Remarks as Prepared

Good evening.  Thank you David Wright, Didier Cahen, and everyone at Eurofi for coordinating this week’s exceptional convening, here in Stockholm, Sweden. Ahead of my remarks, please note that the views that I will share today are my own.

Events over the last several years reveal notable fragilities within asset classes among critical financial market intermediaries and more generally across the financial market ecosystem.  On the heels of a global health crisis—the onset of the COVID-19 pandemic—monetary and fiscal policies endeavor to effectively address a confluence of challenging conditions driving macroeconomic indicators, including international supply-chain disruptions, persistent and extreme volatility and inflationary pressures.  Geopolitical events, most significantly Russia’s invasion of Ukraine, further exacerbate many of these issues, creating remarkable price volatility affecting key markets that we oversee and simultaneously impacting trading volumes on global platforms.

During this same period, we have witnessed the continuing development and adoption of innovative technologies.  This includes an explosive growth in the integration of artificial intelligence, marked by expanding use cases for supervised and unsupervised machine learning, natural language processing, neural networks, the conceptualisation of web 3.0, a decentralised technological application that enables peer-to-peer engagement and empowers content generators not only to read and write but to also own their contributions to the internet.  Coders are carefully developing public and private-permissioned and permissionless internet-based architecture.  Migration to the cloud and the potential for cloud computing raise important questions among market participants as well as financial market and prudential regulators.  Increasingly, quantum computing appears less like science fiction.

Over the last decade, a growing number of digital start-ups launched an impressive bid to disrupt one of the most exclusive sectors of the economy.  Armed with a nascent technology that harvests vast quantities of data and algorithmic platforms capable of interpreting the data, a host of insurgent developers have revived historic debates regarding the architectural design and regulatory framework of the financial markets industry. Leveraging successful disruptions in payments systems, banking, and securities and derivatives markets, a cadre of start-up financial services firms or fintech firms have emerged and, in some instances, captured the spotlight.

Two weeks ago, I had the opportunity to travel to Kenya to meet with the Governor of the Central Bank, the Chief Executive Officer (CEO) of the Nairobi Securities Exchange, and the CEO and President of MPESA.  For those who are not familiar, M-Pesa is a mobile money payment services platform.  MPESA’s story illustrates the promise of innovation and the potential for innovation to achieve financial inclusion.

Almost two decades ago Vodafone and Safaricom launched M-Pesa with a handful of pre-pay mobile subscribers.  Today, MPESA is the largest mobile payment network in Kenya and one of the largest in the world.  M-Pesa hosts 51 million customers and facilitates over $315 billion in transactions per year.  M-Pesa allows users to deposit money into an account, store it on their cell phones, send balances using PINs secured by SMS text messages to other users, and enable buyers and sellers of goods and services to redeem and access purchases.  Users are charged a small fee for sending and withdrawing money using the platform.  M-Pesa represents the potential to develop platforms that give customers access to banking services, reduce transaction costs, and otherwise overcome the endemic frictions that have challenged access to financial services for millions.[1]

As fintech payment and investment platforms proliferate, we are witnessing a shift in the demographic interested in engaging with financial markets.  I noted earlier on our panel that markets have witnessed an uptick in retail market participation. While the class of retail market participants should not be viewed as a monolith, it should be presumed that foundational protections long-established to protect institutional investors and to safeguard market integrity more broadly, are very much needed when retail investors enter markets.

Crypto market crises and recent events reveal important observations regarding two classes of market participants.  A recent Bank of International Settlements study carefully details market activity in crypto-markets. According to the study, “[a]s prices rose, more and more users entered the crypto system. Between August 2015 and its peak in November 2021, the price of bitcoin rose from $250 to $69,000. Meanwhile, the monthly average number of daily active users grew from around 100,000 to more than 30 million globally.”[2]

The study also evaluates losses during the crypto crisis and illustrates that market participants who invested small amounts of capital in crypto spot markets, typically buying a fraction of a cryptocurrency coin or token, often purchased during periods when prices were the highest and when sophisticated investors were engaged in a sell-off.[3]  According to the study, as losses resulting from the crypto crises mounted, major exchanges that execute trading and settlement for retail investors witnessed a marked increase in account activity and upticks in trading volume and notably significant sell-offs by large and sophisticated investors.

As I have noted previously discussing this study, an analogy proves illustrative. The study describes the sophisticated investors, those who own one to 1,000 crypto units, as “whales,” and the retail investors, who own less than 1 crytpo unit, as “krill.” The authors observed that when the seas become stormy in crypto markets, the whales eat the krill. Further, the study details increased retail market participation or exposure as more pronounced in emerging economies, such as Brazil, India, Pakistan, Thailand and Turkey.[4]

I have also previously noted that beyond retail customers engaged in spot market transactions, it is also important to recognize a point of inflection in the engagement of certain institutional investors in crypto markets.  Immediately after FTX’s collapse, two Canadian pension funds acknowledged investments in FTX affiliates.  In 2019, the Ontario Teachers’ Pension Plan (OTPP) launched the Teachers’ Venture Growth Platform.[5]  In October of 2021, the Ontario Teachers’ Pension Plan invested $75 million in FTX International and its US entities. Later, the Ontario Teachers’ Pension Plan doubled down on that investment, adding another $20 million into FTX US.[6]

Similarly, Caisse de dépôt et placement du Québec (CDPQ) experienced significant losses on its investment in Celsius Network. CDPQ had invested $150 million in crypto lending platform Celsius Network.[7]

At the CFTC, I have raised alarms and called for the Commission to carefully and thoughtfully engage our fellow market regulators in a collaborative process to build a  cryptomarkets regulatory framework.  I am also mindful that a number of initiatives have been launched here in Europe, in the UK, and in the United States to begin to bring order to this market.

A number of initiatives seek to outline a regulatory reform.  As the panels today have described in great detail, the European Commission has effectively launched a trilogue process, among the European Commission (EC), the Council of the European Union and the European Parliament, and advanced adoption of the Markets in Crypto Assets (MiCA) regulation.  The Council and Parliament reached a provisional agreement on MiCA on June 30, 2022.  The UK Financial Services and Markets Bill seems to be advancing.[8]  The Financial Stability Board has initiated a consultation to introduce a regulatory framework.[9]  IOSCO launched workstreams on crypto assets and DeFi.[10]  CPMI IOSCO published guidance on the application of principles of financial markets infrastructure to stablecoins.

I would argue that in many ways, the macroeconomic challenges in financial markets have demonstrated the effectiveness of post-financial crisis reforms designed to enhance governance, (specifically risk management policies and in particular, with regard to systemically important intermediaries).  These reforms have minimized single points of failures.  They have strengthened resilience by requiring appropriate allocation of financial reserves and other default-centred reforms.  Perhaps most importantly, the post-financial crisis reforms have encouraged cooperative regulatory responses that are global in nature.  I believe that the governance, risk management, recovery, and resilience reforms that we have adopted in the wake of the post-financial crisis offer a pathway for understanding the critical components that we must include in any crypto asset regulation.

Today, I would like to take just a couple of minutes to talk about the importance of adopting, implementing, and enforcing risk management governance reforms. Specifically, in talking to the Commission, in meeting with Congress, in meeting with industry participants, traditional financial market industry participants and crypto market industry participants as well, I have specifically suggested that each crypto asset intermediary would benefit from adopting well-established risk management practices.  These include internal risk governance practices that have long been part of traditional financial market businesses.  Firms should begin to assess compliance with these principles and inculcate a culture of compliance.  I would further posit that the industry would benefit from a robust dialogue that advances a set of blue-ribbon risk management principles.  This is critical because, in the context of the crypto crises and contagion, we saw that counter party risk is present in every market for all asset classes.  It is not unique to traditional financial markets and crypto markets are not exempt from being exposed.

Finally, in the absence of imminent final legislation that articulates a regulatory framework––I am hopeful that historic commitments to harmonization and coordination in developing and adopting international regulatory standards, equivalency determinations and cooperation in enforcement will continue to serve as guiding principles for the international regulatory community.

I am hopeful that through discussions over the course of this week and ongoing conversations among many of you will help to refine, enhance, and progress the rules that we are considering at the CFTC and more broadly across financial market regulators in the United States.  Thank you so much for giving me your time and attention today.