Making America the Crypto Capital of the World | New CFTC Chairman
Mike:
[0:00] I'm hoping that we have both the crypto capital of the world today,
Mike:
[0:03] which I do believe the president has made the United States crypto capital of the world. I don't think there's any question that this is the best place to build right now and that we're seeing so much innovation in the space. But I want to see that for years to come. I want to make sure that if we do get the next Gary Gensler, the rules and the statues are very clear and they keep this stuff here for the long term
Ryan:
[0:29] Mike Selig, welcome back to Bankless.
Mike:
[0:31] Glad to be here.
Ryan:
[0:32] Mike, I feel like your entire career prepared you for what you are doing now. So you clerked under Crypto Dad at the CFTC many years ago. You spent a decade representing crypto firms as a lawyer. You recently joined the SEC's Crypto Task Force. That was in March 2025. And then in December, you were sworn in as the 16th CFTC chair. I feel in some ways like you are our dream candidate for this position. I don't know if you feel the weight of our hopes and expectations on your shoulders, but can you tell us, in your words, why are you at the CFTC? Like, what did you go there to go do?
Mike:
[1:12] I spent many years in private practice working with firms, innovating on the edge of crypto, AI, prediction markets, and even the traditional firms that were really trying to test the boundaries. And around 2021, 2022, it seemed like every day we were getting a Wells notice or a subpoena or voluntary information request, quote unquote, voluntary. But no, it really was a slog over the years representing clients in this space, trying to do the right thing, make sure that these clients had a place here in the United States, and they were really being pushed out. So when the 2024 election came around and President Trump won and was in office, I had the opportunity to go work with Chairman Atkins over at the SEC, leading up as Chief Counsel of the Crypto Task Force. And we really did a bunch of great work bringing staking back to the United States, ending regulation by enforcement, clarifying what's a security, what's not. And we're still doing some work there between the agencies. But it was it was a great effort over at the SEC. We launched Project Crypto as well. And around December, I was confirmed to to move over to the CFTC and begin work there. And we've been working very closely with the White House, thanks to the president's
Mike:
[2:31] leadership on the Clarity Act, trying to get some legislation across the line. But there's so much we can do with perpetuals and other digital asset products that we've got our hands full. And I'm excited to be in the role.
Ryan:
[2:41] Well, let's dig into all of that. I want to set the context for folks. So I read some of your remarks from a January speech that you gave, which I think maybe charted the path for how you intend to run things at the CFTC. And as we broaden things and look at the scope here, it seems to me like the tone and tenor of what you're saying is that you see a shift that's happening in commodities markets. You said that commodities markets are undergoing a rapid transformation, and you compared it to the electronic transformation in the 1980s. It seems like the previous administration wasn't as open to a transformation that was ongoing. They kind of looked at crypto and looked at prediction markets, looked at other areas, and they said, yeah, we can keep things the same.
Ryan:
[3:32] You see a transformation taking place. Can you describe the environment? What is the transformation that is hitting commodities markets right now?
Mike:
[3:40] Well, I do believe that we're in the midst of a technological revolution globally, but importantly in this country where we have three really important technologies. We've got blockchain and crypto assets, prediction markets, and artificial intelligence. And these are rapidly transforming the way that we consume information, the way that we transact, and the way that we work every day. And that's right. The prior administration really had a concerted effort to drive these new technologies and innovators offshore. war. There was the assault on crypto, which, of course, Gary Gensler was one of the main characters. But many, many folks within the prior administration really sought to debank and to drive these innovators into the Bahamas and to, you know, Europe and Asia and out of our country. We've got to bring that back. We've got to make sure that there's a clear path for companies that want to innovate, software developers that want to create new things. And so that's an important technology that we've got to make sure is developing here in the United States. Prediction markets are another, where we saw a concerted effort to ban prediction markets ahead of the 2024 election. And it turns out that when you have the wisdom of the crowds, when you decentralize truth and make sure that you have a wide range of viewpoints and inputs, the markets are very efficient and they give us really helpful information that serves as a check on some of the fake media. And then we've.
Mike:
[5:02] Rapidly transforming the way that we do work every day, the way that we produce new outputs, and the way that we interact with others and learn about the world. And so we've got to make sure those algorithms are made here in the United States and that they have integrity and that they're not pushing woke or biased ideologies on users. And that was really a problem with the last administration where there was this effort to push historical revisionism and ideologies through our algorithms that really should be neutral.
Mike:
[5:31] They should allow us to utilize our, you know, great resources of information and create new outputs. And so we're working to make sure that these technologies have a place here in the United States.
Ryan:
[5:43] When you think about what a commodity actually is, so the C in CFTC, of course, stands for commodity. What is a commodity? Like, what's the statutory definition? Because this is, I guess... People are wondering how broad the mandate actually is and what this word commodity actually covers.
Mike:
[6:02] The 1974 amendments to the Commodity Exchange Act, which is our authorizing statute at the CFTC, created the CFTC. And it also established a really broad definition of the term commodity. So the CFTC has regulatory authority over derivatives markets with a commodity as the underlying asset. So if I enter into a futures contract or a swap and the asset that the swap is based on meets the definition of a commodity, then that is something that's within our regulatory authority. And the design of the act is to have a wide range of different types of products, services, and interests that are characterized as commodities. So that includes agricultural products, metals, digital assets, things that are intangible, but also services, rights, interests, political events, sports events, really the wide range of things that are not securities. And securities technically actually are a type of commodity, but we share some authority there with the SEC, and the SEC is the primary regulator for all of that. But really, the idea was to include the wide range of things that you might write a derivatives contract on that someone might want to manage risk on or speculate on and put that within the regulator's ambit. So we view ourselves at the CFTC as a regulator for risk management tools for all sorts of markets that go beyond capital formation, beyond capital raising, which really is the territory of the SEC.
Ryan:
[7:26] So some of the things that you mentioned, like, you know, metals, or if you get into oil or something like that, and various digital assets, I think listeners will recognize those as commodities. But the way you were describing it, a commodity is almost everything. In fact, you included some securities as a subtype of commodities. Is the answer to your question just for the layman that the commodities are everything? Are they all assets?
Ryan:
[7:50] Maybe another way to ask this is the reverse. Like, what's not a commodity?
Mike:
[7:54] Yeah. The only things that aren't commodities that are expressly excluded are onions, which was a historical incident following some manipulation in the onion markets in, I believe, the 30s or 40s. And then motion picture box office receipts, which there was an effort actually to set up these futures exchanges that were going to be predictions on the outcomes of motion picture box office revenue, movie receipts. And that was ultimately excluded from the act after some lobbying by the Motion Picture Association. But the idea really has been over the years to include a wide range of different types of products, services, rights, and interests that you might want to trade in the future. It's never been this idea that it's just an agricultural market or certain types of physical commodities that are within our remit.
Ryan:
[8:42] So are you saying the statutory definition is if there's a market and if it's not an onion and if it's not a movie ticket and there are some carve outs for securities, of course, but everything that has a market is essentially a commodity if it's not an onion or a movie ticket?
Mike:
[8:58] That's right.
Ryan:
[8:59] Wow. That's pretty large. It's like all markets. And so what is the role of the CFTC with respect to these markets? Are you guys responsible for market integrity? Is there some sort of efficiency type mandate? I guess, what's your role in helping to facilitate these markets in the US?
Mike:
[9:18] The CFTC regulates the derivatives markets. It does not regulate all of the spot markets and the typical day-to-day cash transactions in these commodities, although it does have anti-fraud and anti-manipulation authority to make sure that to the extent somebody's trading, let's say, Bitcoin in the spot market, if there's market manipulation there, that can impact the futures price or the swaps price. And so we need that authority to police the markets. And of course, we're really excited about the Clarity Act, which might expand our authority broader of the spot markets, but really any time that there's a derivative of futures trading on a commodity or to the extent that there's a margin financed or leveraged spot transaction
Mike:
[10:01] in a commodity, we regulate that.
David:
[10:03] I want to zoom in using that knowledge that we've established here on the pod so far. I just want to zoom in as it relates to the subject of prediction markets. In your recent remarks, you've said, I've directed the CFTC staff to withdraw the 2024 event contracts rule proposal.
David:
[10:18] That would prohibit political and sports-related event contracts. Why was the 2024 event contract rule established in the first place?
David:
[10:27] And then what's the reasoning behind why you are withdrawing that 2024 rule, prohibiting political and sports-related event contracts?
Mike:
[10:33] This was a rule proposal put out by my predecessor under the Biden administration, and it really was a very biased rule proposal that sought to ban political event contracts ahead of the 2024 election. And we saw with that election that the prediction markets were actually quite correct in terms of predicting the future, whereas some of the polls were not spot on. This was a concerted effort, in my view, to ensure that there was the ability to broadcast polls and fake news and make sure that some of the truth that comes out with these markets does not have the light of day in the United States. Of course, there was also a concerted effort within that rulemaking to ban sports-related contracts.
Mike:
[11:19] And the rationale there, I think, is similar. There's a lot of entrenched interests in some of these other markets, and keeping that outside of our remit was an effort of the prior administration. We believe that the statutory tax gives us authority over the wide range of commodities and we've got authority to regulate that and so rather than creating black markets and pushing things offshore and trying to be paternalistic and ban this commodity or that commodity we want to create a market for everything but we also want to make sure that there's integrity in those markets that we police inside are trading and that we've got the right rules of the road and so we're taking a very different approach from the the regulation by enforcement regulation by you know, banning specific markets.
Mike:
[12:00] We're going to set rules for it and make sure that folks comply.
David:
[12:03] So the form factor of the prediction market, you guys at the CFTC call this an event contract. Is that a futures market or like what's the actual designation of what that is and how it falls under the CFTC's authority?
Mike:
[12:17] So under the Dodd-Frank Act, which was really this reaction to the 2008 global financial crisis, we had a new type of derivative instrument that became part of our more holistic regulatory framework. So for a long time, these products called swaps were traded over the counter outside of our exchanges. And the Dodd-Frank Act created a kind of new regime for swaps and these types of derivatives. Many of these contracts are now considered swaps under that new regime. Prior to that they were considered binary options with dot frank binary options are now a type of swap but there are certain of these products that actually meet the definition of a futures contract just depending on how they're structured but the the through line here is that these are exchange traded derivatives that are offered on derivatives exchanges within our regulatory oversight and so they go through our typical process that you would expect with any other type of derivative they're offered on a central limit order book. They go through a clearinghouse. So transactions are matched between a buyer and a seller in each case. And they're novated with an exchange standing in the middle or a clearinghouse rather standing in the middle of each buyer and seller. And there's certain investor protection and integrity standards around the contracts.
David:
[13:31] Does it matter to the CFTC what the substance of some of these event contracts actually are? For example, like facetiously, one example of a market that was on some of the prediction markets was that one of the best it was a Super Bowl bet as to whether the coin toss of the Super Bowl would be heads or tails and you could go on to this like prediction market and it was 50-50 as you would expect you know markets are efficient you know you could you could gamble you could bet on it either being heads or tails does the CFTC really care about regulating this market
David:
[14:03] So I'm not the merit-based regulator,
Mike:
[14:05] The paternalistic regulator that says you can trade this commodity and that and not that commodity. I really think that the markets always find a way. If people want to trade whatever they want to trade, they're going to go find a place to trade it. That said, the way that our rules work is that each exchange is a self-regulatory organization. We license or register the exchanges within our framework, and then the exchanges have certain responsibilities. One of those is to assess each contract, so each event contract, prediction market, that is listed on its market to ensure that that contract is not readily susceptible to manipulation.
Mike:
[14:40] Manipulation within our statutes means fraud, market manipulation, as well as insider trading. And so to the extent that there is a significant risk that, for example, a streaking contract where someone's going to potentially streak across the field is going to incentivize somebody to go actually do that so that they can collect a payout, that creates potentially some risk of insider trading, market manipulation, that sort of thing. So there's questions as to whether that is suitable for listing on an exchange. And we as the regulator on the back end, we're overseeing that.
Mike:
[15:13] We're making sure that if an exchange gets it wrong, there's consequences. And if an exchange gets it right, we regulate those markets, we supervise the markets. And if, for example, there is some insider trading that wasn't foreseeable, that the contract itself still had integrity, wasn't susceptible to manipulation, either the exchange takes action there. And is the frontline regulator is going to bring, you know, a complaint against traders on its platform? Or in some cases, we take that on and we bring our own enforcement actions. But we certainly have a very high standard when it comes to listing contracts and then supervising our market participants for doing so.
Ryan:
[15:48] So Mike, just mechanically, how do you supervise all of these markets at the CFTC? So obviously, you have a large staff, but you're limited in terms of capacity. And what we're seeing in this transformation, this commodities markets transformation, we're seeing so many new markets, like thousands of new markets. And then we'll see tens of thousands and then hundreds of thousands. From a practical perspective, how do you actually maintain order and prevent some of the things that you're wanting to prevent when we have such a quantity of markets? It just seems overwhelming to keep track of.
David:
[16:27] Our derivatives markets are over a $500 trillion initial market.
Mike:
[16:31] So these are massive markets, prediction markets, event contracts, a very small part of that. We have a very robust surveillance and supervision program for all of our exchanges where we're overseeing each exchange. But ultimately, as I mentioned, the exchanges are self-regulatory organizations. They've got a rulebook. They've got responsibility to supervise and monitor their markets. We were pleased to see that Kalshi, one of the prediction markets, recently brought two civil actions against traders on its platform. One was related to an employee of Mr. Beast, who is trading ahead of some YouTube videos that were published by Mr. Beast. And that person was fined and has certain consequences with the exchange. We saw another where there was a political candidate who was trading based on inside information about his chances in an election. We also saw Kalshi bring an action in that case with a civil penalty. We do the same on our end. We take a long time to investigate. I'm sure you've tracked a lot of the crypto cases and all of that over the years. We start with our investigation. We send information requests. We then move to more, whether it's a voluntary information, which is still usually pretty involuntary or a subpoena. We start to collect information and build cases, but we're certainly supervising and monitoring our markets on a daily basis.
David:
[17:46] Is AI relevant here? I would imagine AI as a tool is useful to be able to detect some of this behavior. I think, you know, if you can just prove that like it's very unlikely that this one account made these correct trades as a result to these like correlated markets, the AI would be able to flag that. Is that something that's going on in the back end?
David:
[18:05] Absolutely.
Mike:
[18:06] A lot of our systems are not manual. They're using different types of tools. And we've got, you know, of course, really dedicated staff that's overseeing a lot of that. But in today's age, you don't require as many people. That's just the reality of the technology age that we're in. And that's a good thing. I think we're really embracing AI and other types of software tools to make sure that we're catching things that otherwise might have been overlooked in a manual system.
David:
[18:31] So in this Twitter video that you posted a couple of weeks ago,
David:
[18:34] you planted a flag on prediction markets as just firmly part of CFTC territory. You said that you filed a friend of the court brief to defend the CFTC's jurisdiction over prediction markets. What's a friend of the court brief and what's the argument that prediction markets are under the CFTC jurisdiction?
Mike:
[18:50] In these litigations, we're seeing certain states bringing lawsuits against our registrants, so exchanges like a Kalshi or a Crypto.com or a Polymarket. And this has happened throughout the country. We've seen over 50 of these lawsuits, and there's more filed each day. And the CFTC is not a party to those lawsuits. We've not been sued. We've not sued any states. but we are able to file a brief in the litigation to assert our viewpoints and help support where we think the ultimate conclusion should be with respect to the court's decision. In this case, we filed, as you mentioned, a Friends of the Court's brief, also known as an amicus brief, and we lay out our argument and our reasoning as to why we believe that these products are firmly within the jurisdiction of the CFTC.
Mike:
[19:42] Now, what does that asserted any sort of argumentation around what's gaming or what would potentially be something that the CFTC actually has authority to prohibit under its statute. So the Commodity Exchange Act gives us authority to the extent a derivative contract is offered on gaming, which is undefined in the statute. And some of the litigations are questioning whether sports events and other types of, games of skill would also be considered a type of gaming under the statute. We've not commented on that. We're simply commenting on a very clear and black letter principle that's in our statute to the extent that you have a derivative contract and it's offered to retail. It is offered on an exchange that's registered with us. That's within our regulatory authority. We never go into casinos or Indian travel reservations to go police gaming or casinos or anything like that. But we do regulate derivatives contracts. And when you have a derivative on a sports outcome, on a political event or anything else, that's something that we regulate under a federal regulatory framework. We do not share jurisdiction with the states there or anybody else.
Ryan:
[20:57] A lot of the states pushback, though, Mike, does seem to hinge on this definition of gaming, right? Right. And I think some of that is they're saying that sports betting is essentially gaming. How does that that gaming term actually get resolved if you're saying that the definition is somewhat unclear? What's what's the path to clarity there?
Mike:
[21:18] The way that our statute is set up is effectively if you have a derivative instrument, an event contract, and it is on an enumerated list of things. It could be war, terrorism, assassination and gaming. There's also illegal acts under federal and state law. That comes to the CFTC and the CFTC has the authority to say that if that is not in the public interest, we do not allow it. If it's in the public interest to allow it, we can allow those contracts and we can set up certain rules and requirements for the listing of those contracts. We have authority there and that's all that we're commenting on. So whether something's gaming or not, and we'll look to the courts and see where the courts come out as to what's gaming and what's not.
Mike:
[22:02] And we can adjust our regulations to make sure that they make sense for these markets. But our assertion in this case really has just been on that first issue of jurisdiction, not on what is or what's not.
Ryan:
[22:11] But how do you define what's in the public interest? Is that somewhat subjective? Do you have a working definition there at the CFTC?
Mike:
[22:17] That's something that we define through regulation. So we can lay out certain standards as to what's in the public interest and what's not. Currently, the rule proposal that we have pulled from the prior administration effectively said if something's political or if something's, you know, relates to sports, it's not in the public interest. I think we need to do a better job and have real standards here at the CFTC.
Ryan:
[22:39] What about this definition of an insider when it comes to prediction markets? Because this seems kind of tricky based on the particular market. What's the difference between an insider and just somebody who has, I don't know, informational data flow that they can express in a clear way? They have some sort of information advantage and that's sort of what we want to see expressed in markets anyway. So how do you think about this issue when it comes to regulating prediction markets?
Mike:
[23:10] Markets are efficient. We certainly want the latter type where you have individuals that are trading on real edge and figuring things out in the markets. And that comes out into the data that we see around the outcomes of different events. But the former, where you have.
Mike:
[23:26] Insiders who have a duty of confidence to an employer or somebody else, and they take that, they misappropriate information that they've obtained from their job or from whatever sort of relationship they have with someone that they owe a duty to, and they use that to insider trade. We prohibit that under our statute. The SEC does the same when it comes to securities markets. Now, with commodities markets, historically, you don't have these types of relationships commonly. You have it sometimes with a broker where you have a duty to your client and you trade ahead of your clients in a commodity market. There's other contexts. Of course, we've had many enforcement actions where
Mike:
[24:07] we've brought claims of insider trading. But now with information markets, with prediction markets, you have scenarios like the Mr. Beast example I gave earlier, where you have an employee that trades based on inside information they've obtained from their relationship with Mr. Beast, you know, with their employment. And that is insider trading. We police that. And we're going to see the same in sports leagues and in other contexts where you could imagine a world where you have the Gatorade, you know, mixer on the field and he knows exactly what color Gatorade's going into the cooler. And so he has an ability to use that information to trade ahead. And we've got to make sure that we police that sort of thing. So insider trading is very much something we prohibit and we restrict and we will continue need to police those markets.
David:
[24:53] Is there a clear, bright line as to what insider trading is in the commodities or event contracts context? As I understand it, on the equities side of things, it's very, very clear. It's much easier to tell who's an insider, what's insider trading in the equities context than it is in the commodities side. So is it as clear as there has been a bright line with insider trading historically? Or will there need to be further rulemaking or guidance about what is an insider in event contracts and what's insider trading in event contracts context?
Mike:
[25:29] We like to be transparent. So we always have a need for more guidance and providing more information. That's why I come on podcasts like this as well. But the law is pretty cut and dry. So we have the same authority that the SEC does. And when it comes to this misappropriation theory, where you have a duty to your employer or someone else, and you misappropriate information from your employer in breach of a duty of confidence, and you trade on that, that is insider trading under our authority, and that's been litigated in the court. There's also a classical theory of insider trading that applies to securities that is not really applicable in this context, so I won't get into it. But it's this misappropriation theory that we're really looking at,
Mike:
[26:12] and it is pretty cut and dry, as I said. Okay.
David:
[26:15] There's this one variable with regards to states versus the CFTC when it comes to the regulation of prediction market, and that's the conflict of interest that the Trump family has in prediction markets. Eric Trump is both an advisor to Polymarket and Kalshi. I think he's also an investor in Polymarket as well. And the people who are taking the state's side of this fight are pointing to how you are a Trump-appointed CFTC chair. Is this conflict of interest from the Trump family making your job harder? How is this impacting your job?
Mike:
[26:47] I'm subject to a very detailed, nonpartisan office of government ethics agreement that I take very seriously. I adhere to the law. I don't get into treating anybody differently from anybody else. And I believe that everyone within this administration holds themselves to the same standard. And we're just trying to do the best thing for the American people.
Ryan:
[27:09] One challenge we've had in crypto historically with the CFTC and the SEC has been the definition of crypto assets. There's the whole act. It's called the Clarity Act. It's a market structure bill in Congress right now. And the purpose of that act is to actually define with some clarity what is a commodity and what is a security. Ever since I've been in crypto, there's been like this challenge to have our regulators clearly define these terms for us in ways that people in the crypto industry can actually abide by the law. Can you talk about your efforts there? I know you've been part of Project Crypto. You were part of that task force on the SEC. Maybe talk about that. How is that similar versus different to the Clarity Act? And what are you doing as a regulator to help provide some clarity there?
Mike:
[28:04] As you all have covered over the years, there's been the debate over the Howey test and its application to crypto. There's contexts where you sell a digital asset and you make certain promises and commitments to people that are buying it and you're selling it for capital raising purposes. And maybe you've not built out your network yet or your product and you're telling them, hey, here's a white paper. This is what we plan to do. And so they invest in that enterprise, but then they get a digital asset as a result, or maybe down the line that's delivered. Digital asset itself, it's pretty clear that that's not a type of security unless it gives you certain interest in a company or certain debt-like characteristics.
Mike:
[28:47] But the investment itself, that initial capital raising transaction, that might be a securities transaction under the Howey analysis. It's really important to clarify these things in statute and maybe move away from a Howey-type structure or embrace aspects of it, but set up clear rules of the road. And the Clarity Act is a great effort in this way to really clarify what's a security, what's not, what the rules are for fundraising with crypto assets, and so on and so forth. With our existing authorities, we can start to lay the groundwork to make sure that these markets don't percolate offshore and get pushed offshore without clear rules of the road. And that's really been Chairman Atkins and I, our vision for getting some initial rules of the road in place. So the SEC can rely on the Howey test, but not just use it in enforcement. It can say, okay, here are some clear rules of the road for when you're fundraising. And then these types of assets, as Sherman Atkins has articulated. He said digital commodities, so network tokens, things like Ether, Solana, and so on and so forth, are not a type of security. These are digital commodities.
Mike:
[30:01] Digital collectibles, things like NFTs and so on, are not securities. Maybe they're not commodities either because they're non-fungible potentially, but these things certainly aren't securities. And digital tools, things that you're using just on a blockchain, like you receive a receipt token or that sort of thing, these are also not securities. They're a type of good or a tool that you're using with a network. So getting those guardrails in place without legislation is helpful so that the markets can evolve and develop here in the U.S. And people aren't afraid that they're acquiring something that's subject to the securities laws. That said, a statute can really future-proof it and make sure that it's codified
Mike:
[30:40] in stone and the next Gary Gensler doesn't come in and totally tear it apart. So it's very important to get this done. And David Sachs and the president have been really tremendous in pushing this effort, and I'm glad to support that.
Ryan:
[30:53] So we're hopeful that the Clarity Act goes through. I think actually speaking of prediction markets, on Polymarket there's like a 70% chance or something like that that the Clarity Act passes this year. But are you saying, Mike, even in the absence of that, that between you and the SEC, you're able to give clear rulemaking and issue clear rulemaking to the crypto industry to provide clarity as to like what assets are commodities and which are securities and essentially simulating much of the Clarity Act just by way of rulemaking? Is that something that you plan to do this year? And when when will that happen? Yeah.
Mike:
[31:31] As regulators, we certainly can interpret, for example, the Howey test and lay out the way that we're thinking about that as an agency. But that does not mean that it's going to supplant the case law itself. So if you think about the litigation against some of the big exchanges over the years, which brought in federal courts and there were these debates over what does Howey mean for certain digital assets, we can't necessarily override that through our rulemaking. The statute says what the statute says. It has this term investment contract, and someone can argue based on the Supreme Court case law that a token is an investment contract. The statute itself, if we get clarity in place, that can actually set in stone overriding this nebulous Howey definition and say these things are not securities, these things are securities. That said, as a regulator, of course, we can offer clarity. Courts may find that persuasive, and it's helpful. But I do think there's a real need to get a statute in place that really future-proofs this because Chairman Atkins and I might do the right thing. But if Gary Gensler is back in action, we're going to see a whole different world for crypto.
Ryan:
[32:41] What else is Project Crypto up to?
Mike:
[32:43] Project Crypto is an effort between both the SEC and the CFTC to modernize and upgrade and future-proof our rules and regulations for crypto assets and blockchain technology. And that means tokenization. So we've got to make sure that our rules are set up to allow for the tokenization, both of securities on the SEC side and collateral on the CFTC side for transacting derivatives. And also potentially, we're really excited to see unique types of tokenized instruments that represent exposures to different commodities. So these might be a type of derivative that operates on chain. We're really excited to make sure that our rules are set up for these innovations in the markets. We're also evaluating how to allow for more of the on-chain financial applications here in the United States. Over the past handful of years, all of that activity has really been driven offshore. I can't tell you how many firms I worked with as a lawyer in private practice setting up came in offshore structures and DAOs and all of that. And now we really have an opportunity to bring it back here to the United States with some clear rules and regulations around it. And that's part of Project Crypto as well. We've got to make sure that both the SEC side of things.
Mike:
[33:58] And the CFTC side are consistent and harmonized, because it would be a really bad thing if you had to go to the NASDAQ chain to transact in securities and to go transact in derivatives. Let's make sure that these things interoperate and work on the same standards. And that's something Chairman Atkins and I are both committed to doing. And then, of course, you've got registrants with the SEC and registrants with the CFTC that are subject to duplicative regulatory requirements. For example, you could have a broker dealer that wants to offer securities, maybe they're tokenized, maybe not, as well as Bitcoin and Ether and other commodities within our jurisdiction.
Mike:
[34:37] Let's create a framework that allows for a single regulator to be the primary regulator, and then for the agencies to coordinate and cooperate and not duplicatively regulate each company.
Mike:
[34:50] And that's really the super app vision that Chairman Atkins has talked about. And then I'm a big supporter of, let's allow for our market participants to offer a broad range of products and services under one roof, but with the appropriate regulatory oversight and partnership between the agencies.
Ryan:
[35:06] You just used words like cooperate and harmonize. So should I take that to mean that the turf war between the CFTC and SEC is over?
Mike:
[35:14] Yes, rest in peace. It is a...
Ryan:
[35:17] One other concern I think people in crypto have had is around software developers and users and safe harbors for those developers and users. So I recall, you know, actually you came on Bankless three years ago, and this was a subject of conversation, which is something you said. I'm paraphrasing you a little bit, but the existing regulators were set up to regulate intermediaries, essentially. So some sort of centralized third party that you had to, that you went through. And so they see everything through that lens. Whereas, of course, crypto and some of these prediction markets and peer-to-peer technologies, it's user-to-user. It's peer-to-peer. It's peer-to-maybe smart contract technology. And so what was happening is as the CFTC and other regulators were interpreting everything must have an intermediary, they were just calling all sorts of things that weren't intermediaries intermediaries, right? So they would bring software developers to task, you know, DeFi front ends, that sort of thing. What are you doing and what can you do to protect decentralized finance software developers, those that are pushing code from being labeled as an intermediary? What needs to be done there?
Mike:
[36:30] The first thing we have to do, and this is something that we're working on as we speak, is clarifying what types of activities, what types of, persons constitute intermediaries. Certain software developers that are merely pushing code to a blockchain or offering a non-custodial digital wallet program that somebody uses on their own, holds their own assets, has their own access credentials, that's not the same thing as an exchange that's custodian someone's assets or managing transactions for an individual. So we really need to do a better job as regulators at clarifying that spectrum. I do believe that on-chain software operates along a spectrum where certain products and services have an intermediary that's involved actively or administering things, but there's a wide range that sit in between.
Mike:
[37:21] We shouldn't be applying our traditional rules and regulations to. And then there's the far end of the spectrum that we call decentralized finance. We can call it on chain without any sort of intermediation, but that stuff shouldn't
Mike:
[37:34] be regulated the same way. And we've got to clarify a clear line, a safe harbor to make sure that that activity can happen here in America. And, you know, permissionless innovation is really important.
Mike:
[37:46] Thomas Edison didn't have to go ask for permission to innovate. And we've got to preserve that same framework for folks that just want to push the boundaries and test new technologies, but they don't want to be an intermediary and oversee an exchange or a brokerage or that sort of thing. We'll create a space for it here in the United States. And another area that I really am working hard on together with Chairman Atkins at the SEC is creating an innovation exemption that will allow for a staged approach. You might start off with more intermediation and control over contracts and software as you're finding product market fit, as you're testing things. For security purposes, you might need to have more administrative oversight. But the goal is not to go register a full-on exchange or to register a broker, but really to create a software product in the long term. Or perhaps the idea is you do go and register an exchange in the longer term, But that's not the immediate plan. The immediate plan is to find product market fit and find the right way to develop your product. So we want to get an exemption in place that allows that space and it will be a time limited process or limited by potentially volume or some other factors. But it will allow for firms to go out quickly to the market with a new product or service and not have to worry about consulting the CFTC for a full registration. So we're hoping to get that in place in the very near future.
David:
[39:10] There's a ton of software products out there in crypto that came under the previous SEC administration's ban hammer, if you will. It's just like wallets and, you know, node operators, a lot of people that were just running software that got deemed to be some sort of brokerage, broker deal or something like this. I think we are well beyond that. I think that's in the rearview mirror now. But there are some people, some entities, some software entities in the space that do have some sort of control. Like what comes to mind to me are our layer two networks that have the ability to have some sort of influence over transactions, the sequencing of transactions, the order of operations over transactions. But also notably, many, if not all of those layer two networks don't care to have influence. It's just a byproduct of their position. so they don't they don't want to be regulated as exchanges they don't want to have exchange level responsibility but nonetheless because of the nature of their software they find themselves in a position that allows them to have some sort of influence over transactions what about this category of software where they do have some sort of control they can be regulated they don't want the control but nonetheless they have to have it like it's very it's very a fine area to be in what do you think about this sector
Mike:
[40:26] We need purpose fit rules of the road for all these technologies, whether it's a layer two that has certain vectors of control, but things are automated. And so it doesn't look like a traditional exchange where you've got a ton of regulatory overhead, really because you don't have the automation. You don't have this decentralized trust layer on the layer one network and so on and so forth. So we need to be thinking about things differently. And that's really the approach I hope to bring to the agency, rather than being trapped in this
Mike:
[40:55] past of everything's an intermediary and everything works the same way. The CFTC has a principles based regulatory framework, which is really convenient and nice for this type of environment. We don't have to stick to very prescriptive, hard rules of the road. We can say this is one way to build an exchange and it fits our standards. But this is another, and this one's fully decentralized, and maybe some of the standards that we've applied or thought made sense for the old school don't make sense for the new school, and we're going to take a fresh approach.
Ryan:
[41:26] Mike, of course, through this, there'll be questions. I mean, this is innovative territory. These are new technologies and new challenges, of course, that we're facing. Is it safe for people who have questions to come in the office and talk to you, to visit you? I mean, there was a previous chair of another administration who kept inviting people building in crypto to come in the office the problem was no one trusted him the problem was every time someone came in the office they'd be slapped with some sort of wells notice or a lawsuit is it safe now to interact with our regulators we
Mike:
[41:58] Don't hand out wells notices for coming into the building anymore so we certainly welcome folks to engage with us and i think that's really important the the prior administration, created this really difficult environment for builders and innovators because they were afraid to actually go in and engage. And so they just went offshore or they worked under the radar and were treated
Mike:
[42:25] effectively like criminals. And that's not the world we want. We want our innovators to be building great things here in the United States and feel confident that when they come to talk through their business model with a regulator, the regulator will work with them to find a pathway for them to be registered, licensed if that's what's necessary, or compliant with our legal regime otherwise, but not put in jail or thrown into litigation.
David:
[42:51] Let's talk about perpetuals, perpetual derivatives. So from your recent remarks not terribly long ago, you said the CFTC will use the tools at its disposal to onshore perpetuals and other novel derivative markets so that they can flourish across both centralized and decentralized markets. What does it take to onshore perps. Why aren't perps onshore right now? What will it take to actually attract them to become onshore?
Mike:
[43:15] Part of the reason they're not here now is because there's been this aversion to anything new within the government for a very long time. And we're certainly not following that old path. Perpetuals have gone offshore over the years and they've really been, in my view, the largest source of liquidity in our crypto markets. For the longest time, firms that wanted to trade perpetuals had to go set up an offshore vehicle and had not had that opportunity here in the U.S. We did start to see over the past year what I call kind of non-true perpetuals. So they're long-dated futures contracts. So about 50 years is the typical contract as opposed to an endless, you know, perpetual cycle.
Mike:
[43:58] And there's no reason that we can have the former, not the latter. A 50-year long-dated contract is no less or no more risky to our financial system and to our clearinghouses, in my view, than a perpetual contract. We have the same risk management in place, and we're going to be able to accommodate that here in the U.S. Part of the reason that these products have not started to come into the fore and be self-certified is because the exchanges are not sure if these are truly futures under our rules or swaps, a different type of derivative.
Mike:
[44:34] And the swaps have a lot more regulatory overlay due to Dodd-Frank. And in my view, I've never been a big fan of Dodd-Frank. But one of the things that Dodd-Frank did is take a very hammer approach, essentially, instead of a scalpel approach to our swaps markets, looking at everything as the same. So a credit default swap, some of the types of swaps we were really concerned about around the time of the financial crisis, posed very different threats and risks to the system. Than a cattle swap or, you know, a grain swap or a Bitcoin swap even. And so we really need to start paring back some of the regulations around different types of swaps where we don't have the same concerns that we did with the financial crisis. So we're looking at that. But we're also, for the sake of perpetuals, going to clarify what can be self-certified as a futures contract and what's a swap in our view. And to the extent that we need to give no action relief or exemptions to make sure that our rules make sense and that we're not over applying our swaps regulations to certain of these products, we're going to do that. And so, as I mentioned earlier this week, I'm really excited to get perpetuals back in the U.S. and we're hoping to do that within the next month or so.
Ryan:
[45:48] Mike, all this is very, very exciting and such a breath of fresh air from a regulator. And I've noticed this with Paul Atkins, SEC, and now the Mike Selig, CFTC, that there appears to be a complete tone shift. I was trying to, over the years, doing like a retrospective of like, what the heck happened in the previous regime, regulatory regime, the previous administration? And having talked to many folks that actually came out of that regime, their ideology is different. Every time there was something new, the answer was always like, no, we can't do that. It was like a rejection of innovation. It was almost like deaccelerationist with respect to new ideas or new solutions.
Ryan:
[46:34] And you almost got the sense that our previous regulators didn't really like markets that much. Like it wasn't actually neutral and meritocratic. It was like anti-market in its behavior. And so they saw markets and were like, we got to put a stop to that. The new CFTC and the new SEC that you guys are pioneering, it seems like you're tackling some hard questions here, right? Getting into the thorny issue of what is an events market in the public interest? What are these definitions around insider trading? You're saying kind of yes and, and you're trying to figure out how we adapt these new technologies. And I got to say that that's quite refreshing and just something we've not experienced as an industry from our regulators.
David:
[47:23] Do you see it that way?
Ryan:
[47:24] I
David:
[47:24] Mean, do you like
Ryan:
[47:25] What's because you've been now you're on the inside, but you've been on the outside. Do you have a retrospective or an audit of what went wrong ideologically in the previous administration and how you're doing things differently?
Mike:
[47:37] This fear of the future and things that are new has been, to me, the biggest threat to our country. And we really have to turn the tide on that. For so long, this country has been great because builders and innovators have developed new things and the country's benefited from that. We've seen things like the railroads and the telegraph lines and the Internet. These have opened up so many new possibilities for our country and for our American people. And we can't just push that offshore and say, hey, we're really happy with what we've got. So we're not going to allow for things that are new. And we saw that with blockchain. And we saw it with the crypto wars before that with just pure encryption and cryptography, where when things seem threatening to the existing status quo and the existing system, we tried to block it and prohibit it. And that's not the tone of this administration. I think that comes from the top. I think that's not just my commission,
Mike:
[48:36] but of course, the SEC and others throughout this administration. We want the builders here. We want innovation here. We want new things like prediction markets to flourish here. And of course we've got to regulate it. And that's always been, I think, the mantra of government, right? If people were angels, they would not need government. I think James Madison said that, but.
David:
[48:58] We certainly need some regulation.
Mike:
[48:59] I'm a free market person. I think the market should decide what people trade, what people buy, what they build. We've got to have some controls around it. Disclosure is a good thing. We're not a disclosure-based regulator, but the SEC sure is. And it makes sense to have disclosures when people raise capital and people invest in a company. They should know what the company is doing and what its board looks like. But I don't think we should get in the business of being paternalistic and saying, okay, prediction markets are bad for this country. We don't like that. Let's let it develop offshore. Crypto seems concerning because a few people use it to launder money, but let's forget about all the benefits of protecting people and their financial transactions. AI is something that is too powerful. Let's just let it develop offshore in China. And let's also, if we're going to do it here, program woke and DEI algorithms. So I really do think it's this creep of the government that has just been so in the face of the American people. And it's really refreshing that this administration says, we're going to take a step back, we're going to let the markets and the people build what they want to build. But we're going to make sure that there's some controls around it to protect from systemic risks and that sort of thing.
Ryan:
[50:14] In your remarks, you also doubled down on Trump's idea of making America the crypto capital of the world. So I think you're on for five years, I believe, as CFTC chair, if all continues to go well. Five years from now, where do you expect America will be and how will your role as chair at the CFTC make that possible with respect to becoming the crypto capital of the world?
David:
[50:43] We passed the Genius Act.
Mike:
[50:44] We've ended regulation by enforcement. Clarity is really on the cusp of getting signed into law, thanks to the leadership of the president.
Mike:
[50:52] I think we've got so much more we can do with that room to grow. I really expect to have a permissionless innovation environment within the country where innovators don't have to come ask for permission every time they want to do something new. An innovation exemption is really a first step to getting there. I also do expect for on-chain markets to be a mainstream thing. I don't think there's any reason why the New York Stock Exchange or NASDAQ or the CME can't build on a blockchain and offer that in the same way with the same certainty and clarity that we have when they build on old databases.
Mike:
[51:31] So I'm really hoping to kind of create an environment where folks can innovate. We see a lot of new technologies flourish. And we also don't have the paternalistic tendency to go say, okay, this product's okay, that one's not. If you build on this type of system, we're not going to allow it. But if you build on this one, it works. That really would get us nowhere. We'd still be driving around in a horse and buggy if we didn't allow for the innovations of tomorrow to be developed. So I'm hoping that we have both the crypto capital of the world today, which I do believe the president has made the United States crypto capital of the world. I don't think there's any question that this is the best place to build right now and that we're seeing so much innovation in the space. But I want to see that for years to come. I want to make sure that if we do get the next Gary Gensler, that the rules and the statues are very clear and they keep this stuff here for the long term.
David:
[52:28] Clarity is a pretty wide ranging build. There's a lot of components inside of it as it relates to crypto, a bunch of different things. Is there a part of Clarity that you find particularly exciting or has like a particularly large opportunity for either crypto or America? What part of Clarity is your favorite?
Mike:
[52:45] Clarifying what's a security and what's not is going to be critical because the last thing we want is to backslide into the last administration where all of a sudden now the Solana blockchain, the Ethereum blockchain is the National Securities Exchange. So that's really critical. We're going to protect the industry here in the U.S. With statutory clarity that certain things are subject to securities laws and others are not.
Mike:
[53:09] I also believe that a national market structure for spot exchanges is important. We saw both with the SEC bringing lawsuits against some of these exchanges.
Mike:
[53:20] Claiming their national securities exchanges, but also the states bringing those types of actions. And so having a federal framework where an exchange can register with the CFTC and have the certainty that that's subject to a federal regulatory framework and not a state-based regulatory framework, that will be really important. We have state legislation like the bit license. Now, New York has started that trend, but of course, we have it in California and other states, and they can really be the driver of what requirements and exchange needs if there's not a federal option. And I'm also concerned that you see states picking up where Gary Gensler left off, bringing these same sorts of lawsuits around staking and exchange offerings and all of that, claiming violations of the state securities laws. So having a federal regime is going to be really important to future-proof things. We've got a lot of authority at both agencies to help get an interim solution in place, but having legislation will be really critical to keeping the United
Mike:
[54:20] States as the crypto capital of the world.
Ryan:
[54:22] Mike this has been absolutely fantastic so glad you're there so glad for the energy that you're bringing because I think the message is innovation is good markets are good automation is good neutrality is good building in America in crypto is good all of these are new messages that the previous administration was saying the complete opposite so it's very exciting to have you at the helm and we're just looking forward to everything the CFTC is doing Bankless listeners you guys heard it It is now safe to go in the office, okay, at the CFTC. So if you have questions for Mike or the CFTC, I think it's safe to engage. Mike, thank you so much for joining us on Bankless today.
Mike:
[55:03] Thanks for having me.
Ryan:
[55:04] Got to let you know, of course, listeners, you know, none of this has been financial advice. Crypto is risky. You can lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the Bankless journey. Thanks a lot.