodity markets experts to rely upon as it seeks to understand these pressures of working families, farmers, and producers.  We should use them more, and more publicly.  That is why, in an internal meeting several weeks ago, I recommended that the CFTC conduct deep-dive studies to look at trading in a number of key commodities that have been experiencing significant volatility or price increases and publicly release our findings.  I reiterate my recommendation today, publicly.

I propose that the Commission conduct a series of deep-dive studies in key commodities markets, starting with those that have been experiencing the most recent stress—natural gas, crude oil, and wheat.  The CFTC has a significant amount of data and expertise at our disposal, and the objective of these reports would be supportive of our core mission:  To study whether prices are being determined by market fundamentals.

We should not overlook any factor that might contribute to increased food, energy, and metals costs.  And we should not assume that we can rely on previous conclusions without confirming those conclusions based on an independent review and analysis of the available data.  The series of studies I propose would examine all material elements driving volatility and pricing in key commodities.  One element of the studies should include an examination of the market presence of passive investment vehicles and other speculators, as well as dealers, to ensure they are providing useful liquidity or serving other useful functions and not distorting markets or otherwise undermining the price discovery process.

We should report our findings publicly.  CFTC studies would lead to greater public and market confidence that our markets are serving their price discovery and risk management functions and prioritizing the interests of the farmers, ranchers, and producers who provide food, fiber and fuel for the world.  It would show the world that the Commission is performing its responsibility as a market regulator to actively monitor the appropriateness, and application, of its rules.  Finally, this important work would ensure that American families are not paying artificially increased prices due to excess speculation.

Thank you again to Commissioner Mersinger for sponsoring the important work of this committee.  I look forward to the presentations.

[1] See, e.g., The White House Office of Science and Technology Policy, Climate and Energy Implications of Crypto-Assets in the United States (Sept. 8, 2022), available at 09-2022-Crypto-Assets-and-Climate-Report.pdf (whitehouse.gov).

[2] Ari, A., Arregui, N., Black, et al., Surging Energy Prices in Europe in the Aftermath of the War: How to Support the Vulnerable and Speed up the Transition Away from Fossil Fuels, International Monetary Fund Working Paper 2022/152 (2022).

[3] Along with new tax benefits for renewables and transition-related infrastructure, the Inflation Reduction Act allocates $5 billion in loans to finance repurposing or converting energy infrastructure.  Additionally, the Infrastructure Investment and Jobs Act provides $73 billion to upgrade power infrastructure to improve reliability and resiliency, and to facilitate the expansion of renewable energy.  It also authorizes more than $7 billion to strengthen the U.S. battery supply chain and $7.5 billion in grants to build out a national charging infrastructure for electric vehicles.

[4] World Bank Group, Commodity Markets Outlook: The Impact of the War in Ukraine on Commodity Markets, World Bank, Washington, DC., License: Creative Commons Attribution CC BY 3.0 IGO (Apr. 2022), available at Commodity Markets Outlook (worldbank.org).

[5] See, e.g., W. Shaw, J. Farchy, Wall Street’s Commodity Traders on Track to Break Profit Records, Bloomberg (Sept. 9, 2022) (noting that bank, trading house, and hedge fund commodity trading profits are the highest they have been in 14 years, even as prices and volatility push some nations into an energy crisis), available at https://www.bloomberg.com/news/articles/2022-09-09/wall-street-s-commodity-traders-on-track-to-break-profit-records?leadSource=uverify%20wall.

(As prepared for delivery at the CFTC Energy and Environmental Markets Advisory Committee meeting in Stillwater, Oklahoma)

Thank you all for joining me, whether virtually or in person here in Stillwater, Oklahoma, and welcome to the first Energy and Environmental Markets Advisory Committee (EEMAC) meeting to be held outside of a CFTC building.  Some of you may notice the slight distinction from our press release announcing this as the first EEMAC meeting outside of Washington, DC.  I recently learned that the late-Commissioner Bart Chilton held an EEMAC meeting in our New York office and set up options for participation via teleconference from our DC and Chicago offices.  So, Commissioner Chilton not only held the first EEMAC meeting outside of DC, I think he technically held the first hybrid meeting.  In sum, what I am saying is that this advisory committee has historically taken a forward-looking approach in its meetings.

I want to thank my fellow commissioners for their interest in this committee and participation in this meeting, all of the guests in attendance and online, our panel participants, our committee chair Dena Wiggins, the committee members and associate members on EEMAC, and the CFTC staff who went all-in handling the logistics for today’s first-of-its-kind meeting, including my Chief of Staff, Chris Lucas.

A special thanks to Lauren Fulks, the Secretary for EEMAC, who has gone above-and-beyond in organizing today’s meeting.  I cannot tell you how grateful I am to have Lauren as the Secretary for EEMAC.  She is an amazing asset to the agency.  Lauren is based out of our Kansas City office, and I believe she is the first non-DC based, CFTC staff member to serve as Secretary for the EEMAC.

I also want to recognize Emma Alexander from Congressman Frank Lucas’ office who is joining us today.  Her boss, Congressman Lucas, is a former Chairman of the House Agriculture Committee and has always been a strong champion of the CFTC.  Thank you, Emma, for joining us here today.

When I was considering which CFTC advisory committee to sponsor, I was particularly drawn to EEMAC because of its direct connection to the broader American economy.

When we flick on a light switch, boil water, or enter a Zoom or Teams call, we are using energy.  We might not think about where that energy comes from, and that is a privilege not known to everyone across the globe.  We are very fortunate because the United States boasts an energy system that is most often accessible, reliable, and affordable.

However, we should not take for granted this privilege because it takes a great deal of investment, planning, and infrastructure.

It also takes liquid and well-functioning derivatives markets.  Now more than ever, as we look at global markets and face geopolitical risks around the world, it is important for us to gather facts and prepare for the future of these essential markets.

Critical energy infrastructure investments in the US contribute to the strength and vibrancy of the energy futures markets regulated by the CFTC.  But we cannot forget that physical infrastructure requires repairs, updates and upgrades to remain efficient.  Ignoring existing infrastructure and failing to invest in updates and upgrades to traditional energy infrastructure will not only make the transition to renewable sources of energy costlier and more difficult, it could prevent us from ever achieving our well-intended clean energy goals.

In that context, as we look broadly at energy and environmental derivatives markets, I see two areas where the EEMAC can offer invaluable insight and expertise.

First, is evaluating what is required to ensure the energy markets in the US remain resilient despite the numerous strains on the system globally.  Predictable supply and reliable distribution of physical energy is critical to ensuring the derivatives markets we regulate at the CFTC continue to serve as effective price discovery tools, helping end users and other market participants hedge and manage risk.

Second, is evaluating what emerging threats could potentially impact our CFTC-regulated futures markets as we focus on energy transition in the face of ever-changing geopolitical factors.  Does that transition risk pose a threat to our overall financial stability given the importance of an affordable and reliable energy supply to our entire economy?

Today, we take a look at two areas related to those questions:

• Investment in physical energy infrastructure and the effects on the broader economy, including commodity derivatives markets; and
• The role of critical metals as components in transitional energy sources, and the potential impact and opportunities for CFTC-regulated metals markets.

The utility of energy commodity futures markets is closely tied to the underlying commodity’s creation, transmission and eventual use.  Distortions in any of those three phases can have a significant impact on CFTC-regulated markets.  These markets tend to function as the economic shock-absorbers in times of market volatility, something we have seen first-hand over the last few years.  Without properly functioning energy futures markets, the financial risks from current global energy-related supply disruptions, as well as the cost of transitioning from traditional energy sources to more renewable forms of energy, have the potential to become systemic risks to our entire economy.

So as not to sound too apocalyptic, I recognize that very smart and dedicated individuals are working to really understand these risks and identify policies and actions to avoid these dangers.  We are so fortunate to have a few of those individuals with us today.

On our first panel, Cortney Cowley, Senior Economist in the Regional Affairs Department of the Federal Reserve Bank of Kansas City, and Paul Wight, Senior Legal Advisor to Commissioner James Danly of the Federal Energy Regulatory Commission, will discuss the generation and transmission of traditional energy.  Cortney joins us from here in Oklahoma, and Paul made the trip from DC to Oklahoma to present to us today.  Thank you both for all of the time and effort you have put into your presentations.  I know your time is valuable and limited, so we are very honored to have this opportunity to hear from both of you.

On our second panel, Derek Sammann, Senior Managing Director, Commodity and Options Products for the CME, will discuss the current state of metals markets and provide thoughts on where he thinks metals markets are heading.  Derek is an esteemed member of the EEMAC, and I am extremely grateful that he is sharing with us what I am learning is just a sliver of his vast knowledge.

Derek’s presentation is the start of what I believe is a novel discussion about what is needed to achieve stated policy goals around transitioning away from fossil fuel-based energy.  Copper, aluminum, steel, and lithium are just a few examples of the metal inputs necessary for environmentally-generated energy production and end use.  Any discussion around energy transition is not complete without discussing these commodities and associated markets.

Again, thank you to my fellow commissioners, committee members and associate members, and guests for taking time out of their busy schedules to explore these important topics.  I also want to thank Oklahoma State University for allowing us to hold today’s meeting on their campus.  It is an honor to be here.  Yesterday, I had the privilege of speaking to Dr. Riley’s Commodity Futures Markets class and share some insight into our role as a regulator at the CFTC.  I think I met a few future CFTC commissioners.

With that, I will turn it over to my fellow commissioners who are joining us virtually today for their remarks.  I look forward to a robust and informative discussion.

I have deep concerns about continuing the Commodity Futures Trading Commission’s (CFTC) longstanding and routine practice of not seeking admissions of wrongdoing when settling the overwhelming majority of enforcement cases, which has resulted in routine civil settlements in which the defendant “neither admits nor denies” wrongdoing.[1]  For this reason, I recently voted to concur in (and not simply to support) settlements with undisputed facts of egregious fraud that victimized retail investors and had other aggravating factors.  My concurrences reflect that I support resolution of these cases to the extent that they obtained the same or nearly the same relief the CFTC would expect to obtain in a successful trial (including restitution for victims).  Yet, I do not support allowing these defendants to settle without admitting their illegal conduct.

I propose a Heightened Enforcement Accountability and Transparency (HEAT) Test for the CFTC to require more defendants to admit wrongdoing in CFTC enforcement settlements.  The HEAT Test is designed to identify those cases calling for greater public accountability and transparency—where the CFTC should send a message about the paramount importance and strength of our enforcement program.

1. Requiring defendant admissions in the CFTC’s civil enforcement cases serves the critical public interest goals of enforcement—justice, accountability, and deterrence.

The HEAT test is designed to identify cases in which admissions are necessary to promote the public interest goals of law enforcement—justice, accountability, and deterrence—to the fullest extent.  While a successful trial meets all of those public interest goals, it is well-known that federal regulators, including the CFTC and the SEC, settle the overwhelming majority of civil enforcement cases.  It is not well-known to the public, but is well-known to many regulated entities and the defense bar, that in the overwhelming majority of these settlements, the government does not require the defendant to admit their conduct or the illegality of that conduct.

Federal agencies initially insisted on the “neither-admit-nor-deny” clauses to ensure that defendants not deny their wrongdoing post-settlement[2]—a requirement that I continue to believe is necessary.  These clauses were meant to protect enforcement programs against defendant denials that wrongly suggested to the public that settlements lacked merit.  They have morphed into routine elements of settlements that protect defendants from the collateral consequences of admitting their unlawful conduct and fully accepting responsibility.

Requiring defendants to acknowledge responsibility and wrongdoing to the public is an important enforcement tool that promotes critical public interests.  Unfortunately, this tool has become dull with disuse.  The CFTC, as well as other U.S. financial regulators, continue a routine practice to settle civil enforcement cases without admissions.  Indeed, from all appearances, it has become routine for regulators simply to assume that advantageous settlements would be possible only with neither-admit-nor-deny clauses, and to not even request admissions.  Defendants know that and use that to argue against acknowledging their wrongdoing in settlement negotiations, further dulling what should be a sharpened tool of justice, accountability, and deterrence.

I have served in federal law enforcement for nearly two decades, working hundreds of civil and criminal investigations.  This includes civil and criminal law enforcement experience as the Special Inspector General for the Troubled Assets Relief Program (SIGTARP, within the U.S. Treasury Department), civil law enforcement at the SEC, and now civil law enforcement at the CFTC.  That experience confirms that the primary public interest goals of civil and criminal law enforcement are the same—seeking justice, accountability, and deterrence.  None of these goals are fully served when federal regulators routinely agree to neither-admit-nor-deny civil settlements.

In the criminal context, federal courts require defendants who are pleading guilty to appear before them and accept responsibility.  I have been in many courtrooms during guilty pleas when defendants hedged on their acceptance of responsibility only to have the court question or reject the plea.  I have also heard defendants accept full responsibility for their conduct and wrongdoing, and afterwards talked to victims who expressed the feeling of justice when they heard the defendant take responsibility for harming them.  Denying victims that justice should not be routine.  It is important to remember that financial fraud is often accompanied by human tragedy, and no less tragedy than leads to many criminal proceedings.

Routine acceptance of neither-admit-nor-deny civil settlements undercuts a regulator’s efforts to seek justice for victims.  Those harmed by frauds can feel vindicated by our civil enforcement actions, but they are too often denied the full measure of justice they deserve and that can come only from defendants admitting their actions that harmed the victims.  Full accountability should mean that defendants admit that they have done something wrong; and accept responsibility for breaking the law.  Without full accountability, the deterrent effect for future violations of the law—by the defendant, and others—is significantly reduced.

This is why I am calling on the CFTC to change this routine settlement practice.  From time to time, the CFTC should reconsider enforcement policies and practices to ensure that we are maximizing the public interest goals of enforcement and using all the enforcement tools available to us.  And we would not be alone in this public interest endeavor.  I welcomed the announcement by SEC Director of Enforcement Gurbir Grewal that the SEC would reconsider its longstanding and routine practice relating to neither-admit-nor-deny settlements.  See G. Grewal, Remarks at SEC Speaks 2021 (Oct. 13, 2021) (When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law, and so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest.).[3]  In this era of diminished trust, so should the CFTC require acceptance of responsibility.

2. With the public looking to the CFTC for market integrity during these critical times in our nation, the CFTC should maximize public accountability, transparency of the defendant’s wrongdoing, and the deterrent impact of its enforcement settlements by requiring more defendants to admit their wrongdoing.

In the aftermath of the 2008 financial crisis, which brought the U.S. economy and countless Americans into distress and highlighted the need for strong enforcement and public accountability, the SEC and CFTC strengthened their enforcement programs by announcing that they would require more defendants to admit wrongdoing.  In practice, this started with requiring defendants to admit facts that were admitted in criminal proceedings.[4]  The SEC also sought to require admissions in cases with parallel regulatory settlements containing admissions.  Later, the SEC announced that it would require admissions where there is “a special need for public accountability and acceptance of responsibility.”[5]

The CFTC is again in an environment that calls out for heightened public accountability, transparency, and maximizing the deterrent impact of its enforcement settlements.  Commodity markets (for example oil, natural gas, and wheat) continue to face significant challenges post-pandemic, with supply chain issues, with price volatility in the current economic cycle, and with geopolitical issues surrounding Russia’s invasion of Ukraine.  Commodity producers, consumers, and end users are under increasing pressure.  At this particular time, the public is looking to the CFTC to have the strongest law enforcement program that we can have—to root out manipulation and other distortions to the price discovery process that undermine the fundamental hedging utility of the derivatives markets, and thereby undermine market integrity.  Transparency and public accountability increase public trust in the CFTC and deter future illegality.  Defendant admissions aid in that public trust.

The CFTC’s practices with respect to neither-admit-nor-deny settlements must adapt to the environment in which we find ourselves.  That is also one in which new technologies, new markets, new business models, and new players use old methods and familiar schemes to defraud others, impair market integrity, and threaten markets and American families.  One example of this is the rise of retail investors coming into our markets, excited to buy cryptocurrencies or other retail-targeted products.  Unfortunately, as our cases bear out, that has been accompanied by a rise in those seeking to exploit that excitement for personal gain, and a rise in victims.

This is not just a question of keeping up with emerging markets or market stress events.  The CFTC is also in an environment in which some financial institutions—many regulated—have demonstrated over the course of years that they are unwilling or unable to change the culture of their firms and operate within the confines of the law.  This remains the case for some institutions even after the CFTC and other regulators (including SIGTARP) have imposed substantial penalties and other remedies in multiple successive enforcement actions.

The CFTC should not await a crisis to reconsider our enforcement policies and practices.  We have an opportunity to reassess enforcement practices and strengthen our enforcement program.  I urge us to seize it.

3. The Heightened Enforcement Accountability and Transparency (HEAT) Test would guide the CFTC and ensure that more defendants admit to their wrongdoing.

I propose a HEAT Test to assist the CFTC in assessing whether specific cases demand the heightened justice for victims, heightened accountability and transparency through public acceptance of responsibility, and heightened deterrence that would accompany defendant admissions.  This would include cases with one or more of the following factors: 

• Egregious conduct;
• The presence of a criminal scheme;
• Significant harm or risks of harm to investors and/or market participants;
• Significant harm or risks of harm to market integrity;
• A recidivist defendant;
• Obstruction, lying or concealment, in an investigation/examination by the CFTC, other federal authority on the same conduct, or a self-regulatory organization; and/or
• The need to send a pronounced message about particular conduct or practices.  

The HEAT Test factors are intentionally broad to result in a shift in the CFTC’s current settlement practices.

Going forward, the CFTC should review cases with potential settlements for these factors and provide transparency to defendants about our expectations in negotiations.[6]  Over time, the CFTC’s applications of the HEAT test will provide even more transparency as it develops a body of precedent.

I am not saying that every settlement should require admissions.  There may be circumstances that warrant acceptance of neither-admit-nor-deny settlements, just as accepting a guilty plea may be appropriate in lieu of taking a criminal case to trial.[7]  The CFTC must retain the broad arsenal of enforcement tools necessary to achieve the fullest extent of justice, accountability, and deterrence.

I am challenging the routine acceptance of neither-admit-nor-deny settlements.  I am challenging what seems to have transformed from an enforcement tool to be used in limited circumstances to an expectation by defendants and their lawyers.

4. Call to Action

It has become routine for defendants to demand neither-admit-nor-deny settlements, even in cases where there is a greater public interest for accountability and transparency as to the defendant’s wrongdoing.  Unfortunately, it also seems to have become routine for the CFTC to accommodate those demands. 

That must change.

The CFTC should be willing to require more settling defendants to admit their wrongdoing and take more cases to trial when defendants are not willing to do so.  My proposed HEAT test is designed to identify those cases where the CFTC should require defendant admissions.  For those who say defendants will never settle cases if they have to admit what they did was wrong, I respond by saying nothing ventured, nothing gained.  I have not spent my career in federal law enforcement with the goal of settling cases but instead to serve the public interest goals of justice, accountability, and deterrence to the fullest extent possible.

(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 21^st will be our 100^th 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[1]—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”[2] —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.

As Prepared for Delivery

Introduction

Chairwoman Stabenow, Ranking Member Boozman, and members of the Committee, I appreciate the opportunity to appear before you today as Chairman of the Commodity Futures Trading Commission (CFTC or Agency) to discuss S.4760, the Digital Commodities Consumer Protection Act (“DCCPA”).  Before I begin, I would like to recognize and thank my fellow CFTC Commissioners and colleagues; their dedication, expertise, and commitment to the American public ensures our greatest success.[1]

Last February, when I testified before this Committee,[2] I noted that the unique characteristics of the growing digital asset industry necessitated a comprehensive federal regulatory regime.  I believe that to be more true today than ever, and thank the Committee for taking steps to directly address these needs through the DCCPA.  I have directed staff to analyze specifically how current CFTC initiatives are already leveraging resources, personnel, and technology infrastructure towards the tenets of the DCCPA, and what additional needs we would have to support its implementation.

Digital asset commodity cash markets have significant speculative retail participation, often use high levels of leverage, and largely rely on platform-based custody arrangements outside of the traditional regulated banking sector.  Many participants in these markets may perceive themselves to be interacting with exchanges and intermediaries structured and regulated like those in other financial markets.  The reality is quite different.  The lack of a comprehensive regulatory regime means that traditional market-based disclosures and bankruptcy protections are frequently absent, and disruptions involving trade settlement, conflicts of interest, data reporting, and cybersecurity resulting in unprotected customer losses are more likely.

Since I last testified, over $1 trillion in market value has been lost in conjunction with the failure of several large high-profile firms operating in the shadows.  One lesson from the recent fallout is that leverage, interconnected markets, and contagion can wreak the same havoc in the digital-asset ecosystem that they do in our traditional financial markets, particularly in the absence of appropriate regulation.  Unfortunately, the most significant losses are disproportionately impacting lower-income investors and historically underserved communities.  The volatility in the market, and its impact on retail customers—which may only worsen under current macroeconomic conditions—emphasizes the immediate need for regulatory clarity and market protections.

The CFTC: The Right Regulator

As I have publicly stated several times, including to this committee, and as has been recognized by federal courts, many digital assets constitute commodities.  As recognized by the DCCPA, the CFTC’s expertise and experience make it the right regulator for the digital asset commodity market.  The CFTC facilitates customer protections through its principles-based market oversight and disclosure regime aimed at ensuring transparency, integrity, and security of transactions.  These structures inform customers about who they are dealing with and provide clarity on the risks of participating in our markets.

In requiring digital commodity brokers, dealers, and custodians to join a registered futures association[3], the DCCPA acknowledges the key role that self-regulatory organizations, like the National Futures Association (NFA), our designated registered futures association, play in safeguarding the integrity of markets through strict requirements and oversight.  Going a step further, the CFTC’s Reparations Program provides a prompt, accessible, and effective forum for retail participants to resolve disputes with registered trading professionals.  Decisions rendered by an Administrative Judge are enforceable and may be reviewed by the Commission and ultimately a federal appeals court.[4]

The CFTC has often adapted its oversight capabilities to meet the demands of evolving markets within its jurisdiction, and to protect customers through scaling and building specialized knowledge.  Most notably, in the wake of the 2008 financial crisis, Congress provided the CFTC authority over approximately 95 percent of the swaps markets under Title 7 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.[5]  The rulemakings set in motion by the Dodd- Frank Act now serve as the cornerstone of a robust regulatory regime for the $350 trillion swaps markets.[6]

Expertise and Scale

Returning to the digital asset market, since 2014, the CFTC has brought almost 60 enforcement digital asset related cases, including a recent matter involving a $1.7 billion fraudulent bitcoin scheme.  With a lack of full visibility into the digital commodity asset market, the Agency’s enforcement program has had to lean primarily on tips and complaints from the public to identify fraud and manipulation, including submissions to the CFTC’s Whistleblower Program, which has been a critical driver to our actions.

While we are engaged in a comprehensive effort across the Agency to police these markets and their participants with the tools currently available to us, the DCCPA will allow us to apply our full oversight capabilities without restriction.  For example, a few digital asset-focused companies currently operate CFTC-registered exchanges, and our Division of Market Oversight is actively reviewing new products tied to digital commodity assets both from these new entrants and from traditional registrants.  The Agency has developed a deep understanding of this novel market and the underlying innovations that fuel it, hiring specialists, forming internal task forces and working groups, leveraging public-private partnership through the work of CFTC Advisory Committees, and most recently restructuring the CFTC’s financial technology innovation hub into the Office of Technology Innovation.

Facing the Challenge Head-on

The DCCPA leverages the historical strength of the CFTC as a market regulator by requiring registration and supervision of digital commodity platforms and digital commodity intermediaries as is required in CFTC-regulated derivatives markets.  Digital commodity facilities will be subject to compliance with core principles prescribing, among other things, that the platforms establish and enforce rules minimizing conflicts of interest, prohibiting abusive trade practices, establishing system safeguards to minimize cybersecurity and other operational risks and maintain emergency procedures and disaster recovery protocols, ensuring the financial integrity of transactions and intermediaries, and protecting customer funds.  Critically, all digital commodity platforms must maintain adequate financial, operational, and managerial resources, segregate customer funds, and comply with Commission requirements for the treatment of customer assets.  These tools have proven effective in preserving customer funds and market operations in times of instability, uncertainty, or market misconduct. 

The DCCPA directly addresses the increased role of retail participants in the digital commodity asset markets by directing the Commission to adopt customer protection rules requiring digital commodity platforms to disclose to customers material conflicts of interest and material risks of trading digital commodities, establishing duties to communicate in a fair and balanced manner, and establishing standards for the platform’s marketing and advertising.

With the additional resources contemplated by the funding mechanism in the DCCPA and the clear mandates for customer education, outreach, and information gathering to ensure that our efforts reach all demographics of the investing community, especially those that remain most vulnerable to fraud and abuse, the CFTC can move swiftly in effectuating this new regime.

Conclusion

On September 21, 1922, nearly 100 years ago to the day, the Grain Futures Act of 1922 was signed into law, which led to the near immediate establishment of the then CFTC.  With that legislative accomplishment, this Committee and the Congress swiftly responded to a policy need that arose on the heels of emerging risks to American consumers because of new financial markets and products, technological innovation, and the promise of economic development.  With the CFTC’s rich history overseeing commodity markets, coupled with its expertise and track record, which rests on a firm foundation as a forceful and disciplined cop on the beat, the Agency stands ready to tackle these new risks and opportunities one century later.

Thank you and I look forward to answering your questions.