Welcome back everyone. I am Cass PNC.
I'm joined as usual by my partner in crime, Mr. Bennett
Tomlin. How are you today?
I'm doing well. How are you, Cass?
I'm doing great. We have a special guest today,
Sean Tuffy, regulatory consultant specialist.
How are you, Sean? Doing good.
Thanks for having me. It's awesome to have you on.
We've, I, we've really only done one full episode about the SEC,
the Securities and Exchange Commission, and we more or less
said it, the, the title is provocative.
The title is the talk of the SEC.
All my friends hate the SEC. But in reality, our argument was
that they're caught between a rock and a hard place, that
either they're regulating too much and everyone hates them, or
they're not regulating regulating at all and everyone
hates them. But today we're we're going to
talk about the idea of merging the SEC and the CFTC Commodities
Futures Trading Commission. They were established
significantly later than the SEC.
Can you talk about the difference between the SEC and
the CFTC? Yeah.
Sure. So I think you're right.
They everyone tends to think of most of the financial regulation
in the US happened in the 30s until the early 40s.
So everyone tends to think that's when everything was
created. But the CFTC doesn't come along
into the to the mid, early to mid 70s.
And so the CFTC does separate from the SEC is it it regulates
sort of commodities and Futures Trading, which in its original
origin is all agriculture based. That's sort of really the CFT CS
origin story, whereas the SEC doesn't, you know all securities
markets, secondary markets that we know and love stocks,
exchanges, mutual funds, asset managers and all and all that.
Whereas CTC is was originally much more narrowly defined to
certain commodities. Why to, to start off with the, I
guess maybe a simpleton question here.
Why would it take 40 years later for, for a Regulatory agency to
start looking into, into these markets from the SEC being
established to look to like to regular regulate second
secondary markets and then the CFTC being established 40 years
later to, to, to look at these, you know, more physical based
agriculture markets? Like why?
Why wouldn't the? IT almost is like counter
intuitive. Like why wouldn't the CFTC be
established much earlier than the SEC?
Right. So I guess I'd, so that's a
little misleading on my, my heart.
So there was a Regulatory agency and the CFTC.
So it was the CEA looked after commodities.
And so why the CFTC came in, in the late 60s essentially as the
the original CEA that overlooked commodities.
So the CEA, the ACT and then the Commodities Exchange
Administration. So there's the ACT.
Well, CEA very confusing. So the ACT sort of designated
that the agency overlooked commodities and part of the
thing was that the the only look over what was enumerated in the
text. So every time a new futures, a
commodity came online, they had amend the ACT to add potatoes to
add or in this case not add onions to add any sort of new
commodity to the ACT to allow the CACEA to oversee it.
And so that became tiresome. And then at the same time, as we
move into the 60s, early 70s, financialization as we know in
love it starts to really be born.
And so there's the feeling that futures in general need to be
regulated, not specifically just commodities futures.
And so they decide they being the RSP, the Congress decides we
need to sort of step up our regulation of commodities
Futures Trading because it is now moving beyond, you know,
commodities have been around forever.
They've been traded, you know, for the US since the mid 1800s,
globally traded much longer than that.
But in their original sort of intention, the people trading
the more essentially producers or users because essentially
hedging farmers were trying to hedge their crops, Sherlock in
prices, many, you know, milk bakers were trying to walk in
flour. You know, everyone was it was
essentially a fiscally based real economy hedging tool.
And as you got to financialization, it's not being
that for a lot of people. And it started becoming much
more search trading inspectively orientated.
And so the dealing was that the CEA was not up to the task and
you need to sort of a more robust Regulatory agency with
more strictly with more broadly defined powers.
So one of the things when the CFTC comes in is rather than
Congress having to say, you can, you now need to regulate this.
They can regulate all Futures Trading, which is how we run
into it and fun stuff like the election contracts, right?
So that's on the CFTC claim jurisdiction over election
contracts because those are options and futures.
So that's in their, their broad remit.
We can discuss how that's not how it should be in the later if
we had to chat, but that's how it came to be.
So that's so there was a regular agency.
The decision was that as it became more sort of Wall Street
orientated, but you needed a more robust regulator.
And so in the 70s they moved forward to create the CFTC.
And so that's for the origin now how it's it's fun that there was
a move when it started not have it be on its own.
So if you read Robin Wigglesworth's book Trillions,
the CFTC was originally proposed just to be part of the SEC.
So I think that's a good transition point to kind of get
into how common is it globally historically whatever to kind of
separate out the regulation of like securities product from
these commodities based financial products?
Like, is that typical for other countries?
And like you were talking about, it almost didn't happen here
either. Right.
Yeah. So it's so it's very odd, I
guess it's the best way to put it.
So the US, like this is one of the things you live in the US,
you kind of accept certain you, you live in any country, you
accept the way things are done as normal.
But the US is really an outlier here with the most notable other
exception being, you know, America's neighbors to the
north, Canada, which has an even crazier set up and has no
federal securities oversight and assault on the provincial level.
So that's that's an even more chaotic attempt.
So the US and Canada are the only two sort of regulated
countries globally that don't have a single securities and
market regulator that would have all, you know, futures, stocks,
everything under one regulatory roof.
I bet it, like you said, you know, it almost didn't.
That was almost the root the US went.
And if you read the the book, Rob Riddlesworth's book, the
anecdote is that the SEC is actually was snobby and they
didn't want to be regulating pork futures and pork bellies.
And so they said that stuff is for farmers, not for Wall
Street. We don't want to be regulating
it. And they sort of pushed back
against the idea that should be under the SEC's remit and sort
of pass the send to see dependency becomes what it is
and it's spun out and we are where we are today.
Are there any obvious benefits and drawbacks that arise from
this division? Champions of the division would
argue essentially, if you look at all of America's regulatory
landscape, it's fractured everywhere.
And so there is a belief that having competing regulatory.
I don't believe this, but there is an argument that having
competing regulatory agencies keeps them honest and allows for
competition. I mean, that that's the best I
can do. The other argument is that
commodities are you. Yeah, is a specialized oversight
in our distinct. But that makes less and less
sense as we get to, you know, Dodd Frank putting swaps into
the CFDC's remit and some other things.
So those are the two argue there.
There are really strong arguments for it beyond that's
the way it's always been done. The arguments against it I think
are pretty self-evident. But you know, it's that you
have, you don't have where we are today where new people can
look for crevices between the two agencies and try to sort of
pick them off. And you don't have overlapping
or conflicting jurisdictions. But in the case of, you know,
obviously this podcast and the crypto, you don't really have an
industry that can play mom against dad essentially.
And so like having a single regulator, you know, what is
preferable for efficiency, for oversight, for sort of market
sanity, especially when you look at how it works now that you
know, the CFTC approves suture, but then the SCCS approves their
trading. Like it gets very messy around
the edges. So like the argument against it
is that it purely, it's not efficient and not, you know, not
a good way to run a railroad. Well, you got it there.
Illustrates why the division between the SEC and the CFTC has
become so important for cryptocurrency in that it is
trying to pit them against each other, choose regulations from
one or the other. Trying to effectively remain in
a Gray zone for kind of both of them.
Or like to limit its overall like regulatory footprint by
like specifically lobbying for certain pieces of policy that
would explicitly put it in a certain thing using like
advertisements and political giving to target certain
regulators, like using the mouthpieces of certain crypto
firms to specifically criticize certain regulators and things
like that. And so looking at that like from
crypto, it really seems like that division makes it harder to
have consistent frameworks for financial products.
And yeah, that just seems like the obvious consequence of all
that. Oh, yeah, absolutely.
And I think, you know, if we talked with the CFTC and so we
talked about its origin and it was a largely like, I would say
in the nicest way possible, a very sleepy regulator from its
first 30 years. Like it was, you know, not a bad
way. Like it had its market, it
regulated it effectively when you get to the late 90s and the
name Stacy, but the chair at the time in 98 pushes that the CFTC
should regulate swaps and derivatives.
You know, these are new instruments that are being
create have been created by Wall Street that sort of it's
actually slightly analogous to crypto and they're new when
they're not. But through this come up, swaps
come up and these are new financial instruments that
aren't exclusively mentioned anywhere in legislative text.
And the CFTC says we should be able to regulate these OTC
derivatives like these are both these are essentially not that
much functionally different than futures and options.
Like why wouldn't wait? They released paper, all hell
breaks loose. They get pushed back.
Congress says explicitly you can't do that.
Chair quits, long term Capital Management blows up. 10 years
later, the financial crisis happens, giving the Kryptos
version. And so then after after the
financial crisis, Dodd Frank comes in and they gives the
CFTCOTC derivative oversight that they'd asked for
essentially a decade earlier. And sort of this makes the CFTC
a much more consequential regulator because it is now
really like, you know, it interacted with Wall Street on
futures and options, but now it's really sort of in the in
the meat of the debate. And so that's when it became a
much more consequential regulator for Wall Street for
the industry. And then flash forward to the
mid 2000. And as you guys surely know and
we're sure your listeners do, why it's in the crypto
conversation is because the CFTC became much more, I would say
crypto curious in the SEC and Bitcoin became designated a
commodity. Whether we could argue whether
that's right or not, I think everyone has their opinions on
that, but that's essentially and they, and they actually went a
step further and said all crypto are commodities.
Commodities are what no one's yet to explain, but that's how
the CPC, I would say interjected itself and became the first
regulator to move to regulate crypto.
Now you can argue and somehow that that is a better attempt
than the SEC just sitting back and watching it unfold and not
doing anything till the mid to that the early 2000 twenties.
But that's a sort of essentially how the CFDC became into
conflict with the SEC. And this goes back to the
problem with the set up. You know, one one hand declared
it a commodity. Even if the SEC disagrees, it's
very hard once they've made the statement to disagree unless
you're going to sue your fellow regulator instead of then all,
you know, a really terrible public policy fight.
So that's where you end up in a bad place.
And that's sort of how we ended up in the CTC becoming in
conversation. And now sort of, I would say
it's fair. The CTC is the preferred
regulator of the crypto industry.
So I, I actually want to jump into that for a second because
you're talking about, you're talking about the CFTC and the
SEC kind of like they're on in a sense like equal footing that
that the CFTC is taking on all these new markets and has been
for several decades now. And that I mean there's, these
are pretty large and growing markets, I would say.
But when you look at the SEC budget and you look at the CFTC
budget, one of them is 7 times bigger than the other one.
And I would I would also, I haven't looked at the employee
numbers, but I assume that the SEC has significantly more
employees than the than the CFTC.
So I wonder if the reason that they like they prefer the
preferred regulator is the CFTC is mostly because they
understand that the CFTCS abilities are really hamstrung.
Yeah, I mean, we can all try to. I mean, I would assume that is
part of it with hell. Like I don't see any point not
dancing around this. I would assume the CFTC is
viewed as an easier regulator, regulator and a wider touch
regulator. And I think, and I don't, I
mean, I'm trying to be fair here because I'm not a huge fan of
the SEC either. So I think, I think for years,
you know, so I my career, at least since the financial crisis
has been tracking and you know, really following financial
regulation. And for years the CFTC had a
much intend rate circles a stronger reputation.
The SEC in terms of like turn promulgating the rules that
needed to and focusing on the the issues that it was supposed
to and being essentially a less political organization like the
SEC the last 10-15 years, they come in a highly, highly more
politicized. So I think the SEC, the CFTC is
good at what certain elements will they do, but the expansion
sort of into crypto into the election betting sort of moves
it beyond its comfort zone. And I think you are right, it's
in compared with two aren't funded then on equal funding at
all, the CFTC is well below and that's because now this is an
important point as you talk about sort of who regulates
what. The CFTC is an industry
regulator, not a retail regulator, you know, so that's
a, that's a really important distinction.
And I think it's important when you think about who regulates
crypto or how we, you know, how that gets done in the future.
The CFTC has essentially no expertise in investor level
protection regulation. Like they are a markets
regulator, they are an industry regulator.
They make sure you know that markets function appropriately,
but they don't have retail investor protection expertise.
And as you look at sort of but you know, the two examples I
brought up the you know, the general crypto, the the widest
sense and the election betting, those are far more retail
orientated. So I think that becomes to me
one of the biggest challenges which could all be washed away
to just put these two organizations together is by
having, you know, when you have an organization that's all of a
sudden bookie after retail investor level protection that
has no tradition of that, it's challenging.
When I think even Ruston Benham who leads the CFTC has said in
like some of the cryptocurrency focused hearings that like the
CFTC would need a change to its funding if Congress is
interested in expanding its mandate.
Because like we've talked about here, they are the less
resourced of these two regulators.
Yeah. And so, and that's why I like
now I've been, you know, for those who follow me on social or
whatever, like I I have been ranting about merging the
CFTCNSI totally that windball for like over a decade.
And I will say like it comes up all not all the time, frequently
in conversation. So post post GFC with Dodd Frank
has been. Dropped.
Didn't Paulson bring this up in like 2009 or something like.
That it did come up and it was my feeling is if it didn't
happen, that it's hard for me to see it ever happening.
But so after the GFC, there was a very legitimate push that
these two wars need to be put together, but institutional
resistance sort of stopped it. And so now, you know, when you
think about why it doesn't happen, pack that dependency.
And then if you're cynical, the Senate Agriculture Committee
really likes Wall Street donations.
I mean, they, so they have different congressional
oversight. And so Senate AG Committee
overseas, the CFDC and I, I'm not the only one to suggest
this. So, I mean, I think that there's
a feeling that they'd rather enjoy the attention and bombing
money they get from Wall Street, the Congress overseeing the
CFTC. I will say as like a reporter,
as someone who covers this, it's a little bit hilarious to me
that I that like half the crypto hearings and stuff, I have to
hit listen in on our agricultural committee meetings.
They're talking. About.
How best to regulate Bitcoin in the same hearing they're talking
about corn. That feels ridiculous.
Absolutely. Yeah.
Like it's yeah. I mean, it's a very, it's a
weird place we're in now. And I think, I mean, who knows,
who knows what happens with crypto regulation in the US?
If it, it could, it should spark.
Why are we doing this separate? Because any of the bills you've
seen so far from the, you know, the bad faith ones, the good
faith ones have this weird split when they still need both
agencies and their pieces. And it's just to like who's
who's riding shotgun and who's in the driver's seat when it
comes to it. But they still need both
agencies and it's just still a really weird setup.
And I mean it the industry, it doesn't do industry any good
that had to do with multiple regulators.
Some put it that way. So most most people in industry
would prefer to deal with a single regulator than two.
Are there parts of the industry that benefit from having two
regulators besides cryptocurrency, which we kind of
talked about, which benefits from like pitting them against
each other? Outside of that, are there
people who benefit from having 2?
So I mean, generally speaking, I would say no.
I mean I would say like it. So if you look at what like
let's leave crypto, which will be I know your readers and
listeners are crypto people, but like or anti crypto, they're
crypto adjacent, but like put that aside for a moment and just
go back to futures and auctions. So obviously most buy side
firms, most banks deal with futures options and they deal
with sort of securities until they those more, I would say
established regulatory regulated industries beyond plain
occasionally coming up with a new instrument, trying to get it
on one side of the fence or the other, don't really benefit for
having to regulatory agencies. And I think if you were to ask,
you know, investment bankers, if you were to ask, you know, bank
trading company, you know, trading floors, asset managers,
what their preference would be, they would prefer 1 / 2 because
it's, it's ultimately, especially as you know, stuff
like swaps and derivatives, which is really what bring these
into conflict. And the track 5, having to have
multiple reporting to different agencies, as you know, on the
real back of stuff is a nightmare.
And so it would be easier to have one set of rules to to
navigate. You mentioned that if it, if the
merge didn't happen during the great financial crisis, like
it's never going to happen, kind of feeling that you, you have.
But I'm curious just 'cause I, I'm, I'm reflecting on the
Silicon Valley Bank situation and I, I definitely, Bennett and
I have done reported some reporting on, on the banking
sector and how it's regulated, which is also totally broken and
weird. CCFDIC, Federal Reserve.
Exactly. State level regulators.
And state level regulators. Exactly.
And then and then when something does happen, they always end up
blaming each other and saying like, well, you know, the
Federal Reserve was supposed to be looking out for this.
And then they're like, well, no, the OCC was supposed to be, you
know, it's, it's everybody pointing fingers at each other.
And so they all get off the hook because they say like, well,
wasn't my responsibility. And then ultimately, like the
banks and they're like, I, I don't know, as far as I know,
there's no criminal charges in regard to Silicon Valley Bank.
Like nobody has gotten in trouble about like, right.
So it's like these massive failures can happen.
Everybody points fingers at everyone else and then
ultimately, like, no one faces responsibility.
So while I hear what you're saying where you're like, oh,
investment bankers might want this, I look at everyone else
and I'm like, they don't want it though, You know what I mean?
Yeah, that's fair. I know.
I mean, I think, yeah, banking is far more broken than
securities regulation in the US And I think a lot of it I heard
somewhere a lot of it comes down to sort of the federalist versus
anti federalist breakdown in the US.
And that said most of the US regulatory oversight on almost
everything was largely state level forever.
And so you, what you have is so the SEC created 1933 or 3433 and
34 to to acts. It was the first federal
securities law. You know, prior to that
securities law is all a state level thing.
So, and all of these agencies are trying to sort of stitch
together federal oversight where legal tradition doesn't have it.
But you're right that, you know, we don't, you know, when you
look at SCBI will say I've been reasonable about attention.
I actually don't think there was any criminality.
I just think there was a ton of stupidity running through SUV
from the customer base and you know, just running your hedges
isn't criminal. It's just dumb.
And then having a few billion dollars in a checking account as
a criminal. It's just ridiculous.
Like so I, I I think I don't think criminal, yeah, there
might have been like banking mob banking regulations versus
criminality. I think it's a it's a stuff
you'll try to get sort of parked out.
But I think your point. But I will say when these things
do break down and they always do, you are 100% right in the
banking world. They all pointy each other and
never nothing gets fixed. And the banking world, another
place where you should really rewire things and, and in
fairness, the upper, the trust, the threat, the thrift
supervision guys got shut down after the GFC.
So we didn't lose 1 banking regulator.
We should I guess something. The reason I say we all see it,
what one thing I think, you know, many people might know,
you look at, So what happened to US, those GFC versus the UK,
Ireland and Europe is they did a lot more root and branch on
regulatory oversight in the US. So the US sort of, you know, got
rid of the Office of Thrift Supervision and that was
essentially it and tapered over the cracks and said we're fine.
You know, the UK buried the old FSA, started the FCA, put
Prudential Regulation and then, you know, created PRA Europe,
essentially created 3 now for European level regulators.
So there was a much more acknowledgement of framework
failure, regulatory failure, failure outside the US than
inside the US. And so, but if an event that
almost brings the world to a halt and brings, you know, sets
us up for a decade of low growth, doesn't say why do we
have two securities regulators? I find it hard to believe we're
ever going to get to the place with emerge.
So you're just going to always have this place where I'm
posting dumb beams and jokes until I'm 80, demanding these,
demanding these things get merged, but they probably never
do? I mean, I guess I'm being by
more honest moments. So I mean, is that part of the
take away kind of for the United States here, like real
structural reform of regulators seems unlikely to happen in the
foreseeable future If we were unable to pull it together after
the great financial crisis, it seems unlikely to ever happen.
I mean, the event that would trigger real root and grant
reform is so horrible. I don't think I definitely don't
want to see it. So like, I think it's our, I
think you will see ticking around the edges and you
probably end up seeing you're more likely to see a Regulatory
agency created than you are C1 version destroyed, which is, you
know, like honestly, you could say and I, I think they're doing
good work, but I you know this. CFPB.
Is you know that's you could I now and I did argue and I sort
of changed my tune on this a little bit.
We couldn't that could have been created this division of any
number of the existing regulators already like it did
it now it's fine to stand alone. I don't want to re litigate, you
know, that to the end of days, but like, so there's a world
where you just say maybe that's the SE CS job too, or the
banking job too. But hey, you know, you're not
like it's hard. It's easier to set up a new
regulator than it is to rationalize existing regulators.
And the other take away. I think it's important.
This is something that again, America's tradition of, you
know, and we're in that period now and you look what the the
Supreme Court saying about what is federally allowed and what's
a state's, you know, is unique, but a lot of ways to the
American experience. So we don't you know, that isn't
something that like as you have, you know, when they tore down
the FSA and UK and set up the FCA and the PRA, you didn't have
like the county saying, no, we should be doing that.
People accept federal oversight of securities markets much and
banking everywhere else without much of a second thought, you
know, and so we're talking about the federal level.
But you know, you have like the arguably one of the most
powerful regulators in the US is the NYFDS, you know, New York
Department of Financial Services.
And there I mean, that's a state level regulator that has because
of, you know, you know, Wall Street being in and out and has
an unprecedented global reach and is essentially a state
regulator run out of, you know, Albany Like it's it's, you know,
it's just a very weird situation.
I wonder with the incoming administration, if you think not
that I'm asking you to predict this, but I do I but I am I am
curious if you know you're talk you're you're talking about the
likelihood of a merge of these being near zero and maybe more
regulators coming into place. But I wonder if we're going to
see more erosion of the ability to regulate from the SEC and
CFTC federal regulators. And I don't know if our, our
viewers and listeners are familiar with blue sky laws, but
blue sky laws were far more commonplace before the SEC was
established. And, and they're basically this.
It was like anti fraud legislation, but it was done
state by state. So you just had to like, do
things in a different state and mail things and do like if they
were just weird loopholes that allowed people to get away with
all kinds of crazy financial shenanigans.
But I wonder if that that's more along the lines of what you
expect us to see it like a an erosion of federal regulation
and a cropping up of these state regulators being far more
important. I mean, certainly you know, the
Chevron decision striking of Chevron last year and a couple
of the other Supreme Court decisions make it and this is
really interesting and make it basically impossible for a
regulator to promulgate new rules.
So that's explicitly laid out in their mandate.
So the idea, so you know, the the last, the battle cry of
crypto in the last two years, which has been the SECSEC is
doing regulation 5 for us going we should just give us the
rules. But now it can't give their
rules. So like, like honestly, you so
even if you know, Trump appoints a pro crypto SEC chair and they
produce guidance or rules on crypto, a well financed anti
crypto lobby is going to sue them because they don't have the
right under opposed Chevron to do that.
So it for any meaningful crypto legislation is going to have to
come to the legislator. And that's I mean, I don't see
that happening soon. So I think what you will see, I
think you're right that federal regulators between a Republican,
the Trump administration and the Supreme Court are greatly
constrained. What they can do for regulation,
which leads to two outcomes. The first is actually regulation
by enforcement. I'm using air quotes now because
more prominent because they can't do regulation by
regulation anymore. All they can do now the focus of
said enforcement might diminish or change targets, but that's
all they can do. They can't produce the rules
unless it's expressively and and dare we met, which brings us to
the states. And I think what actually
happens at the state level is I mentioned the NYFDS, they become
much more important, but not in a like Texas could say if it's
stock exchanges and doing whatever they want kind of way
in a Spitzer kind of way and cracking down on research.
So, you know, if you've got to remember that like Spitzer, I
mean, he rose to fade because the SEC of the kind stepped back
from something and the state and you know, ambitious state AGS
stepped in to pursue investor protection regulation.
So I think what you're going to end up with probably for crypto,
but probably for a lot of stuff is a GS, it's state level
regulators in California, New York, to lesser degree
Massachusetts, because it's to a lesser degree these states
pursuing aggressive cases. And so I think, you know, be
careful you wish for, but like state level regulation is only
good if they're on your side. Otherwise you'd have to fight.
You know, it's sort of like would you rather fight one
regulator or 50 regulators, right?
Like I mean, so it becomes like a lot more challenging.
So I think you will see a lot more action at the state level.
I think you will see, but I think you will see the federal
regulators, security regulators, I don't want to touch anybody
else, but I think that you will see them deliberately pull back
in some areas and be and they're restrained anyway.
They do. The current judiciary mood
doesn't give them a lot of leeway to pursue new
regulations. So it sounds like we're not
going to get a federal money transmitter statue.
Well, yeah, I mean, that's it seems.
I mean, I know the the CFPB actually, it's trying their
hardest to sort of row in. Yeah.
I mean, I think I don't like trying to figure out what, you
know, IA Trump administration. I had to do this eight years ago
and it was awful that trying to figure out what they're going to
do now. It's somewhat guesswork, but
like I think in a purest sense, the legislator is not everyone.
You know, you all mine red way, all three houses, but it's a
Republican House by like 2 votes, if not a not votes in the
Senate to push anything through. So you're still in like a
deadlock situation that you know, I don't see a federal
money transmitter coming through.
I don't see, let's say I don't see federal crypto legislation
coming through unless I mean, unless they can really stable
coins is the easiest 1. So they could get their act
together as stable coins. You might be able to thread that
needle through because there is some more slightly more
receptive nature to that. But the problem I think with,
you know, even with stable coin, both sides overplay their hand
constantly. So, you know, like if they could
get to go and say, look, stable coins, for better or worse,
aren't going away, but they're pretty easy to regulate if you
want to, you know, isn't policy decisions about who's allowed to
do them and how we oversee them, but not the hardest thing to
really regulate. But you know, the pro crypto
side will then put a bunch of other stuff on it that is
unacceptable. And then, you know, the Warren
wing will pour in like crazy AML requirements that are like, I
mean, IAM LS useful, but like, you know, secrecy, bank secrecy
needs to be tempered and individual liberty needs to be
tempered. So I think I I think it's hard
in the current environment to see what happens.
And I actually I tweeted the other day or ski did whatever
we're calling it these days that Brown losing in Ohio, though
nominally to a crypto favorite. It's actually probably bad for
the future hopes of the crypto bill because he was not as
ideologically opposed and was willing more so than Warren to
compromise and could have probably shepherded through the
more skeptical votes he did that, you know, you needed to
get it stable going go through. So I just think it's it's hard
to see anything happening. So we're recording this, what,
maybe a week after Marc Andreessen of A16Z went to went
on to Joe Rogan and complained about all of the de banking that
has happened in in crypto and how, I don't know, he was trying
to pretend like he was champion championing the people and how
hard it is for those getting debanked.
I don't think he's mentioning that the people getting debanked
are like multimillionaire venture capitalists and people
spinning up whatever, you know, whatever.
All agree Marc Andreessen has the hardest life.
Yeah, yeah. Well, so, but my, my point here
being isn't that I, I, I kind of feel like this is exactly what
people like Marc Andreessen want.
Like what we're talking about right now, this stepping back
of, of any federal regulation and then this broken kind of
weird system of state regulations that you never even
know if, if what they take it to the Supreme Court and who knows
what they're going to say about it, Right, right.
Like you, you start doing these getting into this weird dynamic
where it's like, oh, isn't like, I think that that's what these
guys actually do want is just complete regulatory failure, I
guess would be the way I would term it.
But maybe, if maybe I'm too pessimistic, I don't know.
No, I mean, I'm a pretty cynical person, so I would I would tend
to agree. And I think if you look at that
sort of the like the CFTB becoming all of a sudden, like
in between Elon and the Joe Rogan thing, like, I, I mean,
you could look at it pretty cynically and say, you know,
like the fintech guy had a bunch of Ding by the CFPB.
It once shut down and you all must once X to get a money
transmitter thing without having to have federal oversight.
I mean, like, it's not like they don't play 8 mental chests over
there. They just, I think you're right.
They just selfishly want to be able to like one of the things
with fintech. Dylan's not even a fan of
two-dimensional chess. Yeah.
So I mean, one of the things you're right that a lot of like
the last decade of fintech has been about getting as close to
doing regulated financial services without being regulated
as possible. And so they absolutely benefit
from world where gridlock rains and nothing get pushed through
because they continue to push through the cracks and allowed
to do as much as they can without sort of oversight.
I think we've entered this period of time where regulators,
and there's not to say there's no reason for this, but where
regulators are are looked at as inefficient, useless, that
they're on the wrong side of a lot of these battles.
And now people would rather trust these billionaires who are
talking their book and they'll be like, yeah, yeah, these
regulators, I hate them. I hate these regulators.
We should get rid of them. Whereas they don't understand
that maybe like, I'm not, I'm not a fan of the way that I'm.
That's why I like the idea of merging these two.
I like the idea of, of enhancing it so that, OK, we merge these
two and then we have clear restrictions on what's gonna
happen and who's allowed to play in these markets.
And, you know, but I, I, yeah, I guess I, I fear now that because
the pop, the popular side of this is actually what the
billionaires want. That again, Yeah, the cynical
feeling of the people don't even realize that the regulators are
supposed to be there for their benefit, that we've already gone
past that, and now people are like, yeah, the regulators are
there to hurt me personally. They're not even there to
protect me. Yeah.
So I think that's probably true. I would say that's particularly
true from what I see online, sort of like from the the
broadest Gen. Z stereotype, but sort of from
the certainly from people who are more interested in crypto or
Bitcoin or whatever. They certainly are definitely
feel the regulator is preventing them from making money and they
feel like, you know, like that's what they see.
You know, the FCC primary function is to prevent me from
making money. And I think that's a match
space. Certainly they, they, they look
past, you know, whatever merits the SEC has and definitely see
them as an inhibitor and they're they're stopping me from getting
mine. And I think that's certainly a
dangerous place. And I think some of that's
earned, some of that's unearned. But I think if you look at sort
of, but I think when you need to look at sort of the, the feeling
of the general industry and the participants and then sort of
the, the rich people and the people, you know, the people who
run the companies. I mean, I think they also sort
of generally prefer the status quo for crypto regs in the US
because there is none. And they can continue to sort of
play in the Gray area because if you look at, you know, Europe
past crypto regulation a couple of years ago came in live, you
know, it's like a, it's tremendously boring and like no
one really likes it or hates it. But like crypto is a very
different thing over here because they put in enough basic
framework that you don't have the sort of the same drive.
So I think a lot of it is very specific to the sort of culture
in the US at the moment and this sort of feeling.
And you know, I don't want to dive too deep into pop
psychology of sort of the system being rigged against you.
And then, you know, let's be honest, like the the crypto
industry was in lobbying industry was handed a gift with
Gary Gensler becoming the SEC chief because he is even when
he's right, he's unlikeable. I mean, he's just not like he is
a very unlikeable character and a perfect boogeyman for an
industry. And so like the simple fact that
like who is the chair of the SEC raised itself to a talking point
during presidential election. It's something's gone wrong.
Like if you're the chair of a securities regulator, like the
average person should not know who you are.
I mean, like, I'd say it's really not a job that like
people should know your name, like they should just know the
regulators doing stuff, but like you should not know who's in
charge of it. And so I think that's sort of
the whole, you know, the the firmament around it.
It's really sort of personality driven and they sort of found
the perfect, perfect bad guy from their perspective because,
you know, like my background is far more treadfy and like I can
say, yes, he's scary. Gunstars raining at the SEC was
not loved by the tribe side either.
I mean, it was sort of like he was an equal opportunity
antagonist when it comes to sort of tribe and.
Crypto. What's kind of hilarious to me
about that is there was a brief window when Gary Gensler was
initially nominated where the cryptocurrency industry was
excited about him because he had lectured on cryptocurrency,
because he had shown some like openness and familiarity with
the industry. And then they very quickly
changed their tune. Yeah, like I told a joke the
other day, you know, 20 that crypto industry was briefly very
excited because they said Gary got crypto, but also like Gary
got crypto. So it's a real monkey problem
monkey situation. Like you want a securities
regulator who understands crypto, like be careful of that
because it also means he understands it.
So like like notwithstanding his approach to enforcement, like he
like I think I will say this like I have had my issues.
I think he was more right than wrong on crypto, but I think
also, as I've been told at various points in my career,
being right isn't a bulletproof vest.
And so I think he his approach made his life a lot more
difficult than I needed to be. Yeah, I think it's proven that
at least under his reign, enforcement, like enforcing
regulation has not worked. And that might just be because
the arguments they made in courts were poorly done or like,
I, I don't know why it hasn't appropriately worked, but like,
I think the Ripple case was really a turning point where it
was like, oh wow, this has been incredibly ineffectual and
inefficient. And.
Wasted everyone's time and money, yeah.
And now, like you guys talked about it on your SEC episode, so
I don't want to sort of rehash it, but I mean, he was whatever
my criticisms of Gary Ganser, he was also between a rock and a
hard place because, you know, the the same industry that
attacked him, you know, and same politicians that attacked him
for regulation by enforcement also attacked him for trying to
regulate FTX and then attack him from out regulating FTX not
before blew up. So, and in a lot of ways, being
a regulator is really thankless if you happen to be there when
something goes spectatically wrong, because you almost never
can catch it before it really blows up.
You just hope to catch it before it like becomes, you know, a
world breaking event. So I, I, I don't think he was in
a particularly winnable situation.
Now. I think he, his approach and his
political ambitions probably made it even less winnable.
But like, it's like, I just think he was in AI.
Think the other thing to think about when he launched is really
this he launched it's real sort of crypto attack.
It was in the crypto winter was happening, you know, like there
were a lot of people and I would say I was one of them that said,
look, this thing's going to burn out anyway.
So he, you know, he's going to come in with all these actions,
mop up the mess. You know, FTX has blown up.
All these things are blowing up. It'll be gone anyway by the time
he's done and that obviously it's proved far more resilient
than certainly I thought it was and I think far more resilient
than the policymakers thought it was.
So then they were places started, numbers started going
up again, and all of a sudden he became bad guy again.
I think there are places you can criticize Gary Gensler, but like
even a lot of his crypto focused enforcement was reasonably
successful. And even the cases that are
still ongoing, most of the ones that are coming to my mind seem
like justified by at least some amount of legitimate concern
about like rule breaking and things like that.
Like they're there was never really a possibility of there
being new crypto legislation coming through Congress in the
last several years. Yeah.
There's never been like enough of a majority or a bipartisan
coalition that was ever actually going to make that happen.
I will say that part of the issue that I, that part of the
criticism for a lot of people is that he was going after, you
know, like famous people doing NFT projects where you're like,
yeah, good, great. Yeah.
Like I'm not saying it's not a worthy case to go after, but
it's it also feels like an A super easy slam dunk and as as
opposed to. That's the thing.
Well, and like, The thing is, if you don't go after those cases,
right, if you don't go after Jake Paul or Logan Paul or
whatever promoting Tron, yeah, that becomes permissible, right?
You need to go after the people who are going to immediately
settle, and in so doing, discourage everyone else from
beginning that type of behavior. I'm not I'm not arguing against
that. I'm saying that it if if that's
the only thing that you're but. It's not right.
He went after like the top crypto firms in the United
States, Coinbase, Gemini's like circle.
He went after Polonie X and Justin's son.
So I think we've been talking about stable coins like the, the
idea that there's no legislation and no actions taking taken
against any of these coins, whether they've done
spectacularly well or they've spectacularly failed.
Like the idea that no one has ever come after them for
anything or tried to be like, hey, here's I, I, you know, even
when Tether got in trouble, the amount of trouble that they got
in was so minimal. And the, the deal that they made
with New York was so easy to just be like, yeah, here's
whatever the information you want and, and we'll pay our $30
million fine or whatever it was and move on like that.
Those, the inability to do real legislation and ensure real
regulation is occurring so that everyone knows what's going on,
I think has been the the real criticism as opposed to like,
yeah, I know he's gotten a few of these people for, I don't
know, like Gemini Earn or whatever.
Like how many people use that Bennett?
You know what I mean? I mean, very few, but that's
kind of broadly a crypto adoption problem.
You know, like the amount of money and attention that goes
into crypto is still somewhat disconnected from the number of
like, people who actually use crypto.
The celebrity thing, I mean that is a standard playbook, like you
go out to the most samuest people because you hope set
example. You know, they did with IC O
clay did with IC OS. It's a pretty standard approach.
I think, you know, just there's so much money in a small number
of people's hands that it's and see, it's you know, SEC doesn't
have the right to fine people for like a trillion dollars.
I mean, ultimately, like there are certain like there's sort of
limits to how much they can do. And so I think the problem, if
there is to be, I think Bennett's point, like SEC is
still won far more than they've lost on crypto cases under I'm
against her. So I think it's, you know, when
you're in the social media sphere and it's very easy to get
like it's stupid. It's very easy to get sucked in
that this is a a bigger industry than it is, but not, you know,
it's big and lots of people have lots of money, but you know,
it's not it's relatively larger financial industry.
It's not that it's not that big and it's easy.
You know, every time FC has a set back in court, you hear
about that ceaselessly for months, whereas when you know
they they win, it just sort of gets brushed aside.
So I think we should say like they've had more success than
not. I think the challenge is he
never the SEC never went the extra step when they could have
and introduced certain guidelines or regulations.
But you know, sort of for these, you know whether.
You know. Gensler, I believe, is sincere
belief that the existing rules come right, that they didn't
need to do the rules, notwithstanding the crypto
custody rule, which sort of contradicts that position.
But so I just think it's sort of it's sort of just been a it's a
they've been in a weird place. They were led by probably not
the person, the best person to lead the crusade because you
need to get public opinion and policy makers on your side and
you can't sort of burn the boats on your way out.
So I mean, if you look at and anyone familiar with Gensler's
terms, I had to be his term at the CFTC.
I mean, it ended largely the same way.
Like it didn't end with like, you know, like high fives on the
way out the door. A lot of people and especially
international regulators were very happy to see him no longer
at the CFTC. So he it part of it is a sort of
a singular management for salad style.
Yeah, I, I just wanted to highlight like I think
sometimes, especially in the crypto information bubble,
there's certain people who like except as true the crypto
industries framing of Gensler's term.
And I think there's a significant gap in certain
places between reality and like the cryptocurrency freezing
there or cryptocurrency industry framing on it.
Especially since like biggest, most prominent loss I can come
up with like for the SEC when it comes to crypto is XRP.
And that's a Clayton suit, right?
Not a Gensler suit? Yes, I mean, I, I think it my
biggest criticism of Gensler, it's not so much like I said,
like he was mostly right. I think it was just his approach
and knowing you were heading into a hostile judiciary and
knowing that like Chevron was going to get killed at some
point. Like that was the writing was on
the wall that at some point they were going to run out of the
road for agency discretion to not come up with some sort of
guideline on how you could register a coin, for example.
You know, I think it's a fair criticism.
It says you can register a coin security and then you go to them
and you say, how do you do that? And they say, I don't know.
I mean, that's a fair, but that is a fair criticism.
I don't relation by enforcement. I don't think it's a fair
criticism. That's how regulation and
enforcement both work. So I just think, and I and I'm
also, I will say like I as a sort of more track by person,
like I think, as I mentioned a little while ago, like his
tenure and his on the track by side has been equally as poorly
received. And I would say as much as he
was mostly right in crypto, he was mostly wrong on trap fry and
I and I. So I think like that is sort of
a double whammy for a sitting core commissioner.
So I I think it just leads us in a weird.
We should be in a better place because I think Ben and Henry
have pointed a lot of these cases weren't bad on the face of
it. You know, you could argue or
certain coin securities, yes or no.
I mean, that's a that's a perfectly fine thing to argue,
but I don't think it was as disastrous as it it now seems, I
guess. Another thing that I forgot to
say, though, is that the other flip side of this criticism is
that FTX happened like that FTX was allowed to have an FT, an
FTXUS, that they were allowed to SPF and others were allowed to
get the ear of politicians that they were allowed to have
meetings with the SEC. That that I, I hear, I hear the
idea of like, well, yeah, why? Why wouldn't they?
But. But like, we need to be clear
that like the critics of the SEC would never permit an SEC see
that would have been taking aggressive action against FTX in
July of 2022. That's true.
I mean, they said all that's true.
There were politicians that sent my letter said back off FTX.
Like somehow that's been like memorial.
So like. And those same politicians, come
November 15th or whatever, a couple days after they declared
bankruptcy, sent another letter saying, oh, you were meeting
with this guy but didn't sue him.
Are you in on this, Gary Gensler?
Like. There was no and there was no
enforcement that the cryptocurrency industry was
going to accept from Gary Gensler.
A single case was too many cases for them.
Yeah. Sure, I agree, I think, but I
think that there is a it's this it's similar to like the I think
the anger people felt after Enron or after Bernie, right
where like I mean, Bernie is the best example probably where you
where you know, the SEC literally investigated him
multiple times and was like everything's fine.
I guess where you're just like, what are you guys doing?
And I think that if you if you want a regulator to behave like
a regulator and actually stop fraud, then that is a valid
criticism. Like, yeah, you should have been
looking into FTX in This American and his weird arbitrage
practices, and you should have been looking at that for sure.
But alternatively, you're right, the crypto industry, anyone in
the in the cryptocurrency industry saying, yeah, why
didn't he catch FTX is blowing smoke up your ass because they
they wouldn't have wanted him to anyway.
So I that's fair, but I think anyone who wants prop good
regulation, that's a valid criticism because it's like,
why, why didn't you catch something like that?
Like why, why not? You know, what are you guys
doing? I.
Don't want to go too far down the FTX rabbit hole, but I will
just say that FTXUS still hasn't really been charged with
anything, which I find by blowing like I don't understand
how FTX Bermuda is honestly criminal and but FTXUS has no no
members of FTXUS have ever faced any serious charges are as far
as I know. But I think part of it.
I think your point about, you know, you did see the same anger
at the SEC, but not blew up. Like when big frauds happen, the
regulators always give them a knack because there's always
everything always looks better in hindsight.
I mean, everything looks obvious in hindsight.
So in hindsight, yeah, of course this was criminal.
Manos facts. The SEC didn't investigate, but
didn't actually bother to check the DTC codes.
You know, like so there are some like really simple oversights,
but I think if you go to bring a sort of full circle ish, you
know what, you bring this FTX into the CFTCSCC part.
Like, you know, you remember like the CFTC was within like a
hair's breadth of approving FDF self clearing for FTX, which
would have been a major shift in policy because a lot of the
frictions we have in the financial infrastructure,
they're intentionally there's a certified brick.
So you can't, you know, do fraud as easily.
And you know, that was dangerously close to being was
through because the CFTC was easier to lobby than the SEC at
the time. And this was back to where we,
you know, opened up here. One of the reasons having a
single market securities market regulator would make that sort
of regulatory arbitrage a lot harder to pull off.
You know, and I think that's really ultimately the case.
It's still the case. The mergence will excess.
And you know, we can look at the FDX thing and say, how does CFTC
and FCC be more aligned? I'm not sure they would have
caught it quicker. But, you know, SDF might not
have been as pervasive and persuasive in his sort of
lobbying efforts with the CFTC. That's a great way to round that
out. Sean, Thank you for joining us.
That was a fun conversation and I'm I'm looking forward to no
more regulation anymore. Well, thanks for having me.
It was a good time. It's fine, you know, so it's you
know, you interact with people online in text based format
forever. It's nice to finally see and
talk to people. So thanks for having me.