Crypto Compliance: Understanding Regulatory Frameworks | KBW2023

[Music] uh good afternoon everyone my name is Jin Kong I'm the head of legal at hasht commissioner fam I would like to First maybe introduce you to the greater audience so please go ahead and introduce yourself to the uh hi my name is commissioner Caroline fam of the US commodity Futures Trading commission I'll give just a little brief disclaimer which is that the views I share today are just those of my own as a commissioner and do not necessarily represent that of the cftc or of any other commissioner I also want to say that it is such a pleasure to be here today given that it's the 70th anniversary of the alliance between the United States and Korea so a very special year to celebrate thank you for the introduction and um I would like to thank um KBW and fact block and hash for hosting this wonderful event um so let's drive uh Dive Right into some of our questions for you um commissioner fam could you maybe Enlighten the audience um what CFC cftc does and what are some of the government mandate that you have the authority over so the cfdc is the regulator in the United States at the federal level that oversees the commodity derivatives markets so the trading of pretty much everything except for Securities um so long as it's a derivative based on underlying and that could be anything from gold to oil to grain to interest rates to bitcoin great um we know um from some of your recent activities that the global markets um advisory committee is something that you are sponsoring with your generous support could you tell us a little bit more about what GMAC does what are some of its objectives and what are you trying to achieve especially when it comes to digital assets going forward so it's my my pleasure to be the sponsor of the cftc's global markets advisory committee or GMAC which is an independent advisory committee comprised of public uh and private sector experts and it's really designed to provide advice to the commission on some practical challenges that we're facing today so I'm so pleased that over the past year I was able to do a global stock take of the most significant challenges in global markets given that the gmax mandate under my sponsorship is to ensure that there's a Level Playing Field for Global businesses and Global markets and one of the issues that is at the top of the list is the regulation of digital assets so I've been very pleased to sponsor the creation of a digital asset markets subcommittee and what this subcommittee is going to be focused on doing uh for the next two years as part of its proposed work program is first of all to create industry standards and best practices for tokenized asset markets irrespective of what the underlying is whether it's a security or a digital asset commodity but it's to make sure that there are standards and requirements for digital asset taxonomy for pre-trade execution and post-trade requirements and for governance risk and control Frameworks so I'm very excited for maybe the first set of recommendations to be coming out at our next meeting which is October 5th and the other thing that I hope that the subcommittee will focus on is to propose recommendations for the regulation of nfts and utility tokens in the United States because the United States is unfortunately one of the few jurisdictions that has not yet come up with the definition of utility token great um in that regard I think the previous session also kind of addressed a lot of the tokenization efforts um and in South Korea as you know we've amended our um Securities act to allow for stos to happen and I think you've expressed previously that the modernization of financial services will include tokenization of assets so please tell us a little bit more about um what your views are on rwas and do you think um the market is ready for such assets and if we're not there yet what are some of the um railroads that are required to implement this um at a larger scale so I try to think of things in simple terms and to me a digital asset said is just a digital representation of a thing and that thing could be money or it could be an asset and if it's an asset it could be a financial asset or a non-financial asset and I think especially when it comes to regulation it's really important that we make this distinction upfront because if it's a financial asset then it should be subject to the same regulation as other Financial products and services so you may have heard the term same activity same risk same regulation what I think is actually more interesting is the non-financial assets space where nfts and utility tokens are because I think this is where really the future of our world of virtual worlds lies where you see building in web 3 and all of the conversations that are happening at this conference and particularly around the metaverse so to me I really would like to see some more exploration of what are the appropriate legal and Regulatory Frameworks for non-financial assets and I think you're going to need to look at areas like commercial law trade law intellectual property um consumer protection all of these different areas are going to be very important here now when you think about tokenization people are already tokenizing things today they've been doing it for several years tokenization has some powerful benefits for financial markets because it can increase security it can increase um operational efficiency and so people all around the world have been looking at modernizing their Securities markets for example the EU has the DT pilot regime uh Japan and Singapore have also put together laws with that and I've been very encouraged in my discussions both last year and this year with the Financial Services Commission and in particular uh seeing that the virtual asset user protection act was recently passed and is going to go into effect I think next year that is correct and I think it's really wonderful to hear from you um from a regulator who's really excited about some of the Innovative potential that the blockchain does offer and so um I think everyone here would be pretty um curious to know that there are precedents legal precedents that are coming out of um courts in New York that offer some confusing confusion for the audience so the contradiction or some of the confusion or someone say someone could say that the duality of the the legal precedence what should we make how should we make sense of this um we would love to hear from you on that so I think this is going to remain a challenging area I think last year I might have been one of the first um to publicly go on TV and say that I thought in the United States the regulatory Clarity around the definition of a security was going to happen first in the courts because under us law there's really only three authorities that could Define what is a security so the Congress through passing laws the SEC through delegated authority from the Congress or the courts and surprisingly the courts were moving the fastest so those are some of those big cases that you recently um mentioned that came out with some opinions but they do have different interpretations so I think what's going to be interesting is since you are looking at uh a circuit split potentially then what'll happen is it'll have to go up to the Supreme Court this is a lengthy process and I think that if it continues to be an area of concern there are already um quite a few legislative proposals with some momentum that hope to resolve this question of what is a security and so it remains to be seen if maybe Congress will have to step in if the the courts are coming out two different ways great and so maybe let's take a little bit um at a larger scale and going beyond the United States I know that you have been quite busy traveling around the world speaking and attending conferences what are some of the key takeaways that you've had um through your travel and what are some of the lessons that you think would be applicable for the attendance here today so last year as part of my efforts to conduct the global stock take to launch the GMAC I also wanted to go and meet with Regulators uh policy makers central banks finance Ministries from I think about a dozen countries to understand how they were approaching innovation in their countries and particularly in the financial services space and what really struck me is how there's there was a unified approach between the policy makers The Regulators and the private sector and how to to encourage Innovation for economic growth as a matter of industrial policy that's something that that was common across the UK Europe and Asia and I think it's funny that maybe in the United States that we have been so used to some of the tremendous successes that we've had in the tech sector that we take it for granted and we're not thinking about how do we sponsor our national champions and how do we make sure that we are continuing to be at that Cutting Edge of innovation so it was a great learning experience for me to see how other jurisdictions tackle this and it's something that I've been putting together to consider how we can create an innovation facilitator in the United States something that's like a regulatory sandbox but that fits within our laws rules and regulations because the cftc is primarily an enforcement agency just like the SEC so I'm excited to be announcing this proposal I think tomorrow not quite sure what time it is in New York right now well thank you for that exclusive preview sneak peek sneak peek um great and um I've actually joined hush back in 2018 and I think over the 5 years um I've seen incredible growth and incredible maturity from the industry and I've recently noticed that in your press coverage um you've also uh seen you you also seem to be seeing the similar kind of convergence between the crypto industry and the more you know Financial traditional Market why do you think that is happening and what are some of the lessons that the crypto industry could learn from the financial industry and vice versa so in the financial services space look there's been lessons that have been learned over probably hundreds of years of banking and markets and those are important lessons to be learned you have to have safeguards you have to have credential requirements Capital requirements risk management requirements and so to me the story of tokenization in financial services is really one about pipes and plumbing it's actually a really boring story it's about how do you modernize and make more secure and more um less operational errors and and more efficiency and and save costs and things like that and I think if people realize just how boring blockchain as a financial Market infrastructure technology is then you would lose a lot of this um hand ringing and uh kind of painting everything with this broad brush in Washington where somehow the blockchain technology is evil technology is just technology it's neither good nor evil it's what you do with it so I think that's the story in financial services but what's exciting to me is what the blockchain technology could mean for the real economy and like we were talking before for Virtual Worlds you know I have a daughter and I remember when she was 8 years old and it was covid she was playing with her friends on Roblox and it was incredible how she would spend her time and how she would use her imagination and eventually one day she said mom she said I don't want my allowance anymore in dollars I wanted in Robux and I thought oh my gosh like she's already transcended you know the US dollar and moved into virtual currency so that's the future that I think we need to be thinking about and as Regulators it's incumbent upon us to be forward-looking and to be thinking about how we future proof our regulations for how the world might be changing around us great um let's change the topic a little bit and um I think right now there is overall two competing Trends in crypto regulations so on one hand you have you know chupen and Singapore who are taking you know liberal approach and Progressive approach to enabling you know stable coin regulations and then on the other hand you have China and perhaps India who are you know on the other side of that Spectrum um why do you think these Trends are happening globally and what are some of the reasons um that these Trends are happening in these particular Juris itions and what do you think would be the kind of optimal regulatory framework that we should be thinking about when it comes to cbdcs and stable coins so this is a question that central banks have been struggling with um I think there are about a hundred central banks who are doing some kind of experimentation with cbdcs and stable coins being a a new kind of money a new format for money and so this is something that obviously Monet policy considerations National Security considerations and so you know really depending upon the jurisdiction and the kind of legal system and the um characteristics of that country I think those are what you see being expressed I think what's important to think about in in free and open and Democratic societies is that people want to ensure that they have control of of their money and and expect some micom of of privacy and autonomy and I know that these are values that the crypto Community really espouses and really believes in so I think we need to figure out how to separate the good from the bad and appreciate the benefits of the technology while understanding and realizing that there are an awful lot of scammers out there who are really giving the whole sector a bad name and also on the other hand you have sort of a lack of robust risk management a lack of compliance a lack of maturity in the sector as well and so I think those are some of the lessons that can be learned um for thinking about how do you grow in the in the nft and the utility token space and you know there was something that I said the other day when I was speaking at um the Christies art and Tech Summit in New York City and so some of the creators were asking me you know what should I be thinking about what should I be doing when i'm trying to launch my my nft projects or I'm trying to launch my token project in conjunction with you know my fashion brand or something like that and I said look 90% of it is what your mother told you don't lie don't cheat don't steal these are basic truths that everybody should be living by and then for the other 10% in the United States you need a Securities lawyer security to yeah um okay so since this is the second year that you've come to Korea um and this is the second time you've also come to Korea blockchain week is there a reason why you come to Korea first of all and what are some of the things and some of the lessons that you've learned during your trips um that have had some meaning to you and what kind of contributions do you think you've made while you're traveling here in Korea it's been great to come here to Asia into soul in particular because every time I come here I feel like I'm looking into the future it's like everything here is 10 years ahead of where we are in the United States and not because we don't have some of the most advanced tech and and Innovation and people who are out there they're really being Founders and dreamers but it's because there's an openness to technology and to and to changing things and there's an openness to that I think at the at the general population level where it's part of the culture to embrace Innovation and to be looking forward so it's always very exciting for me to be here and to come back to the United States with some lessons that I can learn you you see a theme Here I try to be a lifelong learner and learn from other peoples and learn from other cultures and learn from other countries and so that's something I've really appreciated about having this role and having a role on the global stage I think um it's been it's been terrific to see the partnership between the United States and South Korea uh for economic prosperity for security there's the trilateral summit which happened recently which is a huge milestone and so it's been wonderful that some of the learnings that I could share some of the information that we exchanged could lead to some of these legislative proposals and some of the approaches and I think that there's a very likeminded uh very like-minded approach to regulation and I've also been pleased to see that there's um a real focus on growth and progress and access to markets which are three of The Guiding principles for my commissionership great and um going back to some of the original objectives that you've mentioned through GMAC um I think one of the efforts that you wanted to really clearly lay out would be the kind of digital ass at taxonomy what does that mean and why are you trying to do that and like walk us through some of the framework large principles um so that the audience could understand how a regulator would approach um digital asset regulations so it comes down like I said to the definitional piece you have to first figure out if it's Financial if it's a financial asset or if it's a non-financial asset if it's Financial we already have laws rules and regulations for Securities for derivatives if it's a banking or payment product in the United States that's going to be the state and federal banking regulators and some of the other money transmitter licensing regimes so I think those are some of the foundational pieces what I think is a bit tricky is that people are forgetting that there are uses you know use cases for crypto that are non-financial and so by looking to financial regulation as a panisa for everything I think we're really foreclosing a lot of the Innovation that could be happening so for example the SEC recently had a case against um an nft promoter and found that the nfts in the specific facts and circumstances of the case uh were Securities but if you think that in every instance an nft is a security how how is anybody ever going to develop uh nfts for for ticketing nfts for rewards programs or for loyalty programs nfts for fan engagement there's so many different use cases in the real world and I think that's some of the short-sightedness that we're seeing and that's why I hope to um do a couple things first of all there's a lack of awareness and education in the United States so the GMAC is really focused on bringing up that level of awareness and education at a broad level um which I think is here in South Korea but maybe not so much in the United States great and we really welcome that kind of educational Outreach um here in South Korea as well and I think we can all learn from each other for greater awareness so that we can um try to close the gap of misunderstanding between you know potentially regulator or the industry and so I think having that communication is like absolutely crucial so thank you for making this opportunity possible today um going forward um yesterday when we were at the um we were discussing you know together some of the powers that a regulator have and the first one you said was audit the second is to enforce and the third is to regulate um what do you mean by these three principles and what are some of the initiatives um that you think would set cftc apart perhaps from the SCC and what are some of the future agenda that you have in exercising these three um powers of the regulator so I've long said since I began my term as a commissioner last year that the cfdc has plenty of tools tools available today right now that we can use to bring uh crypto Financial activities within the regulatory perimeter and what do I mean by that so there are three powers like you said there's the power to inspect or to examine so that's sort of the normal oversight you would have over registrant and I think that would include asking questions about unregistered Affiliates um many of the crypto firms uh out there um who have exchanges have a affiliate that is actually registered but with the cftc as a Futures exchange so I think it's perfectly fine for us and within well within our authority to ask questions about their Affiliates as well uh we also have the power to enforce that's pretty self-explanatory the cfdc has been incredibly active in bringing enforcement actions uh in the crypto sector and I can talk a little bit more about some of our enforcement priorities and then the last one but not least uh is the power to regulate and that's the ability to engage with the public and to put out proposed rules that can become final rules and then establish that regulatory Clarity those clear rules of the road for the sector and unfortunately I think in the United States we have not been using that last power enough I really would like to see more engagement with the public more input from experts and a clear framework being laid out upfront instead of being more of a gotcha system where people are coming in after the fact and um going after people who maybe don't have have any signs of being um conduct misconduct or or bad acts it's not fraud but maybe it's uh from not really understanding because there's this lack of clarity um for enforcement priorities uh the cftc has been bringing a lot of cases against uh so-called crypto exchanges for failure to register with us and the cftc which many people don't realize has Global jurisdiction we have Global jurisdiction from the dodf Frank act over swaps and so if it's some kind of crypto trading platform and it's listing derivatives which includes perpetuals and there are us persons that have access to or transacting on that platform they may very well be required to register with us as either a Futures exchange or a swap execution facility so we have brought cases with both of those allegations we have had settlements um and it's an area that people should continue to watch the other area where we've been very active from an enforcement perspective is Defi and I have long said that when you look at defi I don't think that decentralization is a defense to regulation I think that that has been a red herring that some people have been overly focused on and I wish that people would stop being distracted by that and kind of maybe start over with a fresh page because I just don't think it's going to be working in in jurisdictions where Regulators are not going to let that slide so for me I think the better way to think about uh decentralization or or defi or decentralized exchanges is more like algorithmic trading um algorithmic trading is subject to regulations even though your your programming code and then your code is out there so I think that is the better way to think about it and um of course if you are a service provider or a vendor there are still ways that you could be subject to regulation even if it is indirectly and speaking of Regulation going forward um um I think the EU Mika you know case study that you've mentioned is a bespoke regime catered to crypto assets and then I think I was trying to get into this a little bit earlier in which the the second half would be more retrofitting an exis existing regulatory framework into crypto um which model do you think is better and what does the cftc currently have in terms of exercising potentially um its authority over digital assets uh within the existing regulation so the EU has a different legal and Regulatory framework than the United States the EU is largely a civil law um Society the United States is common law and so I just think these are are just different places that we're both starting from um and you know m is what the EU has put together in a relatively short amount of time all things being considered and they're moving forward with implementing that I think the fact that they have uh the DT pilot regime which is focused on tokenized Securities uh is very encouraging and it's something that I wish we were paying a little bit more attention to in the United States um around uh enabling tokenized Securities for the United States as I mentioned before when you look at the universe of uh crypto Assets in the financial sector those Banking and payment products are going to be the Federal Bank Regulators the the fed the um OCC and the FDIC or state banking Regulators um or it could be non-bank e-money that's another legal regime there I think um a lot of the crypto or token projects that are out there are in fact being used for Capital raising activities and in the United States like I said before you really need a good Securities lawyer and you need to consider whether or not um those need to be issued in accordance with the Securities regulations under the SEC so that's a huge swath I think think of the tokens that are out there a lot of the tokens that are being used for trading are some kind of trading pair I think those look a lot like derivatives and so you'd have to look at each specific product uh individually but I think a lot of that could be derives the cftc regulates about 95% of the dures market so that is something that could come under our jurisdiction um as I mentioned before the cftc overseas uh Bitcoin and ether and other uh tokens um from a the perspective of trading derivatives so back in 2017 the cfdc was I think the first regulator to allow the listing of Bitcoin Futures on Futures exchanges and so that really began um our uh case law around the regulation of digital asset Commodities I think that when you consider the true market structure of a lot of these uh crypto tokens and how they trade it's very similar to Emerging Markets effects and so I've said and I've called for in the United States that there should be some kind of spot crypto dealer regulation um a registration and oversight framework similar to what we have for retail FX dealers which is overseen by the cftc uh that's been in place for I think since 2008 and there's a lot of the same risks a lot of the same concerns and a lot of the same um need for customer protection against frauds and abuses so that's one way that I think in the United States we could provide that regulatory Clarity and we could do it um without having to uh go much different or further than what we already have that what works I always think you start with what works why reinvent the wheel great all right well I think we're running out of time today um thank you very much for coming all the way here and share your um input with us with us um before we depart um I would just like you to have an opportunity to address the audience and be able to say whatever you would like to share today so thank you thanks it's really such a pleasure to be here and to talk with each and every one of you you may have seen that I've been very focused on doing my crypto learning tours because just like when I was in the private sector how am I supposed to regulate something if I don't understand it so if you do see me around the conference uh I think we're coming to the end but please come and tell me about your token project I'm always interested in learning more great I think that's it thank you everyone thank you commissioner [Applause] [Music] fam