CFTC Chairman Michael Selig on new proposed crypto rules: We’re creating a federal option

>> WELCOME BACK. SQUAWK BOX THE CFTC STEPPING IN WITH SOME NEW PROPOSED CRYPTO RULES TO ESTABLISH OVERSIGHT AFTER CONGRESS FAILED TO PASS A LAW. JOINING US RIGHT NOW WITH SOME OF THE DETAILS IS CFTC CHAIRMAN MIKE CELLA. GOOD MORNING TO YOU. I KNOW YOU'VE BEEN FRUSTRATED, I THINK, WITH CONGRESS IN TERMS OF NOT PASSING THAT BILL IN. IN PLACE OF THAT, WHAT EXACTLY DOES THIS NEW FRAMEWORK DO? I'M ABSOLUTELY. >> DISAPPOINTED IN. >> CONGRESS AND NOT GETTING THIS BILL TO THE PRESIDENT'S DESK. IT'S BEEN A PRIORITY SINCE DAY ONE. WE'VE WORKED REALLY HARD TO GET HERE, BUT WE'VE GOT STATUTORY AUTHORITY AND WE'RE GOING TO USE IT. THE SEC IS DOING THE SAME. THEY ISSUED THEIR PROPOSED REG CRYPTO ASSETS, WHICH IS KIND OF THE FRAMEWORK FOR DISTRIBUTING CRYPTO ASSETS. AND GARY GENSLER WAS VERY CRITICAL OF THESE OFFERINGS, WHICH HE AND OTHERS REFERRED TO AS INITIAL COIN OFFERINGS THAT CREATED A PATH TO GET THE TOKENS INTO THE UNITED STATES WITH THE PROTECTIONS OF THE SECURITIES LAWS. BUT THE TOKENS THEMSELVES ARE NOT SECURITIES IN MOST INSTANCES, SO THEY NEED A PLACE TO TRADE. AND WE SAW FOUR YEARS AGO, WITH THE COLLAPSE OF FTX, MANY OF THESE EXCHANGES, EVEN IF THEY'RE LICENSED AT THE STATE LEVEL, DON'T HAVE MARKET BASED REGULATIONS. SO WE'RE PUTTING IN PLACE MARKET BASED REGULATION, ANTI MANIPULATION, ANTI-FRAUD SEGREGATION OF CUSTOMER ASSETS, SEGREGATION OF FUNCTIONS BETWEEN BROKERS EXCHANGES AND CLEARING. AND WE EXPECT CUSTOMERS TO, TO WANT TO TRADE ON THESE PLATFORMS THAT ARE FEDERALLY REGULATED. IT'S AN OPTION. WE DON'T HAVE THE ABILITY TO SAY EVERY EXCHANGE NEEDS TO REGISTER WITH US AS THE CLARITY ACT WOULD HAVE DONE, BUT WE CAN CREATE A FEDERAL OPTION. AND THAT'S EXACTLY WHAT WE'RE DOING HERE TODAY. >> WHAT DOES IT MEAN TO HAVE A FEDERAL OPTION? BECAUSE YOU SAY NOT EVERYBODY HAS TO DO IT THIS WAY. >> IT'S SORT OF LIKE THE BANKING MODEL, RIGHT? YOU CAN GET A CHARTER AT THE STATE LEVEL OR THE FEDERAL LEVEL, AND YOU'RE ABLE TO ENGAGE IN CERTAIN PERMISSIBLE ACTIVITIES WITH FEDERALLY REGULATED CRYPTO MARKETS. YOU'RE ABLE TO OFFER FRAUD, NOT FRAUD. YOU'RE ABLE TO OFFER MARGIN LEVERAGE OR FINANCING. SO THAT IS A SPECIAL AUTHORITY THAT YOU'RE NOT ABLE TO DO AT THE STATE LEVEL. STATES ARE ONLY ABLE TO OFFER MONEY TRANSMISSION ACTIVITY, RIGHT? THESE ARE ALL LICENSES, MONEY TRANSMITTERS. SO IT'S MORE OF A PAYMENT PLATFORM. THEY CAN'T ENGAGE IN MARKET BASED EXCHANGE ACTIVITIES. >> HOW MUCH LEVERAGE DO YOU ALLOW OR CAN YOU ALLOW YOU THINK IN THE CRYPTO WORLD? I ASK BECAUSE, YOU KNOW, OUTSIDE OF THE US, SOME OF THESE EXCHANGES, YOU KNOW, THERE'S 5100 TIMES LEVERAGE. >> THAT'S RIGHT. IN THE UNITED STATES, WE'VE NOT ALLOWED FOR THAT TO HAPPEN AT ALL. RIGHT. SO IF YOU EVEN LOOK AT OUR PERPETUAL CONTRACTS, THEY ACTUALLY HAVE LESS LEVERAGE THAN TRADITIONAL FUTURES CONTRACTS IN MOST CASES. WHEREAS IF YOU GO OFFSHORE, YOU SEE 100 X PLUS LEVERAGE. WE'VE NOT PERMITTED THAT. AND THIS WILL BE NO DIFFERENT. WE HAVE THE SAME MARGIN MODELS AND CONTROLS. SO THE EXCHANGES WILL BE WORKING TOGETHER WITH THE STAFF TO GET THESE MARGIN NUMBERS OUT HERE IN THE UNITED STATES FOR SPOT CRYPTO, FOR FUTURES, FOR PERPETUALS. AND IT'LL BE ALONG THE SAME LINES. WE'RE NOT GOING TO SEE EXCESSIVE LEVERAGE AT ALL. >> WE TALKED TO THE HEAD OF THE SEC WHEN WE WERE IN D.C. ABOUT A WEEK AGO. WE WERE TALKING ABOUT TOKENIZATION AND TOKENIZING DIFFERENT ASSETS AND THE LIKE. BUT ONE OF THE THINGS THAT'S SO INTERESTING ABOUT TOKENIZATION, BUT IT GETS TO FRAUD AND OTHER QUESTIONS, IS WHETHER YOU'D BE ABLE TO MONITOR TOKENS FOR INSIDER TRADING IN THE SAME WAY THAT YOU CAN MONITOR, FOR EXAMPLE, INSIDER TRADING IN THE CONTEXT OF CLASSIC EQUITIES AND SORT OF WHAT YOU THINK EITHER YOU OR THE SEC ARE DOING ABOUT THINGS LIKE THAT. >> WE'RE BUILDING OUT A VERY COMPREHENSIVE ON CHAIN SURVEILLANCE SYSTEM. SO OF COURSE IT'S NEW TO US, BUT WE HAVE BEEN LOOKING AT THIS FOR MANY YEARS IN THE CONTEXT OF ENFORCEMENT CASES. SO FOR OUR NEW ON CHAIN MARKETS, PLATFORMS THAT WANT TO OFFER DERIVATIVES AND CRYPTO DIRECTLY ON CHAIN, THIS IS SOMETHING THAT WE'VE BEEN BUILDING UP AND WORKING WITH EXCHANGES AND OTHER PARTICIPANTS TO GET IN PLACE, BUT FOR ENFORCEMENT PURPOSES, MONITORING FOR INSIDER TRADING. THAT'S OUR BREAD AND BUTTER. WE'VE BEEN DOING THIS FOR SOME TIME. WE OF COURSE WORK TOGETHER WITH THE SEC. WE HAVE A MEMORANDUM OF UNDERSTANDING BETWEEN THE AGENCIES. SO WE'RE WORKING TOGETHER ON CROSSES. THERE'S A. >> WHOLE BUNCH OF NEW EXCHANGES, WHETHER THEY BE PREDICTION MARKETS OR OTHER THINGS, WHICH TYPICALLY HAVE NOT HAD ANY KIND OF, YOU KNOW, ALL OF THE THINGS THAT I UNDERSTAND HAVE BEEN REPORTED IN TERMS OF INSIDER TRADING OR OTHER KINDS OF PROBLEMS HAVE BEEN REPORTED BY A COURT OR BY A POLYMARKET OR BY BACK TO YOU, AS OPPOSED TO YOU DISCOVERING IT ON YOUR OWN. >> IT'S A COMBINATION OF BOTH. THE WAY THAT OUR MARKETS WORK IS THAT THE EXCHANGES THEMSELVES ARE SELF-REGULATORY ORGANIZATIONS. THEY HAVE AN OBLIGATION TO SURVEIL THEIR MARKETS. AND THAT'S THE REASON WE HAVE, FOR EXAMPLE, AN AGENCY OF ABOUT 850 PLUS. YOU KNOW, TYPICALLY IT'S BEEN BETWEEN 800 AND 51,000 PEOPLE. AND THAT ALLOWS US TO BE LEAN AND SAVE TAXPAYERS DOLLARS. BUT WE RELY ON THE EXCHANGES THAT WE PROVIDE A LICENSE TO, TO MONITOR THEIR MARKETS. AND THEY'RE GIVING US INFORMATION. >> DIFFERENT, FOR EXAMPLE, THAN THE WAY, YOU KNOW, STOCKS ON THE NASDAQ OR, OR THE NYSE WORK, MEANING THEY ARE REPORTING. BUT ALSO MY UNDERSTANDING IS THAT THE SEC HAS A MUCH MORE SORT OF ROBUST SURVEILLANCE SYSTEMS. IS THAT NOT. >> THAT'S INCORRECT. WE HAVE THE SAME SORTS OF SURVEILLANCE SYSTEMS IN PLACE AT THE CFTC, AND WE'RE ENHANCING THOSE. I MEAN, WE'RE IN CONVERSATIONS WITH THE SEC STAFF ALL THE TIME. OUR SYSTEMS ARE COMPARABLE. AND IN MANY WAYS, THE SEC WORKS TOGETHER WITH OUR STAFF TO LEARN. WE LEARN FROM THE SEC. SO WE'RE BUILDING OUT THE SIMILAR KIND OF SYSTEMS IN BOTH PLACES. AND WE'RE ALSO WORKING TOGETHER THROUGH OUR MEMORANDUM OF UNDERSTANDING TO MAKE SURE WE'RE SURVEILLING ACROSS MARKETS. >> HEY, YESTERDAY WE HAD JUST A FOLLOW UP ON ANDREW'S POINT. YESTERDAY WE HAD GUNJAN BANERJEE FROM THE WALL STREET JOURNAL HERE. SHE HAD JUST WRITTEN A STORY ABOUT HOW A LOT OF QUANTS, YOUNGER 20 SOMETHING QUANTS AND COMPUTER SCIENTISTS ARE REALLY GETTING INVOLVED WITH THE PREDICTION MARKETS IN PARTICULAR. AND SHE KIND OF EXPLAINED IT AS SEEING BIGGER INEFFICIENCIES IN THESE MARKETS, VERY MUCH LIKE THE CRYPTO MARKETS A FEW YEARS AGO, AND WHERE YOU SEE INEFFICIENCIES FOR THESE, YOU KNOW, YOUNGER GUYS WHO ARE KIND OF GOING IN AND SETTING UP THESE TRADES, THEY TAKE ADVANTAGE OF THE INEFFICIENCIES. AND THAT'S WHAT THAT'S HOW MARKETS ARE MADE AND HOW THEY BECOME MORE ROBUST. BUT SHE SAID THAT SHE THINKS THERE'S MORE INEFFICIENCIES IN THESE PREDICTION MARKETS RIGHT NOW THAN OTHER PLACES. AND THAT'S WHY IT'S BECOME A PLAYGROUND FOR SOME OF THESE QUANTS. OBVIOUSLY, THEY'RE TAKING ADVANTAGE OF RETAIL INVESTORS. IF THAT'S THE CASE. ARE YOU CONCERNED ABOUT THAT? DO YOU THINK THAT RETAIL INVESTORS WHO ARE BETTING ON PREDICTION MARKETS DON'T GET A FAIR SHAKE BECAUSE OF THESE INEFFICIENCIES? >> WELL, WITH ANY NEW MARKET, YOU'RE GOING TO SEE THIS SORT OF BEHAVIOR. WE SAW IT WITH RAILROAD CERTIFICATES. WE'VE SEEN IT WITH THE EARLY DAYS OF THE STOCK MARKET. WE'VE SEEN IT IN OUR MARKETS FOR MANY, MANY YEARS. AND THESE MARKETS ARE NEW JUST LIKE CRYPTO IS NEW MANY YEARS AGO. WE'RE GOING TO SEE, YOU KNOW, COMPUTE MARKETS DEVELOP AS WELL. AND THERE'S GOING TO BE PROBABLY SIMILAR, YOU KNOW, MISBEHAVIOR IN THOSE MARKETS. SO OF COURSE WE'RE GOING TO CRACK DOWN AND POLICE IT. AND IF YOU LOOK AT THE ENFORCEMENT ACTIONS WE'VE BROUGHT OUT IN THE LAST SEVERAL WEEKS AND MONTHS, MANY OF THEM HAVE BEEN IN THIS SPACE WITH PREDICTION MARKETS. AND SO, YOU KNOW, I CAUTION MANY OF THESE FIRMS THAT THINK THEY CAN GET AWAY WITH MANIPULATIVE STRATEGIES OR INSIDER TRADING OR THE LIKE. WE'VE CRACKED DOWN ON INSIDER TRADING. >> THESE ARE JUST KIND OF FINDING PLACES WHERE, YOU KNOW, THERE'S A BIG SPREAD AND IT PAYS. IT PAYS TO TAKE ADVANTAGE OF IT. AND IN MANY CASES, SHE SAID, THE PREDICTION MARKETS ARE KIND OF WOOING THAT BUSINESS. THEY WANT THE VOLUME OF TRADES THAT COMES WITH IT. BUT THE PROBLEM IS FOR EVERY ONE OR THERE'S A LOSER, RIGHT? >> AND THE MARKETS BECOME MORE EFFICIENT OVER TIME. I MEAN, THAT'S WHAT WE'VE SEEN WITH ALL OF THESE PRODUCTS. IF YOU LOOK AT CRYPTO, YOU KNOW, THERE WAS VERY WIDE SPREADS IN ALL THESE PRODUCTS. YOU KNOW, IT'S GOING TO TIGHTEN UP. AND WE EXPECT WITH MARKETS, JUST AS WE'RE DOING WITH CRYPTO, JUST AS WE'VE DONE WITH PREDICTION MARKETS. YOU KNOW, MY CONCERN IS THAT YOU'VE GOT THESE UNREGULATED MARKETS IN VARIOUS PLACES, OR THE STATES THINK THAT THESE PRODUCTS CAN TRADE IN A CASINO, AND THAT'S GOING TO CREATE THE EXACT SORTS OF MARKET INEFFICIENCIES THAT YOU'RE TALKING ABOUT, MAKING SURE THAT WE APPLY THE SAME SORTS OF MARKET STANDARDS TO THESE PLATFORMS IS WHAT'S BEST FOR THE AMERICAN PEOPLE. AND I DO HAVE SERIOUS CONCERNS WHEN WE SEE STATES SUING OUR REGISTRANTS SAYING, HEY, THIS SHOULD BE REGULATED UNDER A TRIBAL COMPACT OR UNDER SOME STATE REGULATORY FRAMEWORK FOR CASINOS.