Gensler on CFTC Jurisdiction; Governor Wallace on CBDCs; Commissioner Goldsmith Romero on Retail Crypto Investors
DEF Weekly Roundup - October 19, 2022
Gensler on CFTC Jurisdiction
Last week, Securities and Exchange Commission (SEC) Chair Gary Gensler spoke at Georgetown University Psaros Center for Financial Markets Quality Conference. In his remarks, he opined on the role of the Commodity Futures Trading Commission (CFTC) in regulating the digital asset markets.
The Chair offered the following remark when asked about the CFTC’s existing authority over digital assets: “I think the CFTC could have greater authority. They currently do not have direct regulatory authorities over the underlying non-security tokens. They have anti-fraud, anti-manipulation, but [not] actual plenary authority to write rules around the exchanges.”
He went on to echo a belief we’ve heard the Chairman espouse before, suggesting the “vast majority” of digital assets, including algorithmic stablecoins, are securities that fall under the SEC’s authority.
What does this mean?
Although the Chair’s comments seem to be advocating for broader CFTC authority over digital assets, in the context of his comments in the past, he seems to still believe that the “vast majority” of digital assets are securities and therefore within his agency’s purview.
Jurisdiction over stablecoins has been a hot-button issue in Congress. The Financial Stability Oversight Council (FSOC) recommended that Congress pass legislation to address regulatory gaps in the digital asset markets and focused on bolstering oversight of both crypto spot markets and stablecoins.
Governor Waller’s CBDC Speech
On Friday, Governor Christopher Waller of the Board of Governors of the Federal Reserve System delivered a speech concerning Central Bank Digital Currencies (CBDCs) and the US dollar’s (USD) international role. He expressed skepticism toward the idea of issuing a US CBDC and argued that it could threaten the USD’s international dominance.
Governor Waller argued the USD already serves as a “safe, stable, and dependable form of money” for global trade and cross-border payments and reduces “the cost of transferring capital.” He also expressed concern as to whether or not CBDCs could prevent illicit activity as well as existing payment systems that are improving, according to Waller.
While Gov. Waller argued that a US CBDC threatened the USD, he suggested foreign issuance of CBDCs was no threat to the USD and should not provoke the US to issue their own.
His first line of reasoning was that the “primacy” of the USD isn’t due to any technological advantages but rather “the ample supply and liquid market for US Treasury securities and other debt and [the] long-standing stability of the US economy and political system.”
Second, he argued that foreign CBDCs, such as China’s, would optimize government transaction monitoring and surveillance, which would discourage their broad use. A US CBDC, he argued, would not serve as an effective alternative for foreign companies and instead would bring various costs and risks, “including cyber risk and the threat of disintermediating commercial banks,” harming the USD’s international standing.
He added that its global availability would enable money laundering and international financial instability.
Governor Waller then touched on stablecoins, differentiating them from CBDCs as they do not require banks to provide access. Therefore, to improve stablecoin payments, Waller argued they “must be risk-managed and subject to a robust supervisory and regulatory framework.”
He went further, dismissing their effect on the USD since they rely on US monetary policy and not vice versa. He concluded that because they are pegged to the USD, their demand will only increase the primacy of the USD abroad.
The Governor ended his speech by restating that the US has no role to play in the issuance of CBDCs and should instead focus on its effects on “financial stability, payment system improvements, and financial inclusion.”
What does this mean?
The US CBDC debate is heating up. Many members of the administration—like Secretary Yellen last week—are increasingly vocal about their support for the issuance of a US CBDC.
As we’ve written many times before, CBDC’s are a “tabula rasa” that can either be designed to empower individuals via self-custody, peer-to-peer transactions, and privacy or empower states with unprecedented levels of economic control and surveillance. It’s encouraging to see Governor Waller make his views clear given (what we think will be) the profound societal consequences of where the “US CBDC debate” ends up.
CFTC Commissioner Seeks to Define Retail Crypto Investors
Last Friday, CFTC Commissioner Christy Goldsmith Romero said in an interview with CoinDesk that she intends to redefine the concept of a “retail investor” in crypto markets, as the CFTC may gain oversight of the space from Congress.
She argued that a newly defined retail investor would distinguish “household” investors from professionals and institutions and provide them with more consumer protections and disclosures.
The CFTC currently defines a retail investor as “an individual with total assets that do not exceed $10 million, or $5 million if the individual is entering into an agreement, contract, or transaction to manage risk.”
Commissioner Goldsmith Romero did not explicitly provide her new definition in the interview, stating she’ll informally introduce the concept on the CFTC’s website for the public to weigh in.
What does this mean?
The appropriateness of restricting certain investment opportunities to individuals based on their wealth has become a topic we’ve seen debated more frequently over the last few years, particularly as private markets have increasingly dominated high-risk/high-return opportunities.
The SEC’s accredited investor rules have generally been the focus of discussion, so it’s a good sign that a CFTC commissioner is thinking about the same issues in that context. It’s all the more important given that it’s a good bet the CFTC will, eventually, play some role in regulating digital asset markets.