CFTC Commissioner Rostin Behnam on Regulating Crypto Futures and Derivatives

Editor’s Note: The U.S. Commodity Futures Trading Commission (CFTC) is responsible for regulating futures and options markets, but how is it approaching things like crypto futures and crypto-asset derivatives? Core to its jurisdiction for crypto markets is the definition of a “commodity” — but when is a token a commodity, and where does the CFTC’s power end and the U.S. Securities and Exchange Commission’s (SEC) begin? How does the CFTC think about market oversight in the face of decentralized exchanges? What underlying concerns animate the agency’s current thinking, what is the latest guidance, and how can startups engage?

Rostin Behnam, commissioner of the CFTC [more about him below], shares his thoughts on all this — as well as on regulations and policies for financial technologies underpinning the crypto-assets market — in this fireside chat in conversation with a16z’s Scott Kupor. It took place at the inaugural a16z Crypto Regulatory Summit, which brought together leading crypto experts and builders, other technologists, academics, industry executives, and government officials along with forward-thinking regulators to foster collaboration and the exchange of ideas. 

Kupor: We’re trying to make sure that we cover as much of the regulatory landscape as we can in the short period of time that we have here today. So, obviously, you just heard from FinCEN and OFAC. You heard previously from the chairman of the CFTC and it’s my privilege to have one of the commissioners from the CFTC, Commissioner Behnam with us. Thank you for coming out today.

Behnam: My pleasure, Scott. Great to be here.

Kupor: So, what we’re going to try to cover today is hopefully as practical as we can be about what is the role of the CFTC, what’s happening, and particularly, any advice that you have for entrepreneurs. But maybe we’ll just start with level settings a little bit since I know it’s an agency, perhaps, that a lot of people in this room haven’t dealt with on their regular basis. What are the goals of the agency, and how broad is the regulatory footprint, and how do you think about, in particular, what that means as it relates to crypto?

Behnam: We have a pretty clear mandate of fostering open, transparent, competitive markets. Obviously, that is a huge responsibility, but within it, comes a lot of enforcement, and surveillance, and market oversight. The one thing that I would actually encourage a lot of you to do is look up the definition of “commodity” in the Commodity Exchange Act. It is very broad. Historically we are a regulator that used to be a part of the Department of Agriculture. So, we have a number of enumerated agricultural commodities, and over the years that’s expanded to energies, minerals, financial futures, interest rates, and whatnot. So, it’s grown over the decades to encompass a pretty large number of commodities. The kicker, and this is where it applies to the crypto space, is at the end of the definition, it includes a phrase which was included, I think in 1975, “services, rights, and interests.” And that, you can imagine, is a pretty broad catchall where if you don’t have that hard or soft commodity or that financial future, you can pretty much encompass anything within that term. So, it’s broad. It’s a pretty interesting job in the sense that you can go from a conference like this to a grain elevator in the Midwest. Obviously, the chairman did a great job in giving an outline of what our history is with respect to futures, but then post-financial crisis OTC swaps coming at least within the purview of the agency. So, a broad purview, but one thing that I’ll end on with respect to this question is that definition aside, there has to be a product for future delivery. And if you don’t have that, then we don’t have jurisdiction. So, we are obviously a risk management agency as compared to the SEC, which is about capital formation. But you need a financial product that is based on future delivery.

Kupor: It’s funny since you mentioned agriculture, I will fully acknowledge my ignorance. I got an email about Ag months ago. He’s actually here today in the audience, one of the staffers on the Ag Committee, who asked me to testify for a crypto hearing and I admit I had to look it up and understand why I was getting called by the Ag Committee. So, I now understand obviously why that is.

Behnam: I was a former Ag Committee staffer myself, so I can give you the full explanation.

Kupor: One of the things that’s interesting to me, is there’s this concept at least as I understand it with the CFTC which is you have control over things like market and inflation and anti-fraud, but you don’t actually control spot markets. I guess, what does that mean? And again, if you think about that in a crypto context what does that mean, therefore? Where does jurisdiction begin and end when you think about crypto assets and when CFTC comes into play?

Behnam: So, two things. First is, and I alluded to this earlier, we regulate derivatives. For us as an agency, we are not a large agency. We don’t have an enormous budget and it’s appropriated by Congress. Historically we regulate derivatives. For us to regulate cash or spot markets would be a sea change for the agency and I’m not suggesting we couldn’t handle it; at the staff level we have very smart folks, but it is not what we do, and I would never advocate that we should regulate or oversee primarily cash markets. The connection that you made is the relationship between fraud and manipulation and the derivatives market. And at a very simple level just thinking about the connection between cash markets and derivatives: If there’s fraud or manipulation in a cash market, it’s going to obviously have a direct relationship to the derivatives market and cause essentially a price distortion. So, you’re not having that price discovery mechanism, which the futures markets are meant to have.

What’s unique about crypto, from my perspective, and as we had the Bitcoin futures launch now almost a year and a half ago, you think about underlying grain markets, you think about oil markets, gas markets, financial futures there’s a long history with these cash and spot markets of regulation. You know, grain markets, there’s a lot of programs at USDA which regulate and oversee how the cash market is regulated. There are these internal and very pretty robust mechanisms of regulation to oversee the cash market. Thinking about the Bitcoin futures contracts that were on CME and Cboe, I think their delivery months will expire shortly if they haven’t already. It was an unknown for us and it was a challenge where one, you had an index that was based on four different exchanges and then the Cboe contract, I think, was based off of Gemini itself. But no historical or no clear insight from our perspective of how the exchanges were regulated and I’m not suggesting there wasn’t. We spoke extensively and exhaustively with those exchanges and there were some conversations to build in relationships between the futures exchanges and the cash markets to make sure that we felt comfortable with some level of reporting and some level of relationship, so that we knew if there was, in fact, fraud or manipulation in those markets — the cash markets — we would have some access from a data perspective.

Kupor: Right. So, does that mean in some respects, again because you don’t have spot market contro,l that you don’t really care at the end of the day whether Bitcoin or Ethereum or any other token is itself declared a commodity or security? You only care to the extent there are derivatives on those assets.

Behnam: Primarily that’s our responsibility. And, you know, from a cash market perspective we don’t have enforcement staff on the ground. That’s again not our primary responsibility. We don’t have the resources. We don’t have the staff. A lot of it will come from customer complaints or issues that are raised and brought to us from outside sources about, “Hey, you should take a look at this. There’s some potential manipulation that we’re seeing or some price distortions that may be worth looking at.” And then we have surveillance staff and a number of people who are able to do examinations from that point.

Kupor: Got it. The Chairman touched on this a little bit in his talk, but I wanted to get your perspective as well, which is we’ve seen obviously end of 2017, CME and Cboe both listing kind of BTC futures. Can you talk a little bit more just about what was the role of the CFTC in that process and then how did you think about, and the chairman again alluded to parse this, but how did you think about kind of consumer protection concerns about potentially having futures versus market stabilization?

Behnam: So, we have a unique process at the CFTC. It’s called self-certification of products, of contracts. It is in statute, so we are required by law to embrace this mechanism where an exchange can come to us, work with us within a set of parameters, that the chairman mentioned, that are principle-based regulations we have — but there are a numbers of primaries that we have to work within when we look at a contract with respect to delivery day and how the contract is structured. But ultimately if the sort of structure of the contract fits within the domain of what our rules require, then the entity can self-certify the contract. And I’m very confident in the work that our divisions’ staff does to work with the entity and get the contract to a point where they can self-certify it.

The Bitcoin contracts were unique. We do have a mechanism within law where we have the self-certification process and then we do have an approval process. But I think it’s something that we care about deeply at the CFTC because there’s a great chart from pre-2000 when the law was changed to allow the self-certification where the number of contracts that were being listed in the futures exchanges was literally single digits per year, and the backlog at the agency was months long because you had to go through this very arduous registration and regulatory oversight process. The self-certification process created this relationship between the regulatee and the regulator which we was a healthy dialogue, and then the self-certification process really spurned a huge growth in the number of contracts. So, we’re cautious about the underlying contract, obviously, and the underlying market. We want to work with the market to ensure that our boxes are checked, so to speak, and we have some insight and that we know the cash market has some sort of guidelines to make sure that we have insight if there is fraud or manipulation.

Kupor: Right. But it sounds like volatility per se on its own, absent fraud or market manipulation, is not necessarily a reason why you wouldn’t want to see trading in BTC futures contracts.

Behnam: We definitely were thinking about the two Bitcoin contracts. Our Division of Clearing and Risk was very involved in the conversation because of that volatility. The chairman mentioned conversations we had with outside groups because you can imagine a clearing house has a number of clearing members, many of which would not participate or choose not to participate in these assets. And from their perspective, you can appreciate their concerns like, “Why should I take on potential risk as a clearing member of a clearing house when I don’t want to participate, but my fellow clearing member wants to participate?” So, those are all issues we have to think about.

Those are all issues we have to talk to the clearing house about so that we have a mutual understanding of what the risk is across the board and that the mechanisms are put in place so that we mutualize it appropriately, and that if you do have those price spikes and volatility which we did in December of ’17 you’re protected. And ultimately, it comes down to the customer. Another thing we have to think about, which the chairman again alluded to, was the history of the agency and how we hold customer money and customer property sacrosanct within our agency and we have to be very diligent about what we do and how we set up the regulations to protect it from a custodial perspective.

Kupor: Interesting. Just switching gears here, we heard earlier from George Osborne* in the UK and I think I read recently the agency signed an agreement with the UK’s FCA. Could you just give us a little bit of a context of how did that come about? What does it mean? And then, as you think about regulating as a US regulator, how much do you worry about or think about regulatory arbitrage or jurisdictional arbitrage where entities might be trying to either evade US law or find creative ways around it by looking at international law?

Behnam: A good analogy from my perspective is when you think about post-crisis you had the over-the-counter swaps market coming under a regulatory regime, and this was mandated by the G20 in 2009. The then chairman of the agency took a very aggressive approach. It was post-crisis. The economy was in shambles. There was a congressional mandate. There was a global mandate. And he took a very aggressive approach to set up our domestic reach of swaps regulation and it upset a lot of people overseas. The bottom line is, we moved first. We were first actors. Over time, and if you look at the global regulatory regime of swaps right now, it’s fairly cohesive.

There’s still a number of jurisdictions that have work to do, but we’re at a position now where under the chairman’s leadership we’ve been a little bit more, I think, receptive to refining our rules and our regulations, so that they’re more balanced and more harmonized with our fellow regulators. But if you think about what’s underpinning that is financial markets are global. It is absolutely the case with crypto. And you’d have to have a harmonized regulatory regime in order to avoid arbitrage because, in my mind, and tell me otherwise if there are experts in the room who would know, but very easily an individual can download an app, buy coins on a market overseas, connecting it to some bank accounts domestically, right. There’s too much connection there that we, as US regulators, have to be concerned about and that’s why we have to have these relationships with the UK, Singapore, Australia, as well where it’s just a matter of information sharing, thinking about how we don’t have the foremost sandbox per se, but it’s our engagement through Lab CFTC, it’s referrals. We’re each going to hear about different things from our constituents about potential fraud or manipulation, or sharing what sources they’re coming from, and potentially where that fraud or manipulation is. So, in the end, they’re good relationships. They build trust. And ultimately, I think, they will hopefully foster a more harmonized regulatory regime.

Kupor: That’s great. So if you shift from a kind of international engagement to domestic engagement as we’ve talked about there is another agency, the SEC, of course, that plays an important role in a lot of things we’re talking about today. And I don’t want to get you in trouble with your colleagues at the SEC, but how do you think about that relationship? How much is that particularly with respect to crypto? How much of it is you guys saying, “Hey, let’s let those guys decide what’s a security, what’s not a security? And then, let’s just wait for things to come over the fence because they tend to show up at the futures market.” Or what’s that working relationship look like to the extent that you can share it with us?

Behnam: It’s healthy for sure. It’s challenging and it’s not unique to this space. It’s been going on for decades especially in the derivative space. We have agreements going back to the early 80s, at least, and more recently with Dodd-Frank, where we parse up jurisdiction. Look, if you redrew the regulatory map and the Chancellor noted this, he probably would not draw it like the US system is today. We used to be a division of the USDA, but for good reason, but it is what it is. It’s not going to change. I think we all have very talented people. We all have very clear mandates. And I think above all else we all, Republican or Democrat, always put our best foot forward to work with each other, respect each other’s jurisdictional lines, and ultimately come up with solutions that will be cohesive and harmonized. It’s not easy. We don’t always get the end product we want. We always have more work to do. But it’s something that I know we absolutely try, and this is again not unique to any one party. Administration after administration tries to do it.

Kupor: Makes sense. In the few minutes we have remaining, let’s break some news. I know everybody has been so focused on the conference today, so you might haven’t seen it. Although, if you followed me on Twitter, you will see I tweeted it out. But you had an op-ed today in Bloomberg talking about a proposal for how can we move the dialogue forward on crypto. So, very appropriate to the conference here. Maybe for those people who haven’t had a chance to read it yet, give them a little bit of perspective: what you called for and then you reference a very ancient historical analogy for where this has happened before. Why don’t we start with that and then we can jump off from there?

Behnam: I actually drafted this as a rough draft a year and a half ago and it was after the Bitcoin contracts were launched. We were having a lot of conversations, a lot of folks, many in this room, were coming to the CFTC to discuss regulatory uncertainty, the challenges of developing from a market perspective a startup business. Obviously, the risks of going overseas, which I know Marc spoke about earlier, and it reminded me of something that I’d dealt with when I was in the United States Senate as a staffer, that you pointed out that Agriculture Committee has jurisdiction over the CFTC. I worked primarily on financial services issues, Dodd-Frank and the CFTC, but I did work on one sliver of Ag policy which was biotechnology. And biotechnology, which actually in many respects was first started in the Central Valley, a lot of academics at UC Davis back in the 80s, this was the next phase of plant breeding which actually started with the original sort of green revolution in the 70s and it was plant breeding in the lab. And it was in the mid-80s that the U.S. government was a little bit stifled with what we do with this technology. And there was not a clear understanding of what it would become in the years ahead. It is notwithstanding the obvious which I’m not going to determine any sort of opinion on but it’s genetically modified organisms, but it’s also water-resistant, heat resistant plants that Bill and Melinda Gates Foundation does a lot of work around in developing countries with any number of crops for food and nutrition for adults. So, it’s science. It’s a huge part of our agricultural production.

Bottom line is there was uncertainty about what to do. The Reagan Administration convened within one of its offices, which is the Office of Science, Technology and Policy, a working group, and it brought together all of the academics, the scientists, the policymakers, lawyers, the technologists, and over a three-year period they came up with what was called Coordinated Framework for Regulation of Biotechnology. It still exists today, and I make this point, it’s certainly not perfect, but as a policy staffer in the Senate, you had a situation where you had a lot of these young startup companies, many from California, coming to DC saying, “Okay, in the end, you had to get your seed regulated by USDA. You had to get approvals from the FDA for the feed element. And then, you had to go to EPA for plant protection, which is essentially pesticides.” Again, not perfect but it was a roadmap for the technology. And there were questions asked about do we get a dedicated regulator? Do we get Congress involved to write a new statute? And in the end, they said, “Let’s use existing statute. We’ll parse it up between the three agencies.” And it was just kind of an interesting thing.

I was at a conference three weeks ago in LA and it was the first time I had spoke with a lot of individuals I had engaged with a year and a half ago and nothing has changed from their perspective. They still fear regulatory uncertainty. They’re still talking about moving overseas. So, in my mind, you have a patchwork of agencies, and this is what the piece suggests, and I would encourage you all to read it. It’s very difficult for a chair or a secretary to move ahead singularly. You’re going to have turf wars with other agencies. You’re going to have statutory uncertainty, because to the chairman’s point, we have a decades-old statute which has to be transformed and interpreted in a modern way. And then, you have just the fear of risk taking. You don’t want to be the one who’s caught when something goes wrong. So, you need that leadership.

I’m kind of calling on the White House to use the model that they did with Ag biotech, convene everyone together, get Congress involved, have the conversation, think about all the questions exhaustively. And I’m not suggesting one or the other.

Where is this going in the next couple of decades? It was so fastening listening to Marc. If you brought up these questions to Congressmen and women and policymakers and talked about that story in the early 90s, when there was this divide between a payments-based or an ad-based Internet, and given the challenges we’re facing with privacy, national security, and I bring all these things up in the piece. You would have people on top of this issue so quickly because those are the relevant problems from a policy perspective that we’re facing, that these elected officials have to deal with, their constituents, and that’s how you elevate the issue to a point where, “Okay. We need a path forward now.” Because I can guarantee you if I asked any member of Congress, “How would you think if Facebook was based in China?” we would know what their answer would be.

Kupor: Yeah. So, have you heard back yet from the White House whether they have accepted your proposal?

Behnam: No. Probably as a Democrat I’m not going to respond, but it also gives me the opportunity to write that op-ed — it’s a long-term project. We’ll see what happens next November, but I think it’s a baseline for people to think about. Maybe, someone in Congress will read it and they’ll say, “Hey, this is actually a thought.” Unlike any other op-ed, right, we’ve got to raise the issue. We’ve got to talk about it. And whether it’s this administration or the next, it shouldn’t be partisan, it should be a conversation that everyone thinks about as a national interest discussion.

Kupor: So, we’re just about out of time. One last question. Any kind of other practical advice that you would give to entrepreneurs in the room, who are obviously trying to build crypto businesses, about when and how best to engage whether it’s with the CFTC or other regulators?

Behnam: Definitely engage. There’s been a couple of times where folks are like, “No. We don’t want the regulator in the room.” You heard that a little bit earlier today, right. Obviously, the folks who are here today from the state and federal level were engaged. We may be a unique bunch, but I do think by and large folks in the government want to learn. They want to educate themselves and they want to play a part in this economic development and job growth that I think this technology can provide.

Two, the story again that I’ll just mention what Marc said, those are the stories you don’t hear. When you explain your story, when you teach that lesson, bring up things that are relevant to policy issues that exist today. We learned this morning, or at least I did, that this is Internet potential 3.0. How are we going to improve on what issues we’re facing today? And that’s the privacy, that’s the national security, that’s the challenge to democracy and elections. Those are the things that will resonate with elected officials and get this issue elevated to a point where, “Wow. We have to do something.”

Third, all too often I take meetings, and people frame this technology, and it’s not unique to this technology, it’s every time they come to a regulator, they want to talk about what they’re thinking about as if it’s infallible. Nothing is infallible. I’m sure if someone came in the late 90s, if Marc was lobbying Congress or regulators in the 90s was the Internet perfect back then? You probably thought it was, but clearly, we’ve over time seen the fractures and the holes and where things went wrong. Think hard about what this technology can do on a positive note, but also think hard about what the risks are. As a former staffer and then as a commissioner I have a light dose of cynicism and skepticism. And I have to, that’s a part of the job. You want me to. You don’t want me to just think everything is great. But if you come to me and tell me that this is the solution to all of our problems, I’m probably going to be like, “I’m not sure about that.” Let’s have a discussion about what the positives are, what the risks are, and how we can create a path forward to resolve those risks and how nothing is going to be perfect. It’s all a risk-based balance. And in the end, I think, if the benefits outweigh those risks, you’re going to have thoughtful people wanting to move that conversation and that technology forward.

Kupor: Wonderful. Well, thank you, Commissioner Behnam for taking the time today.

Behnam: My pleasure. Thank you.

Rostin Behnam was nominated by President Trump as a Commissioner of the U.S. Commodity Futures Trading Commission (CFTC) on July 13, 2017; was unanimously confirmed by the Senate on August 3, 2017; and was sworn in to serve as a Commissioner on September 6, 2017 for term expiring in June 2021. Prior to joining the CFTC, Mr. Behnam served as senior counsel to U.S. Senator Debbie Stabenow of Michigan, Ranking Member of the Agriculture, Nutrition, and Forestry Committee. Mr. Behnam served as counsel to Senator Stabenow from 2011 through his 2017 appointment, focusing on policy and legislation related to the CFTC and the Department of Agriculture. Prior to serving Senator Stabenow, Mr. Behnam practiced law in New York City and worked at the New Jersey Office of the Attorney General. Mr. Behnam is a graduate of Georgetown University and earned a J.D. from the Syracuse University College of Law.

*to appear online once speaker grants permission

Our crypto newsletter is coming soon

Sign up to be the first to get it.