This is our last meeting of 2023, a year where derivatives markets have remained stable despite bank failures and geopolitical events.  We can’t take that stability for granted.  Threats are always changing.  The CFTC’s responsibility includes ensuring that markets and critical market infrastructure remain resilient.

We have our first proposed cyber and operational resilience rule for swap dealers and futures commission merchants, a rule that I support.  FBI Director Christopher Wray has spoken about how malicious cyber actors seek to cause destruction in U.S. critical infrastructure sectors, including agriculture and energy.[1]  Cyber resilience has been a top priority of mine.  I hope that this rule can help advance our markets from cyber response to cyber resilience.

We also consider two matters related to clearinghouses that affect the crypto space.  Clearinghouses play an important public interest role—they are critical market infrastructure intended to foster financial stability, trust, and confidence in U.S. markets.  Dodd-Frank Act reforms increased central clearing, thereby increasing financial stability, but also concentrating risk.  It is critical that the CFTC maintain vigilance in its oversight of clearinghouses to identify and address risk to promote financial stability and avoid systemic risk.  That is always my mindset in reviewing matters related to clearinghouses.

Both matters today center around bespoke market structures not contemplated by the Commodity Exchange Act that envisions the traditional market structure where separate entities serve as FCMs, exchanges, and clearinghouses.  In Bitnomial—a so-called vertically integrated model—the FCM, exchange, clearinghouse, and trading firm would be affiliated, with the same owner.  The proposed Member Funds rule addresses another bespoke market structure, a direct-to-retail model that removes the FCM—a so-called disintermediated model.  Both are popular with crypto and event contract trading, two areas where we have seen a rise of retail participation.

When we break from the traditional market structure, we lose critical checks and balances.  It takes careful assessment to determine whether and how we could replace those checks and balances.

On the Member Funds rule, I have asked for more time for the CFTC to work on this rule, which would be our first rule on a disintermediated structure.  I am strongly in favor of strengthening customer protections for retail participants, including banning commingling of funds.  However, under this disintermediated market structure, retail lose their status as customers, which has serious consequences.  They are essentially being put into the same role as an FCM that is a clearing member.  We received the proposed rule late afternoon on the Wednesday before Thanksgiving, exactly three weeks ago.  There was zero advance engagement with Commissioners on its contents, in contrast to the cyber rule.  There are some really important issues including what happens when we lose the checks and balances from taking out the FCM. Anti-money laundering and countering terrorist financing is one.  This is particularly important given crypto’s role in funding illicit finance including terrorism.  There are recent stories about Hamas using crypto for funding.[2]  I also do not know if retail realizes the position they are put into, and I think it’s important to explore disclosures.  I have other concerns. One is that FCMs are required to holding funds in regulated entities, but that requirement is lost once the FCM is removed.  That means retail funds could be put in crypto affiliates who are outside the regulatory perimeter.  These are just some of the issues that I think our time would be well spent exploring over the next couple of months and consider as part of this rule.

Today we also consider Bitnomial’s application to be a vertically integrated clearinghouse.  This is a precedential decision and would be the first Commission vote to approve a vertically integrated model.  We are in the middle of a public consultation on vertical integration,[3]  and concerns with vertical integration have been expressed by the White House,[4] the Financial Stability Oversight Council (FSOC),[5]  Treasury Secretary Janet Yellen,[6] and other banking regulators.[7]  At the end of September, we received so many comments expressing serious concerns about conflicts of interest risk, risk of customer harm, anti-competitive risks, contagion risk, financial stability risks, and systemic risk.  That means the stakes are high if we get this wrong. I do not understand why the Commission would rush to register this small start-up company, thereby setting precedent, without completing the analysis that we are in the middle of right now.

I want to thank the staff for their hard work, and all who have engaged on these issues—your voice matters.