CFTC Chair Michael Selig On Perps, Prediction Markets & Crypto In The U.S

Transcript

Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is forformational purposes only and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Block Works. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed. >> Awesome. Uh, welcome back everyone. Today we have a very special episode of the Empire podcast. As you can tell, I am not Jason Yanowitz. Uh my name is Rob Haddock. I'm a general partner at Dragonfly and a co-host of the weekly roundup podcast that we do here on Empire. Today we have an awesome guest,

uh chairman of the CFTC, Mike Celig. Mike, thank you for uh for coming on the podcast. >> Thanks for having me. >> So, Chair Celig, um has been incredibly effective in his first five months on the job as the 16th chair of the CFTC. Last Friday, he approved the first true Bitcoin perpetual contract on a US regulated exchange. He opened the door for onore prediction markets and he's issued guidance on 24/7 trading and clearing. Uh before the CFTC, he was the chief counsel of the SEC's crypto task force and a senior adviser to Paul Atkins. He also started his career as a clerk at the CFTC about a decade ago uh and spent some time in private practice far. Today we're going to dig into those

some of those topics. Perpetuals, prediction markets, 247 clearing and chair seal's approach to regulation. Uh chairman, uh that we'll we'll jump right into it. So, thank you for being here. So, uh for the first question, I want to set the stage a little bit. Uh you've made some serious pro-inovation headlines since you started. You know, I think everybody in the industry has been really excited about the um initial phase of of the CFTC in these first six months. you've publicly made waves and put out guidance on a few of the things I just talked about. So, PERBs, prediction markets, 247 trading. You've indicated there's more to come in terms of your um harmonization that you're doing with the SEC as well. How much of this did you feel was part of your mandate walking into the role versus,

you know, how much has it evolved since you've been in the seat and how have you changed your perspective? And that was for six months. Well, it's a pleasure to be here with you and uh in response to your question, I saw in private practice as you just suggested um was a partner at Wilky Far and Gallagher uh representing clients uh in the technology space, financial market space, many of whom were in the uh crypto markets uh and they were just absolutely uh pushed out of the country by the last administration. It was regulation by enforcement. It was lawfare. It was a lack of clear guidelines and rules. And under the Trump administration, we're reversing all of that. We're going to do the exact opposite. We're going to regulate

through clear rules and regulations. We're not going to have the enforcement division setting policy. We're going to return the enforcement division to its core functions of policing, fraud, manipulation, insider trading, and other abuses. and not looking for little footfalls and gotchas uh trying to to collect uh on civil penalties when really what we want here is a culture of compliance. We want crypto to come into our financial markets and and be a player like any other market. Um so we're shifting back to our core mandate of market integrity, responsible innovation, and fair competition. And part of that of course comes from the president. We had a president's working group on digital asset markets report.

Uh I was part of that endeavor when I was at the SEC and it lays out really the roadmap I think for gold standard markets in the United States that incorporate crypto assets, blockchain and all manner of new technologies and a core component of that is bringing the per markets perpetual futures markets back to the United States. Another piece of it of course is the stable coin initiative. We're well underway implementing Genius and uh the Clarity Act is really uh really sitting uh ready to go. We're trying to get that onto the president's desk. So, uh there's a lot going on, but the president's been very clear. We're going to make the United States the crypto capital of the world.

I believe it is today. We've ended regulation by enforcement. We've passed Genius. We've got clarity on the way. And uh and I think it's a new day at the at the SEC and at the CFTC. Yeah, we we'll talk a little bit about clarity later, but that's obviously on everybody's mind uh as well. Um you recently announced uh project crypto uh I think back it was last January with with chair Atkins uh at over at the uh SEC and the point was to or at least the stated point was to harmonize federal oversight of digital asset markets. Can you talk to us a little bit about how that working relationship is with the SEC and how you think about division of labor?

>> Absolutely. Well, coming from the SEC, I had a real desire to harmonize uh when I got in the seat at the CFTC and Chairman Atkins really uh deserves the credit for this initiative. He uh launched Project Crypto last year and it truly was a historic moment I think turning the page from the Gary Gendler uh you know war on crypto that we saw under the last administration. And the idea behind Project Crypto is to modernize the securities rules and regulations. And now the CFTC's the commodity derivatives rules and regulations for blockchain for crypto and all the new innovations that are happening in our market. And the the reality is that our rules and regulations just were not set up for

this. They did not contemplate it. That's why you saw the kind of square peg round hole approach of the last administration fitting crypto blockchain new technologies into rules and regulations that were designed for uh a totally different type of technology. Our rules at the CFTC are principles based which makes them a little bit more flexible when it comes to adapting and allowing for these new innovations. The CFTC's uh lucky to have that because the SEC's rules are a bit more prescriptive, but we're working together. We've now joined forces with the SEC on project crypto.

And we need to make sure that things are harmonized and consistent across because if you're trading uh you know, a perp onchain related to a commodity uh product such as a Bitcoin per uh the rules shouldn't be so different from trading an Nvidia uh perp on on the security side. So, we're working closely to get that done. We're also very keen to get in place some substituted compliance. So, if you're a a securities exchange and you want to offer some commodity products, we want to make that possible. We want to allow for a single primary regulator uh at either the SEC or the CFTC to enable the the market to offer these products that are crossjurisdictional and and that should

be on both sides. So, a two-way street. Um, and we're working very hard to get that done. We're also working very hard to uh make sure that things like whether you're considered a US person. So determining whether um the SEC or the CFDC has jurisdiction over certain persons that are offshore or onshore. Making sure that's consistent because we can't have these inconsistent standards. We can't have enforcement uh you know available at one agency and not the other. Um we want to make sure all that's consistent. Is there a framework in place for how you know when something comes up you decide uh you know who takes first crack or you know how they're um you know potentially you guys divide labor

initially or is it um a little bit more um kind of you know to your point flexible rules based and and maybe common sense. Well, we have a team that is cross agency set up and and so one of the folks on my uh staff is is a co-head of that team and another on chairman Atkins staff is is the other co-head and they are leading the initiative. So they have regular meetings. They're coordinating on policy endeavors. I've announced previously uh that we have a number of requests for comments coming that are joint between the two agencies.

So, one of those relates to reporting of certain over-the-c counter derivatives. Uh, the other is related to portfolio margining, which I think is a huge uh win for the industry. The uh lack of the ability to margin your positions on the security side cross jurisdictionally with the commodity side has been a huge hindrance because people are now posting duplicative margin whether they're uh you know, broker dealer uh or or a futures commission merchant. So, we're trying to uh fix all of that. Um, and there's a number of really exciting initiatives ahead.

>> Yeah, I think portfolio margin is going to be a huge unlock. So, I'm really excited about that. Well, let's move a little bit into the perpetuals, which is the the big move uh the news out of last week. Um, and I think a lot of people were very excited to see you released sort of um a few coordinated actions. I believe there was a policy statement that encourages the DCMS uh wanting to list per other assets like a products, metals, equity security, security indexes, etc. um to submit uh under uh I think it was reggg 40.3 for a case by case review. Um you also uh you allowed for 247 trading and the clearing staff advisory which has expectations for the DCMS, the SEFS, the DCOS and FCMS that want to extend to 24/7 continuous

operations and uh you also um approved uh several entities for these uh for these perpetuals. What would you say is the biggest takeaway uh that you want the general public to get out of you know that big day that was last Friday? The takeaway is that the United States is going to lead on novel derivatives products on crypto and on innovation at large. The CFTC's mandate is responsible innovation. And the responsible piece is important. We are not allowing for the thousandx leverage, 100x leverage that you would see offshore. We're going to start with reasonable leverage up to 10x in the United States. And we're going to start with crypto. the the president has

been very clear in the president's working group report that crypto perpetuals are an important piece of the crypto market and we want that here in the United States but as we state in our uh release it's not necessarily appropriate for every other asset class so for certain things especially in the agricultural space livestock futures uh grain futures corn futures cotton futures we don't expect to see that and and we have some concerns around the deliverable supply and and how that would work. We're open to discuss that, but we do not expect to see that uh in the the immediate future or in the mid uh midterm. But we're open for innovation. We want to see novel markets survive and thrive here in the United

States. And perpetuals are just a great example of this. It saves investors money when they're transacting in perpetual products. They're paying less transaction fees to exchanges. And um exchanges should be open to this because it's going to allow for a whole new marketplace within the United States, new products, new trading. Of course, some of the fees may be lower, but that's good for investors, and I think overall it's going to benefit the exchanges in the long term. >> Yeah, I think a lot of the through line that I've seen from a lot of the things that you have done and and that I've heard you talk about has been uh better markets for investors, better for uh for the end customer, which I think is really important. Um you you made a a point there around responsible leverage and I want to push on that a little bit

and understand you know is kind of responsible leverage is that a stagnant number you know it's a number that you've kind of mathematically come up with now and that you think is appropriate does that change over time does it change across markets how do you think about that in the future >> we've seen some of these products which were called perpetual style contracts launched on Bitnomial and Coinbase um and other exchanges is and we've we've taken in a lot of data. We've studied the markets. They were offered at lower margin, lower leverage ratios. Um and and that's worked very well. We will continue to assess uh extending that out to the extent it makes sense, but we have to protect investors. We have a mandate to make sure that investors are

protected, customer funds are protected, that we're not going to have another uh financial crisis because of uh you know some uh innovative new product. And so we want the innovation, but we have to make sure that it's uh not going to cause any sort of um concerns to uh the broader market. And so we're studying it, we're evaluating it, but to start out now, we're we're keeping the the leverage fairly limited. >> Makes sense. Um what do you see next for PEPS? So, uh you know, we've got the BTC perpetual. I think, um you know, one entity or or a couple people have already applied to try to maybe get more out there. Um, do you believe there's going to be more listings, more approved entities, both more onshoring of international exchanges? How do you see,

you know, this evolving uh over the next year or two? Our goal is to make the United States the crypto capital of the world. That means that we want to bring the offshore exchanges, the offshore products and brokers and uh the all of this great economic activity back into the United States. It really was pushed offshore over the past decade through lawfare and through regulation by enforcement and we're bringing it back. And so part of that, yes, is to get the offshore exchanges domesticated here in the US, make that available under a regulated framework. Our aim is not to just bring this economic activity back to the United States. It's to bring it back with responsible regulation that

protects investors and has made the United States the gold standard markets for generations. We believe that crypto is a really fantastic technology. It can allow for settlement faster than anything we've seen in our traditional markets. It can allow for margin to be exchanged instantaneously 247 365. It makes capital uh much more efficient. And so we're very excited about that. But we do need regulation around these markets. We we do not believe that you just bring it in here and it's going to thrive and succeed when you don't have certain guard rails and controls. That's always made our markets great. It always has protected investors. And you know, if you look back to, for example, FTX,

the the entity that didn't fail, the entity that had customer funds protected was the CFTC regulated entity. And so we believe in the regulation that we uh have been enforcing for generations and will continue to do so. >> That's great. Um so you know obviously a lot of this has been about uh crypto perpetuals and we've started there obviously with the Bitcoin perpetuals. You mentioned earlier that not all products are going to be right for the perpetual future. How do you expect or do you expect this to evolve into other as crypto people would call it real world assets or other you know call it traditional regulated markets and and where do you see that process uh playing out or how do you see that process

playing out? >> That's right. the way that we have structured this under our release the the release relating to 40.3 that you mentioned uh for crypto digital commodities are one class of crypto assets that under a joint interpretation with the SEC we've uh developed uh some some um rules around right so digital commodities include things like bitcoin ether salana uh a number of other tokens that we have provided examples of in the release uh as well as others that that have the same characteristics and these are tokens associated with the network uh that that are driving their value from that network. Um those assets can be self-certified. So those assets to

the extent people want to offer perpetual contracts on that we actually have seen um some self-certification start to come in on that that allows for exchanges to list quickly and get these products up and running. They have very similar characteristics. there is some analysis that needs to be done uh when going through and listing those. The contracts can't be readily susceptible to manipulation and so on and so forth. So there it's not anything goes but uh digital commodities have a quicker path to get into the United States through a perpetual contract. But there are other types of crypto assets that I'll mention. One class is digital collectibles. We've put things in that bucket such as of course non-f fungeible tokens um but also uh some of the meme coins and things like that. Those still

need to go through a process with staff with engagement um securities whether they're digital uh securities under that um guidance or just a regular security like an Nvidia perpetual that actually goes through a process between the CFTC and the SEC. So folks will need to engage with us to the extent they want to list those. And then moving beyond crypto as I mentioned a lot of these markets are not appropriate for perpetuals in our view and so we expect the the firms to engage with us very heavily uh to the extent someone's interested in offering in the agricultural space. Our view is that there's going to be significant deliverable supply issues there significant uh economic considerations

and so it's likely not suited. There's regional markets for a lot of these commodities. It's just a very different um set of dynamics that you have with these physical commodities that come to market. They they have a harvest season and so on and so forth. Uh that you have with the uh digital assets and and potentially securities and other things. Um we're also looking at for example metals and so on and so forth. We think there's very different dynamics with a lot of these physical commodities. So we expect engagement from firms that look to list those. uh but they're not going to be listing them anytime soon.

>> And is physical settlement is that the the one area where you see the biggest problem or are there other areas as well? >> It's largely these physical commodities. I mean, we're happy to engage on it and work through it, but uh it was a very historic moment to approve crypto perpetuals. Yeah. >> Um we've not approved a new type of derivative in over a decade at the CFTC. So this was a big moment, a watershed moment, and we are excited to see other types of perpetual products come to market, but it's going to take time. So, so I hope the market uh has that understanding. Come engage with us.

Let's think it through. Uh but it's not a a flip the switch uh moment. We're we're going to do this gradually to make sure that investors are protected, that it doesn't impact these underlying markets because, of course, we oversee a $1.2 quadrillion dollar notional uh market. a large piece of that the the United States is uh over 600 trillion notional uh in terms of the the global derivatives market which I which I mentioned is 1.2 quadrillion dollars. Um so we're overseeing a ton of large transactions. If this is going to impact some of that we we need to consider it before we allow those products to to come to market. Robots and machines will outnumber humans onchain and peak is how they get there. Peak OS enables any

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>> Yeah, absolutely. And you're already moving, I think, at um incredible pace uh for if you look at the history of the CFTC. So, um it's great to great to see um you know, for for both per and prediction markets, which we'll talk about in a sec. uh we've you know I think there's a lot of question in the market right now about how DeFi might fit into your requirements and you know how maybe uh DeFi applications might also come on shore uh you know what would you expect to be required of them how could a DeFi application come on shore and operate legally uh in the US under under CFTC oversight >> well DeFi is is sort of this buzzword we think about onchain markets so there's a wide range of onchain applications and

software tools from unis swap things where you're swapping assets back and forth to lending protocols like a uh to some of these perpetuals protocols things like hyperlquid that we're seeing in the markets we're evaluating all of that we're interested in it we believe in onchain markets we believe in the technology if you look to the president's working group report that I mentioned earlier it talks about onshoring DeFi creating a legal and compliant path for DeFi but there are regulatory considerations on the derivative side under our framework, the CFDC's regulatory framework, futures contracts are always required to trade on a registered exchange with the CFTC.

So, there's not an over-the-counter market for futures contracts. We have characterized perpetual contracts as futures. There's ways to structure them as swaps as well, but by and large, these products that are coming into the United States now are being treated as futures contracts. The market for these products has always been CFTC regulated on an exchange, cleared through a central clearing house, um, and typically intermediated through brokers, but that's becoming um, less common as we're starting to see some direct to exchange models come to to bear. Uh, so that infrastructure is important. It serves a lot of really critical functions. Uh, it protects investors. It

ensures that we have market integrity that we're able to bring enforcement actions when we see fraud and manipulation. Of course, we surveil these markets. So, as you move to onchain, we are evaluating all sorts of new tools to help us enforce and police and and oversee these markets. For example, we use tools like chain analysis to understand what's going on on chain. We're talking to uh exchanges that have a blockchainbased uh exchange model to get data and really understand how that works. But by and large these platforms have always been registered with us. So we are evaluating how to deal with that. I view a lot of these onchain software systems as I refer to them as along a spectrum. So we have

systems that are totally autonomous uh that that are not centrally administered. They don't have an administrator uh that's holding a key or you know a bunch of uh people holding multi-IG keys administering the the the smart contracts. Um and a lot of the you know that's a limited number. A lot of these do have that sort of dynamic still. I think there's a path to gradually decentralize and get beyond that. But the reality is you know there's security reasons for people to be holding keys. You know we we don't want to discourage that where there's real genuine reasons to be doing so. Um but you do have kind of this spectrum of of fully decentralized autonomous software systems and then on the other end these kind of more centrally

administered um systems that uh take advantage of the blockchain technology and do a lot of great things. There's a lot of uh wonderful use cases for uh transferring margin 247 365 the ability to uh real time kind of use auto uh deleveraging and and that sort of thing through smart contracts. That's all very interesting. Uh but but it's still uh more akin to what we see in our markets today with for example, you know, NASDAQ. If they put their entire system on chain, they're still NASDAQ. It doesn't necessarily mean that we should regulate everything differently. Aspects of it. Yes. Because certain things are automated and certain things are taking advantage of this kind of global computer system. So we're evaluating all

that. We want to get to the right place. We're working together of course with the the hill as well as clarity can impact some of this but by and large when it comes to derivatives uh the products have to trade on a regulated platform a registered platform. So we want to get to the minimum effective dose of regulation. We want to rightsize regulation and tailor it for these new software systems. Um but then when you get into the over-the-counter world which has been historically what are called eligible contract participants. So these are very sophisticated firms. You know, you talk about accredit investor. I'm showing your show quite a bit. That's on the security side. This is like an ultra accredit investor, a very high net worth. Um very high sophistication for

an entity. And so it's very limited. And and this came out of the financial crisis. Swaps, over-the-counter swaps, uh markets were largely unregulated, but they were only for sophisticated firms. Um then with the financial crisis we got DoddFrank and a lot of that came under a largely uh more regulated framework in the United States. Some of it moved on exchange some of it remains off exchange but it's always been highly sophisticated firms. We're evaluating we're open to considering whether we open that up and and allow for more flexibility allow for different standards of qualification for an eligible contract participant. That's something we've got a lot of um industry input on. Um we'll continue to evaluate.

But what we're thinking about first and foremost is likely a model where we have some sort of oversight. We have some ability to uh know who's trading in the market so we can still police for things like insider trading, market manipulation, all of that, but then allow for a lot of the great features of blockchain. So the the ability to transact very seamlessly through your wallet, self-custody your assets, um transact 365 247 um and some degree of um being able to not transmit your identity to everybody in the market. Uh being able to preserve some privacy uh but we also need to as a regulator understand who's trading in these markets.

I love the way you talk about it um as a software system because I'm sure that's very helpful uh when you're talking to someone who's a little less conversant on what happens in the space and actually an analogy I use a lot to with um investors in my fund uh who you know we tell them at the end of the day this is this is software just a different type of software and this is software that's um helping uh capital markets uh operate more efficiently. So um that's great and you mentioned a little bit how you're working with the hill and you mentioned clarity act. What do you think needs to be done from a legislative perspective to continue to allow you and to allow the market um to create more innovation onshore here uh in the US versus internationally?

>> We can't overregulate blockchain technology, crypto assets, or really any of these exciting technologies, things like AI, prediction markets. We've got to come up with a regulatory framework that protects investors, does what it needs to do. Our statute's very clear. We need to ensure that our markets have integrity, that they're resilient, that they're vibrant, that investors are protected, customer funds are safe, but we cannot strangle the technology for the sake of uh that sort of regulation. We've got to find a way to thread the needle and achieve our mission, but also allow for this sort of innovation. And I think what we saw under the last administration was this attempt to say, you're a crypto exchange, go register as

a national securities exchange. you're a D5 protocol uh doing uh perpetuals go registers a full designated contract market and exchange with the CFTC with no exemptions, no considerations for the way the technology works. And that's not going to allow for the United States to be the crypto capital of the world. We've got to tailor our rules and regulations. We've got to do things like, for example, we put out a no action position on self-custodial wallets accessing derivatives exchanges. There was a lot of concern uh especially due to the last administration that these wallet providers would have to register with the SEC and the CFTC as broker dealers, futures commission merchants introducing brokers. And we've

clarified that as has the SEC. These software providers are providing software. They're not taking custody. They're not engaging in the the typical broker activities. They're allowing people to to self-tract, access markets, and utilize their own funds. And that's something that we want to have in the United States. We don't allow for that. We don't have crypto in the United States. The whole premise of this technology, in my view, is self-custody and the ability to transact freely. So, we're working on getting that right. We've done a lot uh already and we've got a lot more planned. But the the goal here at the CFTC and throughout this administration is to create a minimum effective dose of regulation approach where we ensure that investors are

protected, funds are safe, that our markets have integrity, that they're the gold standard throughout the world. They are the envy of the world today and we want to keep them that way, but also allow for all this new innovation in our markets. >> Yeah, it's amazing. Um moving on to prediction markets maybe you know they've moved very quickly uh from niche not that long ago to mainstream uh it's really taken up a lot of mind space I know for policy makers for legislators uh for the regulators yourself and others you know what role do you actually think the prediction markets serve in both price discovery and information aggregation and do you think they replace potentially traditional polling and forecasting?

>> Well the prediction markets aren't new. We've had these since the '9s. They started out actually with this Iowa electronic market, which was a nonprofit educational initiative. And they came into the CFTC and asked for a no action letter because what they wanted to offer prediction markets are derivatives contracts. And the CFTC said, "That's a great idea. We're going to grant your request." We provided a no action letter. And those markets really flourish in the US. We've seen so many um great predictions coming out of these markets. they've often uh in particular in recent years been much more accurate than polling. And so we started to see an explosion. We saw multiple of these nonprofit endeavors. And uh a number of exchanges then cropped up that

registered with us to offer this on a a larger basis beyond nonprofit where you can actually put larger amounts of money at risk uh and and engage in a in a larger number of contracts, different types of markets. And the CFTC then fought it because they didn't like the idea and in particular under the last administration they uh did not want to see these come out in particular ahead of the the 2024 election. So KHI one of the exchanges that's registered with us sued the CFTC won in their lawsuit and then was able to offer these products and since then we've seen an explosion in all sorts of new contracts. And it turned out that once Khi was able to offer their contracts, others joined as

well, like Crypto.com. And these uh contracts were much more accurate, much more reliable than the polls. The the polls predicted. We saw this Iowa poll come out that said it was going to be a landslide for Kla Harris. Of course, that was not the case. President Trump wanted a landslide, and the prediction markets had it exactly right. We've seen many such cases. And of course in instances where for example there's very tight control over the information uh the pope uh is a great example the the decision around the pope the prediction markets didn't get it right because the information was was kept very safe and and that's also I think a really interesting tool for national security for protecting information for discovering where there's leaks. So we're very excited about the technology

but we're merit neutral. I you know if if people want to trade these products they can go trade these products. We're not in the business of saying you can trade this contract or that contract or telling people what the best way to invest their money is. We're in the business of making sure that we have investor protections, customer protections, rules and regulations, reasonable guardrails for all these markets and disclosure so people understand what they're doing. So that's been our approach to this. We are seeing an actual uh explosion in the number of contracts listed. Our staff's working very hard to review these contracts, ensure that they're not readily susceptible to manipulation um and take action against firms and and persons that are uh insider trading,

manipulating the markets and engaging in bad activity. But we are excited about these markets. We do believe that they offer a very positive uh externality for society in the sense that they're producing very valuable data. It's not a surprise that you see CNBC, CNN, Fox News, the Wall Street Journal, uh, ESPN, all of these major media outlets entering into deals with the prediction markets. And it's also not a surprise that you see the New York Stock Exchange, ICE, uh, entering into investment arrangements with some of these prediction markets and then utilizing that data. So, I was on a a panel with Lynn Martin, uh the the president of New York Stock Exchange

handful of months ago, and she was talking about and I found fascinating how much data the New York Stock Exchange and ICE are generating from the prediction markets and how that's been really valuable for a whole range of their their business units. So, we're seeing that across the board. We believe that this will be a really great benefit to society to have a check on the fake news, the fake polls, and have really just reliable data that we can use to price a wide range of assets so we can figure out, for example, whether there's a price disparity in an index relative to the asset price, where things are going to move in the future. The wisdom of the crowds is very valuable, and we've not had a technology that has allowed us to have really what I I kind

of think of as a spam filter. So you take fake polls, you take uh people providing information through uh you know Reddit or or things like that online. There's no spam filter. So you have all these bots, you have people that uh lie about uh things in the polls to manipulate the polls. You've got people that don't want to answer the call when they get a polling call. So So I believe in these markets. I think having the check of putting dollars at risk makes a big difference and I expect to see them thrive in the United States. >> Yeah, no doubt. And you're seeing this kind of play out in real time. You mentioned the the more accurate markets on Calchian crypto.com. I think the the international exchange of of poly market as well had famously um had all all 50 states uh correctly predicted um in the

last election. It's very clear that these are um these are definitely truth seeeking machines and you know in my conversations with all the trading firms all of them are ingesting this data to your point about how important the data is to them uh and and the news organizations more broadly and so I think we'll continue to see um uh quite a bit of of data here and data work being uh permeating the uh all parts of of the economy um and so I guess maybe the hot button topic on prediction markets which is that a lot of people are calling prediction markets gambling and I think you know the supporters uh uh like myself um and and many others you know we see these as financial markets you know you have um you talked

about that a little bit already here but what factors do you think that the regulators such as yourself and the lawmakers on the hill should consider when drawing the line and distinguishing between gambling and prediction markets and the financial markets that we believe are are are being enabled Well, at the turn of the century, we saw this interest in what were called bucket shops. There were these casinos, gambling houses that cropped up throughout the country, in particular in Chicago where we had a lot of the commodities exchanges and people were able to place wagers on the price of grains, uh, wheat, corn, all sorts of different commodities. And the Congress then in the 30s created the Commodity

Exchange Act. And the commodity exchange act established a federal regulatory framework when it comes to commodities exchanges. And these bucket shops were essentially closed down. Many of them wound down because we had futures contracts. These contracts have integrity. They require delivery in some cases or they cash settle. Um they they allow for uh market integrity because you have a contract with specified terms that uh has an underlying asset that as I said will either be delivered or you'll get a cash payment on. And a lot of these bucket shops, part of the reason they called them bucket shops is because they bucket your money and disappear the next day. Uh, and you see some of that sort of um nefarious behavior as well in in in a lot of the the bookie environments. But uh over the years we built up a very large federal

regulatory framework around commodity exchanges. The CFTC was established in the 70s to have oversight over our derivatives markets, commodity derivatives markets, I should say. Of course, the SEC regulates the securities derivatives markets uh by and large. And so these markets were given to the CFTC's exclusive regulatory authority. That means that states cannot regulate these markets because the CFTC is the exclusive regulator. Unless the CFTC accepts something or says otherwise, we're the regulator for these markets.

prediction markets, event contract derivatives that are offered on these markets are subject to CFTC oversight. And so what we've started to see are the casinos crop up again trying to offer or or claim that our markets are subject to their regulation, which is not the case. We've had these two parallel regimes since, as I said, the 30s when the the Commodity Exchange Act was established. And so it's concerning to me when I started to see uh our some of our exchanges, exchanges like Gemini, uh Coinbase, Crypto.com, Kshi, Poly Market sued by state regulators who are effectively trying to nullify federal law. They're trying to ignore the fact that the Commodity Exchange Act has

language in it that says if you're offering a derivatives contract on any commodity and and the definition of commodity includes everything except motion picture, box office receipts and onions. It's very clear. Um it includes all manner of events, sports, political, otherwise then those sorts of markets are under our exclusive remitt. Um that's why we have these exchanges registered with us today. they are not subject to these state rules and regulations. Um when it comes to uh policing these markets, we have very comprehensive oversight. We surveil these markets. We examine the markets.

We have uh brokers that are regulated by us and the National Futures Association who trade on these markets. Um it's a very comprehensive regulatory scheme and as I mentioned our derivatives markets globally are over $1.2 two quadrillion dollars notional. These are massive markets. The United States has about 50% of that uh under our oversight, the CFDC. So, these are these are massive markets. We can't have the states going and and trying to regulate uh derivatives markets or or set rules for derivatives markets. It doesn't make any sense. You don't want the state of Nevada uh going over to uh you know, try to enforce something that's occurring offshore in in Europe or somewhere else

where it's got a US nexus. it it just doesn't make sense. That's why we don't have a patchwork of state laws and regulations around derivatives. And so this attempt by the states to nullify that, bring it back to the states. A lot of it's probably about tax revenue or or you know, state oversight, but we've got to keep that line. Um I've been very clear um in in the litigation. The president was clear uh last week as well. The CFTC's exclusive authority over these markets is critical and we'll continue to fight for it. Yeah, it's it's great to see you um you know, really sticking to to what you believe in here and to and to and to into to law, frankly. And so we we um and so we thank you for that. You know, maybe um pushing on on one point there,

you know, we've talked a little bit about pred these event contracts and these prediction markets and you know some roles they can play. How do you see or how do you envision uh them really integrating into broad financial markets, different risk management tools, maybe even institutional investment strategies? What are you hearing and what are you seeing when you talk to people? >> I mean, we're seeing a wide range of of new investment structures around prediction markets, around perpetuals, around novel types of derivatives. So, that's very exciting. We want to make sure that uh we're getting the regulation right, of course, at the CFTC. So, we're spending a lot of time working with institutional investors, working with exchanges, brokers, um even retail investors. So, we're taking in a

ton of input. We've put out a number of requests for comments. So, on the prediction market side, we had an advanced notice proposed rule making received over 1500 comments and they're from all manner of participants. Um, and so, so that input's very important. I think on the prediction market side in particular, we're seeing very novel instruments around, for example, how many cars will Tesla produce in a quarter? And this allows you to hedge risk like you've never been able to do before. These are really uh tailored riskmanagement contracts. So if you're an investor in Tesla and you're concerned about a particular quarter in terms of production or there's uh a risk related to for example the straight of

Hormuz closure um you're able to hedge that risk and I think that's going to make uh it's going to be better for investors overall but it's going to make the United States the the premier markets. I I I find it very hard to believe that uh if we seed this territory, somebody else doesn't pick it up and create that market and and these tools I I think are going to revolutionize how people are able to manage risk and structure portfolio. >> Yeah, absolutely. We've started to hear it from uh you know, Fortune 500 CFOs and treasurers as well as a risk management tool. I I I think uh you can't put the genie back in the bottle.

It's very clear that people see the the opportunity set here and I think it's going to continue to grow and of course we want it to grow here uh in the US. Um maybe last uh question on the topic of prediction markets. You mentioned uh the notice of proposed rule making. You know when should we expect to hear more if you can comment uh and maybe on you know all of those you know 1500 comments that you mentioned um you know what should or what was most encouraging to you or what was most surprising to you about about those comments. So we took in as I mentioned over 1500 comments on this advanced notice proposed rulemaking and that was a very broad set of questions and information requests to the markets to to stakeholders and we received a wide range of comments. It covered

virtually every issue related to prediction markets. So it wasn't a specific rule proposal. was kind of the the initiation of this whole process and we received really helpful feedback in particular around how should we define gaming? How should we uh think about what's in the public interest? How should we think about these kind of nuances in the prediction markets that you don't have in other sorts of markets just because the way the products trade, the way they're self-certified? We've already actually made adjustments to our self-certification process in part in response to some of the feedback we've received because some of these exchanges are listing contracts that are very similar. We call them kind of um children contracts of a parent contract

where you might have a um a contract related to straight of horm closure. Will it be open or closed by X date? And you have multiple of these contracts that then get self-certified um with different dates. And so we should really be able to have a parent contract and a number of subsidiary contracts and get that through the self-certification system much faster and and it makes staff's life easier when they don't have to kind of review these all individually. So we're working on upgrading our systems. We announced last week uh changes to our systems that uh allow for this. So now the self-certification process I think is going to move much faster. Um, but moving into what I think people are uh talking about in in the media more so

these days is the rule proposal that uh that we've submitted to OIRA, which is the um the a division within the White House that reviews um different rule proposals from the various agencies. And so we have that moving uh through the process right now. We're expecting to to get that out um as a proposal very shortly. and that will uh address one aspect of prediction markets. So it is based on some of the feedback we've received uh throughout the process but it won't be comprehensive in addressing every area of feedback. it'll be uh narrow, but we think this is going to be a massive uh aid to our ability to regulate uh providing a lot of clarity to the markets. And so I won't uh spoil it now or prejudge anything. Um but

we're excited to see that rolled out in the very near future. Um and and it will address, as I said, an aspect of the prediction markets, but it will um if we're able to finalize it. Um and of course, we'll take an input um during that process and make sure we get this right. But I but it will uh address a really important part of the the regulatory stream for prediction markets. >> Well, excited to see that uh when it comes out and it sounds like um you know there'll be more rule proposals to come and this will be an ongoing conversation. So um you know excited for to continue to hear more uh maybe you know uh let's talk a little bit about the 247 trading and and clearing and settlement u uh conversation. We talked a little bit about during the during the

perpetuals segment earlier, but and and we we also talked about like why, you know, crypto makes the most sense here. So, I won't kind of revisit that topic, but one of the things that stood out to me was um your advisory flagged, you know, weekend and holiday margining and FCM segregation. Uh the, you know, the FCM and the DCO model today assumes daily settlement and is currently constrained by banking hours. And so do you believe and I know you alluded to this but but I really want to dig in here because I think it matters to to our audience but but do you believe that we need to potentially move to different clearing architecture or you know do you see tokenized assets stable coins playing a really large role here in the future of of these markets?

>> Our markets have evolved over so many years. you know, we we started off trading under a bucket uh under a buttonwood tree and um you know, there's so many new technologies. We've gone from physical trading pits to electronic markets and now we're seeing blockchain technology. And in my view, this is just a natural evolution of our markets. We'll see this uh really take off uh or or it won't or or you know, it'll all be uh air. But but we believe that that this is uh something that is going to transform our markets and there will certainly be things in the future that that continue to to iterate on that. Um the the ability to self-custody is one that that is important. We've never really had this ability to kind of trade from your own account, self-custody your

assets, move assets quickly 247, 365 over the weekend. Um whether you're trading derivatives or securities or or you know spot commodities, it it's really important technology. Um it's not going to be for everyone. I think some will opt to utilize a custodial model, but it will allow to your point the broker dealers, the FCMS, the intermediaries to move assets on your behalf very frictionlessly 24/7 um and and kind of engage in uh the programmability of of their assets, which I think is really interesting as well. So, I do believe that this technology will fundamentally transform our financial markets for the better. Um but but there's going to be a lot of uh rulemaking and thinking as as we're

going through this process. So we have done a number of things to facilitate onchain financial markets. I mentioned the Phantom no action letter where we've clarified that if you're a self-custodial wallet software provider, you can offer software that allows for the self-custody of of assets uh and use of those assets within derivatives exchanges regulated by us. So, if you want to plug into a Coinbase or another market where they're offering derivatives contracts, you can plug your wallet in and trade in a regulated way.

Um, we're also seeing, of course, the use of stable coins and other types of digital assets as collateral. And we've clarified as well that that works within our framework. So, if you're a futures commission merchant, uh, which is essentially a broker within our markets, the futures commission merchants can accept from customers stable coins, other types of digital assets and use those as margin to to collateralize positions. we are seeing a ton of interest from the clearing houses now um and the exchanges to uh also utilize blockchain technology. So the clearing houses uh are are currently largely not utilizing stable coins uh within their framework. So so as a central

counterparty and managing um their uh collateral uh they're essentially taking uh cash from the broker. The broker takes stable coins from the customer. the the broker then passes along cash to the clearing house and the clearing house manages that process um of exchanging margin. So we're likely to start to see the stable coins and crypto assets flow through uh from the customer to the clearing house directly through through the um either directly or through a broker. So that's going to be very exciting. Um a number of of uh participants are are evaluating that working with our staff on that. We're also seeing uh interest in utilizing fully onchain uh technology to execute

trades. Um that's also very exciting. We we've seen a number of these of course in the DeFi world. So it's not new necessarily to your audience, but to do it in a regulated way in the United States where you know I think over the past uh many years people were walled off from that in the United States. we're going to start to see the ability to to trade onchain, execute derivatives, clear trades, all of that on chain. And I think a lot of the major exchanges are are thrilled about this.

They're excited about it because it makes 247 much more manageable. It allows for automation. So, it's going to reduce the the need for certain back office functions. Um, and it it it's truly global technology. I think as our markets are becoming more interconnected, we've always had these barriers between different markets, but creating global liquidity pools where we're all enforcing similar standards around things like uh sanctions trading and and AML KYC and all of that. We need to make sure that we're of course protecting um our customers and our investors and our national security. uh but we can really facilitate global liquidity through these technologies and

I think that's very exciting. >> Yeah, I was I was just uh earlier today at a a lunch with many a lot of trading firms and um and asset managers and where this topic was the exact one that came up and it's clear that people are are excited about this and so that's great to hear. Uh one of the things that you do hear though from some of the um you know critics uh or people who are who are necessarily against 247 trading is that it increases the risk of volatility and market fragmentation. Do you think that's true across all markets? Does it depend on the market?

How do you um approach that criticism? As we stated in our release on 247, we believe that for crypto, this makes a lot of sense because these are 247 markets. We've got markets in Asia, Europe, the United States, all over the world. And the liquidity is largely fragment. I mean, it largely is dispersed rather um but but but it is fragmented in the sense that you have big hubs in particular with perpetuals, right? there were these offshore exchanges that had a lot of the liquidity. Um much of the crypto markets in terms of actual value is traded in perpetuals as opposed to the spot market. And so uh it's very important to

to come up with a solution to get that liquidity into the United States. We don't want to be uh you know lagging behind uh the foreign jurisdictions. Uh but yes, there's this risk of fragmentation and so we're considering that. I think the ability to move things onchain and to offer similar products to what's offered offshore allows for that liquidity to to be um you know se more seamless right because you can hedge risk uh offshore um or people come here to hedge their risk onshore and so the market prices I think start to become uh more aligned and we start to see liquidity um largely uh you know coalescing around certain venues um now that we have a market in the United states for things like perpetuals but

when as well as as you know 247 CME just launched their 247 crypto futures so so we are seeing a lot of this um kind of uh activity aggregate to certain venues but but I do I don't believe that it necessarily creates a a a fragmentation risk I I think the markets will um beget liquidity right uh liquidity begets liquidity I think people will will flock to the markets that have uh large amounts of liquidity now that that we have more of this ability to trade 24/7 in the US. Um but for certain markets, things like agriculture, livestock, um other products, it's not clear to us that uh there's interest first of all in these products trading 247. We actually

get the opposite feedback from most of the participants. They're concerned. Um and many of them would prefer sometimes even constrained trading hours. So innovation doesn't mean 247 in every asset class. might be less trading hours, more trading hours. Um, but we're evaluating that. As we stated in the release, we believe that there's definitely some concerns around extending trading hours beyond what they are today for agricultural products. So, we're um, of course, always open to feedback and won't prejudge any issue, but but likely it would not work as well for for that asset class. But for things that do trade 24/7 like crypto assets on a global basis, we're interested in in um allowing for that market to to be

available in the United States. >> Do you think 24/7 trading becomes the norm for most asset classes? >> I don't necessarily think it'll become the norm for most asset classes. I think for certain asset classes that already have a global market uh things potentially like crypto uh you know may may be the case with some of the equities and other products where we'll we'll continue to evaluate but if you think about agricultural products as I mentioned um and and energy products and other things you've got different delivery locations you've got for example uh WTI and Brent oil um so these are different products with very distinct markets there there's not one single oil contract and and so we have

to evaluate the dynamics there. Um when you're thinking about a Bitcoin futures contract, there's not uh although there's Bitcoin Cash and and other types of uh digital assets that that may be similar, the the the product Bitcoin um it's largely fungeable across these different venues. Um so so it's different considerations. We'll certainly evaluate it, but we're starting off with crypto and uh we're we're taking input. We're going to engage with stakeholders and market participants to make sure we get uh all of this regulation right because the last thing we want is some um financial crisis or dislocation of the markets that's caused by the 247, you know, and and a lot of participants are concerned that they're using these markets to

manage risk, right? And to have to then manage and and monitor the markets 247 creates a lot of additional cost. And my my position and this administration's position is let's lower costs, let's lower the burdens of regulation, and if we're creating new burdens by opening the markets up 24/7, people managing risk, then we're not doing our job right. So, um, so we're evaluating all of it. These are important, uh, questions, important decisions to be made, and we'll continue to engage with stakeholders to get it right. So, so two final questions uh and and we'll get you out of here and appreciate you doing this, but um you know with the Clarity Act, so we talked about it a little bit earlier, but you know, what do you see as the most important implementation

priorities uh assuming that clarity becomes law and what practical changes should the market participants notice first following the passage of that law? Well, the Clarity Act would establish a comprehensive regulatory framework for crypto markets. It would require exchanges that are now regulated at the state level. So, many of these exchanges have what are called money transmitter licenses across the country in uh virtually all 50 states and then have a registration with the financial crimes enforcement network, Fininsen with the Treasury uh as money services business.

So it would condense that down into a single CFTC license where these exchanges would come in register with us as a digital commodities exchange and then there are other uh market participants custodians brokers uh dealers that would similarly register with us. So it kind of maps our existing market structure more or less for securities exchanges and derivatives exchanges and intermediaries onto the crypto world. um it's not a mandatory in terms of DeFi is still largely uh carved out of this although we need to do some rulemaking on that but but generally speaking it's for the kind of centralized exchanges that would come in and register um so we do need to act quickly to develop a regulatory framework most importantly for these new

reg digital commodity brokers digital commodity dealers um and that is work that we're already starting to think about we've been very uh active and involved in the legislative process, providing technical assistance to all of the committees involved. We provided assistance as well to the House side when they were developing the original Clarity Act. Um, and now we're working with the Senate committees as as that's the bill that's really in play at the moment. Um, so we're going to get the the rules implemented. My goal is to get all of the rules done within my tenure.

So, we've got uh about two and a half, three years to get this done. Um, and we're going to work really hard to get that done. Um, in terms of DeFi, which I think is vitally important as well. We've been doing work already to uh, as I mentioned, the Phantom letter, we've got some other things in the pipeline to develop some rulemaking around protecting software developers. I feel it's vitally important that we have u the ability to develop software to self-custody to engage in speech here in the United States. If we start to infringe upon that uh through overly burdensome rules and regulations, then all this great creative activity and innovation is going to go offshore. If we don't have the software developers, the people that are really uh in the

trenches creating really interesting things. If they're afraid to do that here in the US, then we're not doing our job right. So, um we will prioritize that to make sure that it's clear who has to register, what's subject to our registration regime. Um get that done early on. A lot of it we're already working on as I mentioned because it relates to our derivatives markets. So we'll make sure we get all this out as soon as possible. Um but we're very excited to get clarity across the line and the president this has been a priority of his since day one. He promised to make the United States the crypto capital of the world and we've got to cement it now that we've got it.

So the United States is the leader in crypto. But if we don't get the spill across the line, my concern is you get a Gary Gendler and Elizabeth Warren and AOC in power and they're going to tear it all down. So it's it's vitally important that we get this done. >> Yes, strongly strongly agree with you and I love what you said about uh developer protections. It's you know on top of mind for us and and the whole industry. Uh so final question, what is the thing or the scorecard uh if you'll permit me that will use you to weigh yourself uh and the government success in regulating these markets when you look back at the end of the term and when you think about you know all the work that you've done?

>> Well, our job isn't to ensure the price of any particular asset is at an all-time high or anything like that, right? What we are focused on is setting clear rules of the road, clear guidelines so that developers, financial firms, all manner of market participants can come to the United States engage in commerce freely and understanding of the rules and regulations and knowing that they'll be protected from bad actors. So we are focused on developing tailored rules and regulations for crypto assets, for prediction markets, for AI, for all manner of new technologies that are clear that people can understand, they can build within, they uh feel are um tailored to their their products and

services and not products, you know, not designed for other products and services. Um so we're working on getting that right. We're working on right sizing our enforcement program. You know, the the greatest tragedy over the last four years under the Biden administration was this assault on goodnatured builders and developers. There are so many um firms and individuals that were just trying to do the right thing, but there was no law to hang their hat on. There was no clarity whatsoever. They do one thing, the government tells them it's wrong. They do something else, the government tells them it's wrong. So, they were just driven offshore. And many of them were sued. You know, I can't tell you how many developers and founders told me their homes were raided by the FBI and

it wasn't just one or two, it was many. Um, so that's super concerning and uh we want to create a safe place for innovation in the United States. We want to be the crypto capital of the world, but also the innovation capital of the world. So, we will set clear rules and regulations and we will enforce fairly. We are not going to target for political reasons uh certain industries or individuals. Um and we're also going to make sure that when people come to the United States to build a new product or service, the regulator is willing to and ready to work with them.

>> Jess Lake, thank you so much for all of this. Thank you for coming on. Thank you for your leadership. Um and that's our episode.