The CFTC’s Proposed Rules to Reshape US Crypto Markets | CFTC Chair Mike Selig

Michael Selig:

[0:00] There was a clear goal to make the United States the crypto capital of the world,

Michael Selig:

[0:04] and I believe that we've succeeded in that endeavor.

David Hoffman:

[0:07] I'm in the strictest financial prison that exists in the entire world, which is New York.

Michael Selig:

[0:13] We propose first round of crypto exchange regulations to bring market-based regulation to the crypto asset exchanges.

David Hoffman:

[0:22] If this proposed rulemaking is accepted and made into a rule, individual spot retail people like me get margin, get leverage.

Michael Selig:

[0:30] People come to the United States and say, why can't we trade on margin? And so we're creating the rules to allow this to happen.

David Hoffman:

[0:36] How optimistic are you about the durability of these rules without any sort of legislation?

Michael Selig:

[0:41] We do have a ton of authority as an agency and we're going to use it. My goal here is to put in place something that is future proof, something that is bipartisan and has the support of both sides of the aisle. And I think if we get that right, there's no chance that a future administration is going to withdraw all of that. And they'd be taking a huge risk.

David Hoffman:

[1:02] We got CFTC Chairman Mike Selig back on the podcast. Mike, welcome back.

Michael Selig:

[1:06] Thanks for having me.

David Hoffman:

[1:07] Chairman Selig, you were nominated by President Trump on October 27th, 2025. That is just about one year ago. One year of being the CFTC chair. How has the year been? Give yourself a grade, Mike, if you will.

Michael Selig:

[1:22] Well, look, when I came into this position, there was a clear goal to make the United States the crypto capital of the world. And I believe that we've succeeded in that endeavor. Today, we've got Bitcoin and all sorts of crypto asset perps trading in our markets. That was once a purely offshore endeavor. Now we've got it here in the United States. We propose, as I'm sure we'll discuss today, our first round of crypto exchange regulations to bring.

Michael Selig:

[1:51] Market-based regulation to the crypto asset exchanges, which until today, it's really all been about the state-level payment space regimes. We want market protections for traders in our markets, and we're doing exactly that. We've also brought on a number of new controls and regulations around prediction markets, which, of course, is a separate area, but there's a lot of synergy between prediction markets and crypto. A lot of these ideas actually came out of Vitalik Peter and his white paper so many years ago talking about blockchain-based prediction markets. And so we're looking, of course, at prediction markets on-chain as well as other types of on-chain markets. And that's really been, I think, a great focus for this agency. So I'd give us a high mark when it comes to crypto and prediction markets. And then, of course, although I'm sure less of interest to many of your viewers, we're doing a lot in the traditional markets as well. And I think there was a lot that was done in the wake of the financial crisis that made a ton of sense. and we're continuing to make sure we enforce those regulations and beef them up where needed. There was a lot that really was an overreaction, what I refer to as an autoimmune response to a crisis, which of course the time might have been warranted, but now it's really been a bit too much. So we're pairing some of that back and deregulating as well.

David Hoffman:

[3:09] There are two rules that the CFTC has proposed and these two rules are going to be the entree of this podcast, kind of the main course. I mean, we're going to talk about regulation crypto asset transactions and regulation crypto asset markets, what these rules do and how they also work together, because I think the pairing of them is also very interesting. Before we get into them, I kind of want to just zoom out and talk about something that's in the DNA of the country as a whole, which is the debate, the tension between states versus federal regulation. Maybe we can just start at the very beginning. Why is it important for financial markets to be regulated by the federal government, in your opinion, rather than the states? Like, what about the financial industry makes it more appropriate for federal regulators rather than state regulators?

Michael Selig:

[3:56] One of the first federal statutory schemes around our markets was actually the Grain Futures Act back in the 20s, which actually predated the securities laws, which came out in the 30s. But in the 30s, we saw with the Great Depression and the financial crisis of the time that markets need a federal regulatory scheme. Oftentimes, you have different state requirements, state by state, and you also have a need for uniformity across those state regimes. So you need to surveil the markets, need to be able to police bad behavior, you want uniform disclosure. You know, when you're using, for example, whether it's a brokerage like a Robinhood or going directly to an exchange, whether it's in our markets or on the securities side, what you want is the same sort of standards and requirements and protections against fraud and manipulation, wash trading, and the like when you go from state A to state B. And that's exactly what the securities laws set out to do in the 30s. And then the commodities laws, which also developed, as I mentioned, in the 20s, but over almost 100 years now, they've been built up and the CFTC was established in 1974, to enforce a federal regulatory scheme for commodities derivatives markets. And that's been expanded over the years to include things like margin trading on spot.

Michael Selig:

[5:21] But really what the purpose of this regime is, whether it's on the security side or the commodity side, is to make sure that you have uniformity across the country when you have national markets. When you have, for example, an intrastate, so a single state market, you don't need, of course, this federal scheme that crosses state lines. But when you have an exchange or a brokerage that's doing business across state lines, you really want the same standards across those state lines as well. You want the same protections. You want things like, for example, if you buy a security and there was bad disclosure or a lack of disclosure entirely, you want to be able to sue and understand the scheme, whether you're in state A or state B and not have to basically be in the best state to bring your case and have that competition across state lines. So that's why we have these federal market schemes. We don't have it for every type of statutory scheme. Of course, you've got various state laws that are purely intrastate.

Michael Selig:

[6:19] And that typically looks at things like certain types of brokers that are doing business in the state are regulated at the state level, certain types of offerings that are purely in state regulate the state level. You do have state commodity laws that govern certain types of commodity transactions within a state. But when you're crossing state lines, when you get into interstate commerce, that's when we want a uniform scheme across the country. And other countries, of course, don't have the same sort of consideration state by state. They do everything at a uniform level. But here in the United States, we have that balance between the states and the federal government. And we believe very much in the administration and states' rights and the importance of having really decentralized system in the United States. But there are certain areas where we do have federal regulation and that's for efficiency and also protect investors and consumers.

David Hoffman:

[7:07] And we all know the United States is the capital center of the world. We have the global reserve currency. A lot of countries do trade in that currency that gives us this centerpiece and a lot of investment from the rest of the world comes back into the United States capitals market. And it's a very privileged position to be in, being the center of finance. And I suppose a lot of that would be simply downstream of this one single unified regulatory apparatus. If we had like a, just a patchwork of state regulations, it would be much harder to hold on to being the center of capital of the whole entire globe. That's my intuition. Is that right?

Michael Selig:

[7:47] Yeah, that's exactly right. So the global commodity markets, commodity derivatives markets are actually $1.2 quadrillion notional. It's a massive market. The United States has about 50% of that market. And that is because we have the Commodity Exchange Act, we have the CFTC, we've got the SEC as well that places certain aspects of our derivatives markets when it comes to securities. So we've got the best derivatives markets globally. We've also got the best capital markets. And that, to me, is a credit to our statutory scheme, the securities laws, as well as the commodities laws, and the regulators that enforce those laws. And, you know, there's a lot of talk. People will say, oh, you know, this agency is not doing that or not doing this. But at the end of the day, our markets work efficiently every day because our agencies are working very hard to make sure that our rules are enforced, that products are listed in the proper manner, that each exchange, which is a self-regulatory organization, is doing its job to surveil its markets and police bad behavior and make sure that transactions settle as, the users of these exchanges expect. So it's, of course, a huge responsibility on us as regulators that we take very seriously and we work every day to make sure that our markets are the best in the world.

Michael Selig:

[9:02] And we're bringing those same market-based protections to crypto through these new rulemakings.

David Hoffman:

[9:09] Continuing on just this crash course, these appetizers before we get to the main course, can you just inform me who regulates spot Bitcoin? Like the USDC Bitcoin pair on Coinbase or on Kraken, Who regulates that market?

Michael Selig:

[9:24] And I do think this history and kind of, structure in the United States is really important to double-click on, so I'm glad you did. Right now, what we have effectively is this patchwork of state laws and regulations. So, in the wake of the Mt. Gox collapse, almost probably over a decade ago now, I think back in.

Michael Selig:

[9:43] 2011, 2012, what we saw was a number of states like New York and others react quickly to make sure that there were certain protections for users of crypto exchanges. So, Mt. Gox, for those that don't know, was an offshore exchange. Actually, it was originally a Magic the Gathering cards exchange that converted over to a Bitcoin exchange and was really the primary place to get.

Michael Selig:

[10:06] Bitcoin and other types of crypto assets aside from local Bitcoins, which was basically like a Craigslist for crypto. So this is where a lot of the liquidity was concentrated. Most people weren't necessarily mining for Bitcoin or obtaining it offline. So they got it through this Mt. Gox platform. And there was a cyber attack, there was a bit of funds that was stolen, and I think the claims are still being resolved to this day or they were resolved recently, but that was a big fiasco at the time and it set the price of Bitcoin back quite a bit, and the states reacted. And what they did was say these exchanges basically look like currency exchanges. So you, I'm sure, have traveled throughout the world and you go to the airport and you see these currency exchangers when you get off the plane, And what they do effectively is swap out dollars for francs or whatever currency you're swapping into or out of. And basically, that is done at a fee, right? There's a fee taken by the broker who's doing the exchange. And that looks a lot different than a securities exchange or commodities exchange where you go to an order book and trade back and forth or even from a foreign exchange, FX exchange, right? So these are kind of currency swapper businesses also regulated under the same sort of framework are.

Michael Selig:

[11:22] Czech cashers, like a Western Union, money remittance services that move funds across the country and into foreign countries. And so these types of payments businesses like PayPal or Venmo as well, that's all regulated state by state under what's called money transmitter licensing regimes. And so these states, when they saw the collapse of Mt. Gox, said, hey, this is just another currency exchanger type business or payments business that lets people swap from Bitcoin to dollars or Bitcoin to euros or what have you and move that currency around through a custody wallet. And so they said, OK, we're going to call Bitcoin under our statutes or regulations a type of currency or money, and we're going to regulate it the same way as we regulate PayPal and others. And that's worked fairly well up until this point. But then we saw FTX, which I'm sure we'll get to as well. But with FTX and some of these other collapses, you didn't have the market-based regulations that require, for example, segregation of customer funds. So Alameda actually was receiving customer funds into its own bank account, which was an affiliate of the FTX exchange, and then they were using those funds for various purposes.

Michael Selig:

[12:35] Under a regulated market, you have a brokerage that's receiving the funds, and there's very strict controls on what the brokerage can do with those funds, how they have to segregate them. And then when you get into the actual order book, the guts of the exchange where people are putting in bids and offers to trade, you have certain controls around those bids and offers. You have certain requirements around, for example, orderly trading and making sure that you don't have wash trading where people are trading back and forth between their own accounts, manipulation in the market, fraud. These are all things that, of course, you have to do at a federal level or across state lines. It's very hard to police that state by state. Whereas.

Michael Selig:

[13:11] It's easier when you're talking about just swapping someone's currency into one currency or another. You can look at the brokerage itself trading with the customer, or you can look at, for example, fraud that's occurring within one state or maybe involves multiple states. But it gets very hard when you've got an order book with tons of trades matched across the book. And then also in our federal scheme, we usually require clearing. So we separate the brokerage, the exchange, and the clearinghouse. And I don't want to get too in the weeds of our rules yet because I know we're sort of teasing at that. But I think this context is important. So we effectively for Bitcoin have these state by state regimes where you obtain a money transmitter license, you put up usually a surety bond with a state regulator, the same as your local 7-Eleven. I think they have to do the same thing if they do cash back or check cashing or that sort of thing. So these are all payment businesses. There's thousands of these licensed in each state. And, you know, the major exchanges have these licenses across the country. Some states like Montana don't actually even have a money transmitter licensing scheme. So some states, you know, you're basically able to do whatever you want.

Michael Selig:

[14:21] But other states like New York, for example, have taken their statute and created a purpose fit bit license regime where they're licensing what they call virtual currency businesses. So they've taken it a little bit further, but at its core, each of these rules or statutes is effectively a money transmission, payment services, licensing regime, which, again, it's held very well through a lot of this. It didn't stop FTX, even though FTX had a number of these licenses. Of course, customers got harmed in those entities, as well as a number of the other collapses that we've seen with various exchanges. They hold these licenses. They work fairly well to make sure that some of the basic protections are there around anti-money laundering, know your customer, sanctions requirements, but they don't necessarily prevent. Frauds and manipulations that are market-based.

David Hoffman:

[15:12] So your answer to the question, who regulates the spot Bitcoin markets on Coinbase? Your answer is like, well, it's a state by state basis. And each state has different sets of rules. Does the CFTC have any role in like spot Bitcoin? And like, what about FinCEN? What about any of the federal agencies? What role do they play in regulating spot Bitcoin? Or is your answer is actually just completely in the states?

Michael Selig:

[15:36] No, so the core piece is with the states, the licensing piece. The secondary piece is general anti-fraud and manipulation authority. So the CFTC has general anti-fraud and manipulation authority to police fraud and manipulative trading in the markets. So we do exercise that. We've done so in many cases at the state level. And so that's a secondary piece, but it's more enforcement. We do and we'll get to have other authorities to license these exchanges. But as it stands today, what we've done to date is in 2014, the CFTC declared Bitcoin to be a commodity. It later declared Ether and other crypto assets to be commodities, which means that we police those markets for fraud and abuse. And we did bring actions against, for example, FTX. We brought actions against various exchanges, not myself personally under this administration. But in the past, we brought actions against Kraken and Coinbase and others for various, whether we think they're, good cases or bad cases, the prior administration brought them using this same authority, deeming various crypto assets to be commodities and policing fraud and manipulation or other abuses. And so that authority holds FinCEN as a separate.

Michael Selig:

[16:55] Piece of the Treasury Department. So FinCEN is the Financial Crimes Enforcement Unit. And they basically are looking for anti-money laundering violations. Of course, you also have OFAC, which looks at sanctions violations. So they do have authority as well. These exchanges are licensed at the state level, but they do have to register typically as a money services business with FinCEN. There are some exceptions. For example, some exchanges have trust charters, and you don't need to get into all of that. But generally speaking, you have this state regime that's a patchwork, and then you have very limited, narrow focus for federal agencies like Vincent, OFAC, and the CFTC.

David Hoffman:

[17:35] So the answer is to like who regulates spot Bitcoin. A lot of it comes down to licensing from the state. And that probably is what shows up when, as a resident of New York, for example, there are a lot of products created by like Coinbase or Robin Hood, for example, that I just simply don't have access to. Like I'm in the strictest financial prison that exists in the entire world, which is New York, because of the BIT license. And so the way that I get treated as a customer, I think is downstream of a lot of that state licensing, New York being some of the harshest. But even like the state that I came from, Washington, also has some like inconsistencies with other states as it relates to like the products that Coinbase or Robinhood or any other crypto exchange is allowed to give me. And that's because of the state-by-state licensing regime, correct?

Michael Selig:

[18:27] That's right. And they license the activities. So I think that's an important caveat. So Bitcoin itself as a commodity is not regulated in the same way as, say, the Securities and Exchange Commission would regulate NVIDIA stock and the offering of NVIDIA stock.

Michael Selig:

[18:42] What these state regimes regulate are the platforms, the exchanges. And that's important as well for DeFi, because they don't necessarily have the same hook into DeFi that they would have into a custodial exchange or a custodial wallet. Because what they're looking for, basically, state money transmitter regimes came about in the early 1900s. And they were designed to protect consumers that were giving their money to some third party to move that money or convert it into another type of money. And so the concerns there are very different, for example, than some decentralized exchange protocol where people are able to swap their assets or a non-custodial wallet where someone's able to hold their funds in that wallet. That said, I do think some of the state agencies have tried to creep into some of these activities, even under these statutes that really were designed to focus on money transmission, actually accepting value for the purpose of transmitting that value. And the network's the one that's moving the value with a person holding value in their own wallet. I think there's an argument as to whether those statutes really apply. That's also a separate topic from today's discussion. But I think it is important to note that these regimes, oftentimes are trying to creep into areas where they're not designed to creep into because we don't have, to date, we haven't had a federal option for a lot

Michael Selig:

[20:06] of these platforms and protocols.

David Hoffman:

[20:08] All right, let's introduce the main entree here, the new CFTC proposed rules. Two proposed rules from the CFTC, Regulation CTX, that's crypto asset transactions, and Regulation CAM, crypto asset markets. What do each of these rules do respectively? And then what do they do together?

Michael Selig:

[20:23] Yeah, and before I get to those two rules, I do want to preface it actually with the Securities and Exchange Commission's Red Crypto, as well as the joint interpretation that the CFTC and the SEC put out just before that. And I think these are important to understand going into the new rules. So I like to refer to the three as the trilogy, because it harkens back to Star Wars. And I love that the crypto industry sort of formed the Rebel Alliance and fought against the evil empire for so many years. But what we have to start is this joint interpretation. And that's kind of the prequel, where we have categorized crypto assets into a number of buckets. So we have digital commodities, which are the network tokens, things like Bitcoin, Ether, Solana, Atom, the various tokens, UNE as well, associated with decentralized networks or decentralized applications or protocols, where the value of the token is largely derived from network effects, from the value of the network itself or the application and the community around that, as opposed to a centralized issuer company associated with that.

Michael Selig:

[21:33] We also have digital collectibles, things like meme coins and NFTs that are effectively offered as they are. There's not really any underlying business or promises attached to it. It's meant to just be sort of a collectible and the value fluctuates based on the same sort of supply and demand dynamics as other types of collectibles. We have digital tools, things like liquid staking tokens and other credentials that you use on chain that are really designed, fit for purpose. They're not really deriving value from a network effect, but deriving value from their utility and use on the network or an application.

Michael Selig:

[22:12] And then we have stable coins and security, digital securities. And so digital securities, of course, are securities, things like tokenized, NVIDIA stock, for example, digital commodities, digital tools, digital collectibles, and most stable coins are not securities. And so that sets up this preamble, this preface effectively for our rulemakings, because the SEC now put out Red Crypto, which is kind of episode one in the trilogy, And that allows for.

Michael Selig:

[22:43] Would allow for, if finalized, a regime for the offering and distribution of crypto assets as what we used to refer to as ICOs or initial coin offerings effectively, right? It's a regime for fundraising where the team typically will promise to deliver and make certain disclosures around that offering. And of course, the offering itself with those promises and commitments and the funds coming in without performance on the promises is a securities offering. It's no different than selling stock or any other type of asset with those commitments and promises or what's called an investment contract. But the token itself, if that token is distributed along with this promise and commitment, it's not itself a security. And there's a point at which that separates off from the offering itself from this investment contract and can trade as a commodity. So as long as it fits in one of the categories of a digital commodity, digital collectible, digital tool, and it's not part of, you know, it's not a digital security itself or, one of the types of stable coins that might be deemed a security, it can go trade in the state regimes currently or within what we're now establishing under RegCTX and RegCam. So RegCTX deals with crypto asset transactions.

Michael Selig:

[24:05] And these crypto asset transactions are a specific type, right? So when you have the state regimes, what you can offer effectively, typical spot trading on an order book. So you can buy and sell Bitcoin. You can't really do a whole lot else because, again, these regimes are based upon statutory authority for regulating money transmission and exchanging one currency for another. They're not designed for financial markets. What we have in the financial markets that speak and that the CFTC has exclusive authority to regulate are the trading of commodities when you're able to offer to customers and.

Michael Selig:

[24:43] Investors the ability to take out margin, leverage, or financing as a retail customer. So for retail exchanges that want to, say, when someone goes to trade, they want to buy Bitcoin, they can check a box to do that on leverage or take out some financing or trade on margin. That sort of exchange platform is currently not available in the United States. It's popular offshore. But here in the United States, the CFTC has not done the rulemaking work needed to allow for these markets to exist in the United States. The state regimes don't allow for it. The CFTC has authority there, exclusive authority, but we've only used that for enforcement to date. So there are a number of exchanges. Kraken's one example where the prior administration weaponized this provision and went after the exchange. They also went after DeFi protocols like Uniswap, claiming that they were offering effectively what are called retail commodity transactions. We're referring to them when it's crypto as CTXs under these regimes, and they were not licensed. They did not have the approvals of the CPC, and so they had to pay a fine. What we're doing now is laying out our interpretation, our definitions, and our guidance as to what these transactions are and how they can be carried out.

Michael Selig:

[26:02] We're going to permit, of course, a certain degree of margin leverage and financing similar to what we allow for with perpetual contracts in these spot transactions. Now, RegCAM is a separate rule proposal that we're putting out that will allow for these, exchanges to operate not just under our current typical DCM framework, a designated contract market, which is a type of derivatives exchange, but as a crypto asset market, a new type of exchange. So designated contract markets are futures exchanges, derivatives exchanges that are licensed with the CFTC. Virtually every major crypto exchange has one of these registrations with us. So Coinbase, Gemini, Kraken, also some of the new entrants in the prediction space like CalSheet that offer perpetuals. They've all obtained this license with us. And so they would, out of the box, be able to offer these CTXs without having to deal much with reg cam. They would continue complying with their existing requirements. And there may be some new requirements or additional rules related to these new transactions, but more or less, they'd be able to just leverage their existing infrastructure to start offering this.

Michael Selig:

[27:22] But for new entrants that want to start up a new crypto exchange that just offers these CCXs and doesn't offer perps, swaps, other types of futures contracts, they would go and might pursue this.

Michael Selig:

[27:38] CAM regime, crypto asset market regime, and that would be purpose fit for these platforms. So it wouldn't require all of the same things. It would be a bit lighter touch than a typical DCM because you're not offering perpetuals and other types of derivatives. So I like to envision a ladder. You have the states at the bottom of that ladder. The state regime allows you to do spot trading and all sorts of crypto assets. And we police for fraud and manipulation in those markets, but nothing else. Then you get to the second rung of the ladder and you have the CAM regime. So these are exchanges that can now offer the ability to trade spot on margin, leverage or financing. And you have the exclusive regulatory regime of the CFTC. so you don't need to obtain all these state licenses. And then at the top of that, you have the DCM, which is also allowed to engage in perpetuals and, other types of derivative instrument trading on its platform. And that similarly has the exclusive regulation of the CFTC.

David Hoffman:

[28:37] So prior, maybe we can just use Coinbase as an example here. Coinbase got started. It got its license in its first state. I believe Brian was in California at the time. So maybe it got its first license in California. Doesn't matter if this is true or not, just using this as an example. And then as Coinbase wanted to expand to service other customers, they would have to go state by state by state to get license by license by license to expand its market to the entire 50 states. Is that the step that is being removed by crypto asset markets, the new regulation cam by instead, you know, Coinbase in this world, in this new world, or any sort of future exchange is born, they get it, they are in a state, they register in a state to start. But then in order to go to access the whole rest of the United States, they can simply go to the CFTC and use regulation crypto asset markets to be

David Hoffman:

[29:29] homogenous across the entire country rather than having to do the whole patchwork game. So we're eliminating that step. Is that the through line here?

Michael Selig:

[29:37] Yes, we've created an option at the federal level. So it's not... A requirement that you go to the CFTC. If you do want to offer margin leverage or financing, of course, you do have to come into the federal regime, but you don't have to come there if you don't want to, and you just don't offer those products. I also can analogize it to the banking model. So if you're familiar with the banking model, there are state chartered banks, and there's also federally chartered banks, and they can do different things. The states provide a list of permissible activities that they put in your charter, and you can go about and engage in those. And certain states have reciprocity with other states, so you can offer your banking services into those states that allow for that. At the federal level, you're able to offer at a federal scale across the country, and you have other permissible activities that you can engage in. So it's sort of a choose-your-own model if you want to go state-by-state and pursue the licensing across the country like Coinbase and others have. You can do that. The issue at the state level is.

Michael Selig:

[30:38] It's important to flag for a lot of these companies, and they've dealt with it over the years, is some states say, we don't like crypto. And so the requirement for surety bond or for capital is going to be so extraordinary that you have to over collateralize every amount of crypto that you have in your custody. And so it's impossible effectively to get the license. One of those states has been Hawaii. I think Hawaii has maybe amended some of its policies over the years to allow for more crypto transactions in the state. But you have these states that can effectively dictate the model across the country, or at least make it really challenging to operate and service customers in a state. So some exchanges might say we're just not going to offer there. And New York's another good example. Bit licenses are not easy to come by.

Michael Selig:

[31:27] Many years. And so, you know, virtually all of these crypto companies get threatened out of New York with this whole bit license regime. And it's not quite clear. For example, there's a software developer carve out in there, but it's not ironclad. And so many of the firms even building layer one protocols have been concerned about operating the state. Also, firms that are just doing pure market making. They're not actually even taking customer funds or acting on behalf of a customer. They're acting as their principal. So they're trading on their own behalf. Some of those firms have had to go and get a bit licensed. So some of these exchange requirements really intended to focus on, again, these early currency exchangers have been applied so broadly that I think clarity is really important. And that's why this Clarity Act, which I'm disappointed it didn't get to the president's desk, but the Clarity Act would have actually required all of these exchanges register with the CFDC and set a single standard. We don't have the authority to do that under our statute, but what we do have the authority to do is allow for a federal option, and that's exactly what we're doing.

David Hoffman:

[32:35] Federal carrot for them to come in and get some new features, I think is also one of the big reasons why an exchange, an onshore exchange might come to you guys to do this. It's the big feature what you talked about with giving retail access to margin or leverage inside of the spot market. And so again, just using Coinbase as the example, like in the way that Coinbase works today is like I deposit $1,000 and then there's $1,000 in my account and I can buy $1,000 of Bitcoin. With this new regulation CTX, regulation crypto asset transactions, it's a little bit different. And now Coinbase, if this proposed rulemaking is accepted and made into a rule, individual spot retail people like me get margin, get leverage. Can you go into that a little bit more and how that fits into this whole structure?

Michael Selig:

[33:27] Yeah, so when you're trading on the exchange, the exchange would be able to have effectively a drop down or some other prompt and allow you to choose to trade on a margin basis, a leverage basis, or a finance basis. And every exchange might be different in terms of how they carry that out. Our framework is a principles-based one, so we don't tell exchanges exactly how to offer their business, but we do have certain requirements, principles-based requirements around how they do so. That gives a lot of flexibility to the exchanges, which I think is a great thing. But effectively, as a trader, what you would expect is you go to the exchange, you want to purchase Bitcoin, maybe you have a bunch of other crypto assets in your custodial wallet. And so you can trade on margin, you can say that I will take these assets in my wallet, let's say you've got ETH and Sol and whatever else, you pledge those as collateral and you can go trade. And of course, if the price of Bitcoin goes down, you get margin called, you might have to add more to your account. But it allows you to trade and effectively leverage the capital of your assets instead of just having these sit idle in your wallet. You can use them to go and take positions. And the margin requirements would be set by the exchange in consultation with the CFTC.

Michael Selig:

[34:41] But they would be consistent with what we have in perpetuals and other futures markets in crypto, which has been around 7x is really the highest we've gone so far. It's not a hard rule. That's just where it's landed so far. But we have a margin process where methodologies are set by the exchange and worked through with the staff.

David Hoffman:

[35:00] And this is just giving onshore crypto exchanges something that feels like feature parity with traditional brokerages. So Charles Schwab, Robinhood, TD Ameritrade, this is all they've been offering margin financing leverage to their customers based on their portfolio for decades now, as long as I can remember, as long as I've been in finance. And so this is just enabling centralized crypto exchanges to have the same sort of feature set that we've expected from our brokerages elsewhere.

Michael Selig:

[35:28] That's exactly right. And it's also available offshore. This has been incredibly popular offshore. And so people come to the United States and say, why can't we trade on margin? And why are you as an agency enforcing against exchanges that allow it when you haven't created a path for it? And so we're creating the rules to allow this to happen. And we want to make sure, of course, But traders on the exchanges have the same protections that they have in the brokerage account, whether it's Charles Schwab or otherwise, as well as offshore. A number of these foreign regulators have been very strict in terms of making sure that there are protections for customer funds. And similar to in the wake of FTX, how some of the actually CFTC regulated entities, protected customer funds. They had a derivatives exchange that segregated and protected customer funds and didn't fail in the same way as their money transmitter licensed entities and other foreign entities. But there were some foreign regimes where they had very strict requirements around margin and segregation of funds. And those exchanges, similarly, the subsidiaries protected customer funds. So we're just making sure that Americans have best in class protections. And we're really trying to set the gold standard here that will protect customer funds and make sure we're competitive globally.

David Hoffman:

[36:43] I want to connect something for the listeners. You talked about the trilogy of the rulemaking first from the SEC with their original rulemaking. I can't remember the name of it. But then also the two new rules that we're discussing here today, regulation CTX and regulation CAM. When we first had you on, as you were named chair, you talked about wanting to harmonize regulation between the SEC and the CFTC. And then now we have these trilogies of rulemakings, first one from the SEC and now two from the CFTC. Is that what you were, is these what you were talking about? That's what you were referring to. These are trilogies. I'm also getting like an image of like, well, these are puzzle pieces fitting into each other. And because you have just been talking with SEC chair, Paul Atkins, you guys can work together to draw lines as to which regulation goes under which rule to make sure that these three rules together harmonize and work together to create the regulation that they are intended to create. Is that the story here?

Michael Selig:

[37:43] That's exactly right. We want to make sure that there's a harmonized and consistent regulatory framework. For so many years, the two agencies have been locked in turf battles. Under the last administration, of course, Gary Gensler, all of our favorite SEC chairman, he used to fight all the time with Chairman Benham. I mean, it appears that they didn't even agree on what's a commodity and what's a security. And so we're ending that turf battle once and for all. We've put in place a memorandum of understanding between the agencies to work together to make sure that we're totally harmonized and consistent across our policies. And that includes crypto. So we have, as I said earlier, done this joint interpretation, laying out what's a security and what's not. The SEC's regime around, Crypto asset distributions will fit right in as a puzzle piece with our market structure. And I think there's even a possibility of a world where we continue to harmonize and allow for broader trading of, for example, tokens that are associated with an investment contract. Because the tokens themselves are not the securities, but the investment contract is. So we need to take special care around the trading of those products because they touch both jurisdictions. But the products that are no longer associated with an investment contract per the red crypto, which is the SEC's regime, red crypto assets.

Michael Selig:

[39:02] As long as the token is separated from the investment contract and is safe harbored under that rule, then it can go trade in our market. So all of this fits together very well, and we're going to continue to harmonize in future rulemakings and other areas. But I think that's an important message as well for the American people that we're done fighting. We want to make sure that there's a regime that makes sense. We don't want an exchange coming to market and getting sued by the CFTC and then sued by the SEC, and the two are fighting over what the products trading on the market are. You know, we did see, for example, with many of the exchanges, you know, even the mango markets incident, which, not necessarily, you know, an example of something that was good behavior, but both the agencies went after the same person and had similar allegations. So one agency should be policing certain products and the other one policing other products. And so the agencies need to agree on what's what for that to happen. And that's exactly what we're doing. We don't want to waste taxpayer dollars fighting between the two agencies. We want to not waste those dollars,

Michael Selig:

[40:08] use them effectively to police and protect American people.

David Hoffman:

[40:11] I want to go back into history a little bit and get a little bit more of some lessons out of you to the best of my ability. When the CFTC enables margin from a centralized exchange, an onshore centralized exchange like Kraken, Coinbase, It seems we are integrating different businesses that, to my understanding, in the TradFi world have been segregated. And this is like, so Coinbase is an exchange. I think its corollary is a clearinghouse. It clears transactions and spits out dollars or Bitcoins between the different parties. It clears things. Now we are also allowing it to provide margin, which is typically what a brokerage does. But a brokerage in the TradFi world is not a clearinghouse. And this goes back to the Commodity Exchange Act of 1936, which required futures brokers to segregate customer margin funds. And in the securities world, the SEC's 1972 customer protection rule established possession and control and also reserve requirements intended to prevent customer assets from financing the broker's unrelated activities, such as proprietary trading, something that we saw in the great crypto contagion crisis of 2022. I think maybe to illustrate some of the tension here for the audience, you could imagine that

David Hoffman:

[41:32] That there's an exchange who has an affiliated lending business who has financed a very large customer on that exchange. Now, imagine if this customer owns a lot of Bitcoin, but Bitcoin falls and this customer is approaching default. The clearinghouse of this one entity, the clearinghouse risk team, wants more collateral from this customer or immediate liquidation. The lending division wants time for this customer because the liquidation would crystallize its loss and they would have to deal with that. The exchange wants the customer to keep on trading. And then if all of this is happening under one roof, management has to just balance its own interests of its independent divisions. Now, to my understanding, in the TradFi world, these are three segregated entities. And when they are combined together, it might create a perverse outcome that historically we have segregated. So there's been historical precedent for segregating these services. And this is something that I know the TradFi world was pointing at crypto, looking at like, look at these services, look at like these exchanges doing all of this integrated services that we've learned the lessons of from the Great Depression in the 30s. And then later on in the 70s. Why now do we think it's correct or okay to combine these services under one roof?

Michael Selig:

[42:54] So let me be crystal clear, because we don't believe that that is the case. And that's exactly why we're offering this federal option. So under the state regimes, to your point, this is exactly what's happening now. It's not even a hypothetical. You're able to offer... Look no further than, for example, BlockFi, which had the lending business, it's money transmitter business. It was tied into other businesses and was lending assets out from customers' wallets and paying interest and all of that and allowing people to trade crypto. So these types of businesses have existed. Many of them have failed. Some of them still exist today. The federal option actually is not an all-in-one. So, for example, under the crypto asset market regime or under our DCM regime, you have separation of the broker, the exchange and the clearinghouse. The broker is the customer facing piece of the equation. It would custody customer funds or work with a custodian to custody those funds, segregate the funds and is walled off. Whether all these entities are owned by the same holding company or not.

Michael Selig:

[44:08] It's walled off from the other two business lines. So, for example, in the case where there's vertical integration, we've put out actually a vertical integration rule proposal that we'll hopefully finalize in the near future. And this will apply just as much to the new regime with CAMS as to our existing DCM regime. There are certain conflicts of interest requirements that we have in place today, but this will actually bolster those, make sure that there's actually more granularity in our rules than currently exists around these types of models because we are seeing more of them these days.

Michael Selig:

[44:42] You would have the brokerage separated off. That's what's called a futures commission merchant within our markets. But that would be the customer facing piece where you would obtain the leverage financing margin and that connects into the exchange itself. So the exchange itself is the order book, the matching engine, the execution piece of the equation. That's where customers would go to trade through their brokerage account. And then you have the clearinghouse that handles the customer funds that have been moved on from the Futures Commission merchant for settlement to the clearinghouse. And the clearinghouse, of course, will call margin to the FCM where required to do so. So all of this is separated. We do have the same sorts of requirements we have in our traditional financial markets that we're bringing over to crypto, acknowledging that there are some unique aspects of how these exchanges operate and some unique aspects around how the assets settle on chain and how they're custodied and all of that. But we think that's just as important today as we did in the time of FTX. We saw the collapse of that platform and the failure to have in place conflicts of interest prevention.

Michael Selig:

[45:51] Alameda was getting special trading privileges on the exchange. As a market maker, you saw the ability to go into negative balance as that entity. You saw customer funds, as I mentioned, wired into Alameda's bank account. So it was a total disaster. There was no compliance program to speak of. I think if you go back and listen to some of the hearings and the bankruptcy proceeding, I mean, John Ray, I think, was the... The CEO we took over during the bankruptcy was like, this thing had absolutely no legal compliance to speak of. It's the