CFTC Not Ready for Crypto's Expansion, Expert Warns

Added: 2026-05-31

[00:00:00]When Atkins and Behringer are merging the the agency space, hats off to them.

[00:00:03]When they're dropping enforcement action and firing lawyers that are pursuing them, then like vomit face.

[00:00:14]>> [music] >> Welcome to the Policy Protocol, a brand new show from CoinDesk that gives you a bite-size overview of all the happenings in crypto law and policy from the past week.

[00:00:27]This is your espresso shot of everything you need to know to be in the know.

[00:00:33]I'm here with my co-host Rebecca Rettig.

[00:00:35]Uh Rebecca, it is been an interesting week. I mean, and I will tell you if there's one thing that has stood out this week, it's four letters, the CFTC.

[00:00:48]>> That's right. I was going to say all roads lead to the CFTC this week. I think there's been a lot of news uh running from Sunday uh and a big article in the New York Times to uh lots of news even as current as Thursday when we saw Kolshi sue the state of Minnesota over their pending rules for prediction markets. So, let's jump into it.

[00:01:12]>> Yeah, jeez. I think I don't know if that would be news. That that's it would almost be news if they didn't sue uh at this point. I feel like Kolshi is litigating in every state. All right, well, let's talk about that New York Times article. I mean, that was an investigative look at some of the activity in the CFTC throughout the current administration.

[00:01:32]And you know, a lot of this had previously been reported, but I think there's some very significant additional detail here, Rebecca. There was some prominent names quoted. I as somebody who has been practicing in CFTC land for quite some time, there was a lot of you know, big names uh who had been at the CFTC. And really, you know, if I was going to say from my perspective, from my vantage point, what the biggest takeaway was for me, it was how decimated the the CFTC has been. I mean, really, you know, what what you you know, they should kind of show there. I mean, we've seen the numbers. I think it's like about 24% down from its numbers, but you know, from under the prior administration in terms of head count.

[00:02:16]But really just the sheer amount of expertise lost, particularly on the enforcement side, a lot of leadership. I mean, you heard the stories there. Um and you know, it was you know, there was allegations that were made in the reporting that some of that was in retaliation for staff who were trying to push forward investigations and you know, thought that there was corrupt or um improper activity going on.

[00:02:41]>> Yeah, and for anybody who's listening or watching who didn't read the New York Times article, and if you're in crypto, it seems unlikely that you haven't read it. Um but what I will say is what the article looks at is how the CFTC went from a somewhat aggressive enforcement enforcement stance under Chair Benham and the prior administration. And then when acting Chair Pham took over and you know, whether enforcement was rolled back and how crypto has been treated at the CFTC since the new administration took over. I think for people in crypto, there is a feeling generally that the New York Times is fairly anti-crypto.

[00:03:19]They have not had a lot of positive coverage over any number of years. And I do I would I'd say that there were some gratuitous throwaways, right? Like oh, crypto is full of scams. Maybe true. Or maybe certainly that there are scams that we don't want in crypto. But I think there are also facts here. The one thing I'd also caution people is that the last administration was so far along on the enforcement spectrum, right? This concept of regulation by enforcement that we didn't know the rules and they making them up through enforcement orders through the regulators, is antithetical to anything we've really ever seen from most other industries. And we did, of course, um have Chokepoint 2.0, but like when Chokepoint 1.0 was going on, we didn't have the same level of aggressive enforcement through the agencies. And crypto, you know, was spawned as this anti-government type of uh agenda um or asset. And so, I think that's always been in the back of government uh officials' minds, right? I had conversations years ago with EU regulators and policymakers where they said like, "Well, we think that our, you know, general control and power come through state-backed fiat currency, and crypto, you know, threatens that." And so, I think we saw that in spades in the last administration, and anything rolling that back looks like favoritism or something that we're not used to as well. And so, I think we have to look at that article with that bent, too, that we're seeing a massive pendulum swing.

[00:04:54]>> Yeah, I think we certainly are. And you know, just I'm trying to zoom out here, and instead of getting into the specific allegations, cuz there are some very substantial allegations in the piece, but, you know, really talking from a high level, you know, if you look even at the way that they titled it, I think it actually gets to an important point.

[00:05:11]I mean, they're talking about crypto and prediction markets, how they Now, they're saying they steamrolled a watchdog agency, but one point I want to make that's maybe more a more neutral point, but I think it's super important, is the CFTC as an agency has existed for quite some time. It's pretty small, right? 500 something odd employees. It has an industry that it is regulated, kind of traditional commodity futures and and derivatives for you know, agricultural products, you know, and so on. You You suddenly now you have this industry regulating two of the fastest growing sectors in financial services when we're talking about crypto and prediction markets.

[00:05:54]And as crypto becomes more and more important, as blockchain technology becomes more integrated in with TradFi, I really think this what this article, you know, hopefully can do is start a conversation about what funding the CFTC needs, what sorts of personnel the CFTC needs. Maybe they don't need as much enforcement, but they sure need a lot of people in let's say the, you know, market participants division or in, you know, market oversight or other portions of the CFTC that are, I think, serving important roles to ensure that, you know, for example, registrations are completed on time and and exchanges have proper surveillance.

[00:06:36]>> Yeah, and I think if clarity passes, it's going to give the CFTC brand new jurisdiction, lots of new registrants, and so we will have to look at what type of resources the CFTC will need under that new new set of laws as well.

[00:06:52]>> Well, absolutely. And look, you know, I think this this topic is an important one right now. So, let's bring in our guest, Brookings senior fellow Aaron Klein. Aaron is, you know, somebody who, you know, has had a lot of experience in economic regulation. And really, I think, Aaron, I'm really interested to hear what you think about the CFTC and what the CFTC's role should be, let's say, in regulating prediction markets, crypto, and and whether or not it needs to evolve to do that.

[00:07:22]>> So, I think the CFTC absolutely has to evolve because this is a massive increase in its bandwidth, its portfolio. Because you talked about the history of the CFTC, CFTC was created in 1974, came out of the agriculture department, which previously was regulating and actually not doing a great job in some of these commodities.

[00:07:43]There's something called the great salad oil swindle of the 1960s that was a scandal that bankrupt 16 different brokerages with non-existent trading in futures regarding a guy who was basically scamming on salad oil. It's a It's a wonderful story for history, but that created the legislative momentum to take this regulator out of the agriculture department and create an independent regulator in the CFTC.

[00:08:10]Uh along with other independent regulators, they've been they've been turned into a subsidiary of the White House in this administration. The White House this White House and this Supreme Court is radically upending a century of precedent that had independent financial regulation and is now fire financially regulating out of the White House. And that's the part of the article that concerns me the most. We can have a debate about what the right level of enforcement is, what the right method is for a regulator to enforce. What we ought to all agree on is that if you've committed an illegal activity, you can't call the president and have the president call the head of the agency and have the head of the agency fire the lawyers leading your investigation.

[00:08:56]And that's basically what the white what the New York Times story alleges happened.

[00:09:00]And this happened to the point where uh the Trump nominee was being asked point-blank by the Winklevoss twins, will you drop the settlement where we paid a bunch of money for wrongdoing and let us get our money back? And he said, I can't prejudge that, and they canned his nomination.

[00:09:21]Uh and that's what the New York Times story alleges, which is a quid pro quo that we should all be able to say that we're against.

[00:09:28]Right? You know, you that's just the basic nature of financial regulation of having a a political system of justice.

[00:09:39]>> So, Aaron, you were heavily involved during the Dodd-Frank era in getting that legislation passed, which obviously gave all sorts of new jurisdiction to the CFTC. And the Clarity Act as written also looks to give a lot of new jurisdiction to the CFTC to regulate, you know, digital commodity spot markets, which they've never had before.

[00:10:00]What are the learnings from having passed Dodd-Frank that you think are particularly important that we'd need to think about from a CFTC perspective if Clarity ends up passing?

[00:10:10]>> Yeah, so one of the things that it was interesting I had Senator Merkley over at Brookings to talk about prediction markets and he was the legislative father of the Volcker Rule and I asked him what he thought the takeaways were from his experience. My takeaway from from watching the Volcker Rule is don't ask seven regulators to agree on on whether it's sunny outside.

[00:10:32]Trying to do combined rule making between too many different agencies is just an an absolute train wreck. That was my takeaway, not not his. Uh I'm a little concerned about the CFTC structural capability to handle this task.

[00:10:47]Fundamentally, it's an appropriated regulator. It doesn't have independent funding. Under the Trump administration, it's not even a commission, it's a single agency head. Uh it's resigned and sidelined a bunch of folks.

[00:10:59]In its current capacity, I'm not sure it's up to the job that it's being given under Clarity. And my big concern is that part of the game plan in these legislations is to give authority, which then can be used to show that these things are regulated without giving the staff resources, capability, and frankly, regulatory will.

[00:11:20]In which case then you're just going to have an unregulated market and repeat subprime. And one of my takeaways from the great financial crisis is the Office of Thrift Supervision had tons of regulatory authority and was a captured and malfeasant regulator. Uh Congress eventually eliminated it only after the thrifts blew up the economy multiple times, I might add. You have the savings and loan crisis, then the thrifts were were were pretty deep in mortgage subprime. So, I'm I'm very concerned.

[00:11:47]The United States is the only country in the world that has two different capital markets regulators. We have the SEC and the CFTC uh because we treated agricultural commodities differently than we created than we treated stocks and securities. I think that time is long gone and we should merge the two agencies. I don't see Congress being up to that job to do that because of parochial distinctions between the two. I've actually been heartened by some of the things the Trump SEC and CFTC have done moving into the same office.

[00:12:15]Uh you know, try trying to work more closely together, but but I I I'm somewhat skeptical that this CFTC is up to the task.

[00:12:24]>> Yeah, I mean I look, I will just say Aaron, I agree with you that more funding and more people are needed at the CFTC. Certainly, a lot of experience is lost as I had mentioned earlier. A lot of very important personnel have been have have departed that agency. I'd love that talk to you about some of the very recent developments that we've had.

[00:12:42]I mean, just yesterday, um the CFTC uh brought another uh uh charge against uh uh uh insider trader who by the way is a Switzerland uh native Italian uh citizen trading on an offshore market. Um not not uh regulated by the CFTC. Um and then um you also saw uh something relate you know, a uh an action related to that uh topic that you had mentioned about um uh you know, about the uh the uh undoing of a settlement. I was curious what your reaction was to the CFTC's most recent activity.

[00:13:21]>> You know, I thought the New York Times story was pretty damaging that they showed that Polymark was taking types of actions from offshore accounts the soldier overseas they said they weren't taking. I mean one of the big things that that that regulators often do with this new model of trust but don't verify which seems to be the regulatory zeitgeist in the current crowd is they say oh the firm said we weren't going to do this but we're just going to take them at their word and one of the the aspects of that showed that. So I try not to get too deep in the weeds of specific cases. I'm an economist not a lawyer but one of the big mistakes economists make is they assume that because things are said they're done.

[00:14:03]And I'd like to see some more action behind the CFTC. I'm sympathetic to the arguments you raised earlier about regulation by enforcement not setting clear rules not going through the administrative procedures act in order to do that. But I also think that we have the softest on financial crime administration that I've ever seen. I mean even during the height of the Enron scandal what when I was involved there was a desire by the Bush administration to find the bad apples. We could debate whether it was just Enron or Tyco or WorldCom or Fannie Mae or all the other companies that were engaged in suspect accounting practices but everybody acknowledged that you know people should go to jail uh if they commit fraud. And I think one of the criticisms you can have of the Obama administration when I was in it was they didn't prosecute the bankers.

[00:14:51]Uh uh but now we're getting to the point where we're finding people who are guilty who are having connections in the White House and are then getting uh uh let off the hook. I mean you see what happened with CZ and Binance.

[00:15:06]>> Um so to sort of round us out a little bit you I think uh uh alluded to this but Renato and I were speaking before we hopped on about the rumor we both heard that the SEC and the CFTC were going to at least sit in the same office. Unclear, you know, unconfirmed rumor, so not saying that as actual news, but if we don't get a a merger between the two agencies, which is something, you know, people in crypto have long talked about as being necessary in order to be able to regulate crypto. I think even just showing something like clarity as a 309-page bill just on the Senate banking side and now needing to merge with the ag side of things. Um, do you think if they sit in the same office, again, a rumor, but if they sit in the same office, will that make a difference to how everything gets regulated? Whether there's this MOU, you know, you know, we have this memorandum of understanding that they're going to work together, which I think is a very useful thing, but we haven't seen tons of examples of that yet, but do you think that will change how everything works?

[00:16:08]>> So, one, uh, I think where you sit is where you stand and being in the same office together makes a huge difference.

[00:16:14]Look, Washington is a town of real estate. Uh, one of the biggest mistakes John Foster Dulles ever did, uh, was move the State Department outside of the old executive office building and and and across town in Foggy Bottom when we were in the Treasury Department. You could walk across, uh, to the East Wing back when there was an East Wing.

[00:16:33]Uh, it made a huge difference and and and I think that, uh, being in the same office is a brilliant idea and I applaud them for doing that, merging the staff there. MOUs, I think are often not worth the piece of paper they're written on.

[00:16:45]From my experience, agencies talk about collaboration, they trot out MOUs as a way to pretend like they're working together and then when Congress or the media closes the door, they go back to knife-fighting and cutting each other out. That's certainly what the bank regulators do all the time with each other. So, moving into the same office space to me is worth 500 MOUs.

[00:17:07]>> Hm. I will say as a as a lawyer, I certainly find non-binding MOUs also not that useful, but people in crypto love an MOU.

[00:17:15]>> [laughter] >> Uh, you know, I if you want to show that you're doing something without actually being required to do it, it's a it's a very useful document.

[00:17:26]Uh, but but I I if you talk to social scientists, they will tell you where you sit in office makes a huge difference. I think Mark Siri has some interesting data from that from the University of Buffalo and some other folks. So so I and you know, you I try to call them like I see them. I think when Atkins and Selig are merging the the agency space, hats off to them.

[00:17:49]When they're dropping enforcement action and firing lawyers that are pursuing them, then like vomit face. So you know, you try you try to call it as you see it.

[00:18:01]>> Well, you certainly done that, Aaron. I really appreciate you coming on to talk to us about the CFTC. We'll definitely have you on again well, whenever we want some lively discussion. Thank you for sharing your expertise with us.

[00:18:14]>> Pleasure to have me. Have a good day.

[00:18:16]>> All right, and that was Brookings senior fellow Aaron Klein. You know, Rebecca, look, I mean, you know, he he certainly had some strong opinions about what was going on at the CFTC.

[00:18:27]I really think that no matter what, one thing I really agree with him on is that the following. At at the end of the day, whenever there is a going to be a change in administration, um, there's going to be I would say a real dilemma for whatever administration comes next. Um, because you're ultimately going to have this regulator that has a lot of authority. It's lacking expertise. It's lacking personnel. It's lacking the appropriations it needs. There's going to be a lot of work that's going to have to get done to turn the CFTC into the regulator it needs to be. And I think that's going to be a really important goal for whoever ends up being in charge of the CFTC next. And I really think there are differing visions of what that could look like.

[00:19:17]>> I I think that's right, and I think because is not just in this administration, but the last um the agencies seem seemed from the outside highly politicized in certain ways that ensuring that you attract high-quality people who know the laws, are able to enforce them, whatever they may be, or ensure that licenses are given out appropriately, but making sure you have the right people in the right seats is going to be a big feat, and I don't think we can start you know, once Clarity passes, or once there's appropriations. I think there needs to be meaningful movement towards really staffing up the CFTC. I do think Chair Behnam is working towards that. I think he has a lot of computer already right now, and so getting staffed up is hard, but but he is bringing in staff.

[00:20:05]It's just not making front page of the New York Times in the same way that a spicy, you know, prediction market, crypto sort of story is in the same way.

[00:20:17]>> Yeah, I mean, I guess to offer a little different perspective there. I don't think that the staffing up is occurring nearly to the level it needs to. So, I just I fundamentally disagree with that.

[00:20:27]I think that yes, staffing uh you know, up is occurring, um but it's in no way replacing the decades of institutional knowledge that have been lost. Um it is not occurring at the the scale it needs to. I mean, right now the goal is really trying to replace the people who've already been lost thus far in the administration, but really if you're expanding jurisdiction this much, and there's these growing markets that need to be, uh you know, aggressively policed by the CFTC, I think more funding is needed. I think more personnel are needed, and I just wish that there was more advocacy from within the four corners and the four walls of the CFTC for that than there is today. I mean, the message that oh, we have what we need. Um which is where the CFTC's at right now. Um and that's the message coming from the CFTC. I don't think that's helpful because ultimately in the long run, I think you're going to have more articles like this one. Um talking about you know, whether whether you you know, whether all the allegations are true or not and you know, that'll be determined by somebody other than me. Uh one thing I think no one can disagree with is that there's definitely more bandwidth needed at the CFTC. Uh calls are not getting replied. Right, calls aren't getting answered, emails aren't getting replied to.

[00:21:45]>> Yeah, that's the one thing I was going to tee off on a little bit, which is if we're going to have this expanded jurisdiction and we even saw uh President Trump post on Truth Social this week about the need for prediction markets and the CFTC's jurisdiction on them and how they're, you know, such a great new part of our financial markets and our system in general. But that is really expanded jurisdiction. Yes, of course the CFTC oversaw prediction markets or event contracts previously, but with the rise of prediction markets and the pace that they are going and as you alluded to at the beginning of the show, the lawsuits flying around, I don't think the CFTC has the resources it needs even to have things that are currently under its jurisdiction regulated properly. So, we don't disagree there.

[00:22:30]>> Rebecca, let's talk about our person of of the week or rather our people of the week. Uh House Agriculture Chairman GT Thompson and Ranking Member Angie Craig.

[00:22:38]And you know, one the reason that I I would love to highlight them this week is because this is a rare show of bipartisanship on the issue of strengthening the CFTC.

[00:22:48]You know, they wrote a letter um asking the president to appoint a full slate of commissioners, bi- bipartisan commissioners, both Republicans and Democrats to fill out the CFTC because as you you the the CFTC is intended to have five commissioners. Three from in this in the current administration which would be Republicans, two Democrats. And right now we only have one commissioner which just makes it hard to have the sort of breath of activity that you'd expect at the CFTC cuz each commissioner would have their own staff and they would be working on various committees and so on.

[00:23:22]>> That's right. And the one commissioner now is the chair. It's not somebody other than the chair. And so I think that's an important point. And look, I think given the the expanded jurisdiction, having different voices in there, having people with varied expertise would be really useful in building out what we need at the CFTC even pre-clarity, pre-having regulation over spot markets and making sure that you can as I was saying attract talent, bring people in, have people who know different people who, you know, want to hire within. So, I agree with you. Um good show from the House Ag Committee. And we know there've been a lot of people calling on the president here and I do think that there may be some trades behind the scenes in clarity to make sure that CFTC commissioners get appointed very soon.

[00:24:08]>> Yeah, I've heard that same rumor. I've only heard one and one, not two and two, but it would be great to have a full slate. And I just hope um whether it's via clarity which we've talked about in the past or uh on this issue that we can have more bipartisan movement uh on crypto and policy issues. All right.

[00:24:26]Well, um Rebecca, you know, before we go, I know there's there was a a a deep loss in our community. Um you know, we actually um want to mourn I would say the passage of someone uh much too soon.

[00:24:40]>> Yeah, the CEO of Nathan Almond, the CEO of Ondo, Nathan Almond, passed away and we wish condolences to his family, his friends, and we are thankful for all the contributions he and the Ondo have made to the crypto community. Look forward to his legacy living on through everything that Andre continues to build.

[00:25:00]>> Indeed. Well, thank you all for joining us for the policy protocol. Come here next week where we will come back with more crypto law and policy and be sure to leave your comments and send us your suggestions for future episodes.