US Commissioner Caroline D Pham of the CFTC sat down for a fireside chat with Adam Jackson, director of Policy, Innovate Finance at the City Week event organized by City & Financial at London’s Guildhall this week. The discussion centered on the CFTC’s role in regulating digital assets.
Commissioner Pham explained that the CFTC is one of the US federal market regulators, and like the SEC, has a “commissioner structure”. Each of the Commissioners is nominated by the President and confirmed by the Senate to serve staggered five-year terms. No more than three Commissioners may be from the President’s party, to ensure a bipartisan commission.
One of the Commissioners is designated as chair who both sets the agenda for the agency and directs the staff, but otherwise each of the Commissioners is independent, similar to a US board of directors. It takes the full commission to take any official action by the agency such as rulemaking and also enforcement actions.
Broad jurisdiction
“Our jurisdiction is incredibly broad because in the United States, basically, pretty much almost everything is a commodity under the US Commodity Exchange Act, but then for securities, those are backed out and given to the SEC to have exclusive jurisdiction over,” said Commissioner Pham.
She reminded the international audience that the CFTC’s jurisdiction is also global. The commodities markets are worldwide and include not just physical commodities, such as agricultural, metal, or energy but also interest rates, derivatives, equities and fixed income, with the market place being worth over $700 trillion.
Jackson asked if Pham considered the CFTC has all the rules and standards in place to regulate a stable digital assets market.
“The CFTC has a principles-based regulatory framework, our mandate specifies that we are to oversee an effective system of self-regulation.”
CFTC Commissioner Caroline D Pham
She answered that the question of whether there was a need for the federal government to introduce new rules is a “hot topic” in the US, with a wide range of views being expressed. Traditionally, the CFTC markets have been institutional markets or wholesale markets, and have a principles-based regulatory framework. She was opposed to a more prescriptive rule-by-rule regulatory framework.
“We do have incredibly broad authority since it’s so difficult to pass legislation. They [federal government] want to give agencies, which have the technical expertise, quite a bit of leeway to be able to regulate our markets and oversee our jurisdiction,” said Commissioner Pham.
She explained that regulators have three core powers:
- the power to inspect or examine;
- the power to regulate; and
- the power to enforce.
Commissioner Pham referenced the House Bill – the FIT 21 Act (see The FIT 21 Bill: A comprehensive regulatory framework for digital assets), which aims to provide a market structure framework between the CFTC and the SEC. The Bill divides digital assets into three categories: digital commodities, restricted digital assets and permitted payment stablecoins. The Bill focuses on the first two categories and allocates primary regulatory authority over digital commodities to the CFTC and over restricted digital assets to the SEC. The measure was approved by the House of Representatives with a 279-136 vote on May 22, 2024.
Commissioner Pham considered the tools the CFTC currently have and how they are applied. “The CFTC has a principles-based regulatory framework, our mandate specifies that we are to oversee an effective system of self-regulation.
“Our regulatory framework really involves a close partnership with us, the exchanges and clearing houses which are self-regulatory organizations. Dodd-Frank gives CFTC jurisdiction over OTC, derivatives,” she said.
The CFTC’s remit is also to promote responsible innovation and fair competition. Commissioner Pham said: “I think we’ve been quite successful in balancing that. A principal-based framework is more tech neutral.
“We stopped bringing our enforcement actions and filing our complaints in federal court so we can actually create most of our non-binding precedence through settlement orders (or, what sometimes people call ‘speaking orders’ at the SEC).”
“Quite a lot of the projects out there are intended to raise capital and so it is quite possible and probably likely that with very many of them their tokens are securities.”
Commissioner Pham has been involved in crypto since 2013, when she was previously on staff at the CFTC, and also through her role at Citigroup.
She views digital assets as the crypto or token container, “it really is just a wrapper around an underlying asset. The asset could be money, whether it’s public money or private money, or it could be some other kind of asset,” she said.
In understanding digital assets supervision, the Commissioner said we need to ask:
- Is it money? And if it is money and it is just banking or payments activity, then it should go to the Prudential Regulators. “BIS, the Basel committee, and all of the central banks around the world have been working quite diligently on creating appropriate, safeguards over banking and payments activities,” she said.
- Is it a non-financial or commercial activity? This is an important distinction because the US has a very comprehensive regime which involves a lot of state law when it comes to commercial activities. The Federal Trade Commission has a large role, particularly in enforcement section 5 of the FTC Act, which governs unfair, deceptive, and abusive practises, and fraud around sales or trade practises. “An important step forward that the United States could take is to create a definition for utility token which makes clear that it is non-financial activity and therefore would not be subject to financial regulation,” she said.
Commissioner Pham said: “I think a tremendous amount of the activity in digital assets probably does fall under banking.” She advised the audience that if they are doing any kind of capital raising activity, to instruct “a very good securities lawyer in the United States and understand whether or not you are indeed engaged in securities activity.
“I do think quite a lot of the projects out there are intended to raise capital and so it is quite possible and probably likely that with very many of them their tokens are securities.”
However, she added: “Trading is usually trading pairs of things and I do think again if you’re trading a pair of something you must get a good derivatives lawyer and find out if indeed you are trading a derivative.
“So, I think that’s an important frame of reference to think about, all comes back to what’s the underlying activity, regardless.”
Regulation and policy
Jackson wrapped up the conversation by asking who was leading the way globally on digital assets regulation and policy.
Commissioner Pham said that Asia is an area to watch, with “Singapore being a clear example of leading the way in a lot of the government-sponsored experiments together with the BIS Innovation Hub around tokenization.” She also noted that many regimes in Asia have comprehensive frameworks for digital assets, which include both financial activities and commercial activities.
In the EU, she said she’s interested to see what will happen with MiCAR and she’s keen to see how the digital asset regime develops in the UK, “I do think the UK is moving faster than the US.”