Cftc commissioner Kristen Johnson is Calling on Congress to modify a lot of Pieces of proposed digital asset Legislation to extend the U.S firm's Authority to conduct due diligence on Any company looking for to purchase a minimal 10 share of the equity curiosity in a Cftc registered Market participant Joining us to debate that's cftc Commissioner Kristen Johnson welcome Kristin Good morning thanks so much for Having me okay Um it's good to have you ever ever proper right here there's Been fairly a bit occurring significantly with Ledger X and and a wide range of completely different points But can you merely break down just a bit bit Some of the arguments that you simply simply've been Making Um about you already know let Direction Specifically and the place of the cftc Absolutely partly what I'd want to Share is that we now have a long-standing Um protection of uh partaking in a gentle Dialogue with Market members and Others who shouldn't registered Market Participants who search to build up Registrants in our markets it's a Critical Um line of dialogue should you'll on account of It is through this communication that we Are a company we're ready to affirm the Financial Health and well-being of any Entity that may develop right into a dad or mum
Company to an entity that is working In our markets and that's true all through Asset programs so that's experience Agnostic it's not explicit to crypto Markets uh individually it is really More about making sure the safety and the Soundness and stability of markets Broadly nonetheless we see it very sharply Brought into focus inside the context of Ledger X for a lot of causes first let's Recall that it's merely a number of years Ago that FTX by way of West realm shires Acquired Ledger X and in that Acquisition there was restricted visibility Into the dad or mum agency FTX there are Many critics which could be aggravated by Regulators failure to predict or foresee That FTX was a house of enjoying playing cards nonetheless actually one in all The best challenges on this context Is the reality is that this very small nonetheless really Important piece of Regulation Thank you for a clarifying that nonetheless can You make clear just a bit bit about why this Would be the place of the cftc Specifically on account of as everyone knows inside the U.S there's a wide range of debate over what Agency does what at any time when comes out to Crypto This is truthful uh and there's uh the reality is What I'd suggest is beneath the Securities Act of 1933 and the Securities Exchange Act of 1934 and Sec-based Regulation and inside the in Connection with the chapter code the
SEC has uh powers and Authority the FDIC The FED completely different chartering Um Financial Market Regulators have Authority in positive contexts as relates To a celebration shopping for an entity that is Registered of their markets so that's About Ledger X on account of Ledger X is Registered as a derivatives clearing Organization a DCM and a swap execution Facility with the cftc we're at current The regulator for this registered Market Participant so this isn't a Turf War This isn't a battle it really revolves Around when a enterprise makes the Decision that it want to be half Of a particular Financial Market Ecosystem and on this context it's the Commodity derivatives ecosystem as you Well know Ledger X has been facilitating Re retail Market participation completely Collateralized inside the spot market and in The context of the roof commodity Derivatives Um Bitcoin Futures and so what I'd like To highlight proper right here and emphasize is that Here we now have a market participant that Has made a acutely conscious willpower to Register and be part of the cftc Regulated ecosystem and our ask or my Specific ask I'm urging Congress and my Fellow Commissioners to be thoughtful About the necessity of constructing sure that When a enterprise open air of our ecosystem Acquires a enterprise inside our register
To operate inside our ecosystem it's Important for us to know positive data Information data regarding the agency Acquiring a registered Market Participant so commissioner Johnson I'm Gonna I'm gonna ask this question as if I'm pushing once more uh And that claims Pushback I I it's not primarily my Thought proper right here nonetheless let your ex survived Ftx's collapse and it did so one would Argue on account of they adopted the foundations of The cftc they adopted all the registry They they saved their they saved Everything clear they often did regardless of They wanted to do as they've been registered Into it didn't matter who owned it Um what about that argument that who Cares Wellens it as long as the entity Itself that is registered abides by the Rules and and has the liquidity required Etc and so forth Um why does it matter if it's owned by FTX or binance or Kim jong-un's uh Retirement fund or regardless of it is as Long as a result of it's going to get it's going to get to do what it Needs to do So I really feel it's a truthful question and It really raises um I really feel components that Are part of an important dialogue that we Have to start to have spherical exactly With the Contours of any intervention Particularly a legislative intervention Might be I I'd emphasize one factor you
Suggested which is that ledger X did in Fact comply that compliance is pushed in Part by our presenting to Ledger X Conditions or obligations for the entity Operating in our markets the reality is it is Helpful that we had a registrant who was Uh centered on and thoughtful about uh Acknowledging uh menace administration Customer segregation segregation of Customer funds Um Financial helpful useful resource requirements Setting aside reserves uh for in case of A moist day or additional importantly in case Of liquidity catastrophe Um these obligations that we imposed on Ledger X you're correct they serve wonderful They served their objective they've been match For objective they often have been environment friendly and Effectuating or making sure that prospects Assets prospects funds have been account Accounted for immediately accessible even In the context of the dad or mum agency Bankruptcy nonetheless no one could dispute no One could dispute that ftx's chapter Is a serious disruption it's not Merely A disruption for Ledger x actually one in all The many Um subsidiaries owned by the dad or mum Company nonetheless it's a extraordinarily important Market disruption I'd go toe-to-toe With anyone who would suggest in every other case I moreover take into account that the Ripple outcomes Not merely of the FTX chapter nonetheless of The broader daisy chain of crypto company
Collapses over the course of the latter Part of the spring and summer season season and fall Of 2022 so proper right here I'm referring to Tara Luna coming unpegged from the US dollar I'm thoughtful about three arrows Capital Voyager Celsius FTX ultimately In Block fi after which most not too way back the Crypto lending arm of Genesis what we Have to be centered on is that this disruption Is really Um problematic for all Market Participants engaged on this ecosystem Now it could be troublesome for others To impression counterparties for getting and promoting for Trading features or others who're Operating inside the ecosystem nonetheless it's Really doable for us to look as a lot because the Parent and say we'd want to know with Certainty that you will grant Representations warranties that you will Covenant to be sure that the company that You private will abide by our guidelines And that inside the event this agency Experiences a liquidity or solvency Crisis you are prepared to help this Firm navigate by way of the chapter Process unwind or perhaps lengthen strains Of credit score rating which is usually additional widespread the Role of the dad or mum to the subsidiary It's important proper right here to suppose that there Is a a sacred tie should you'll between The dad or mum and the subsidiary uh the Parent could be primarily essentially the most invested Person invested get collectively inside the success of
The subsidiary so it's important for us To have a relationship with the proprietor of Any entity that is registered to operate In our markets um I'm going to go Further proper right here and say {{that a}} custom of Compliance often begins on the prime and In the context of a enterprise which means Setting up a chief menace officer Chief Compliance officer establishing a board Of direct Well-informed and capable of Necessary to stay away from the corporate Governance failures and menace administration Failures that there are rumors floating About suggesting occurred at FTX I really feel I I'd suggest that that custom won't be Solely part of what's happening inside the Subsidiary nonetheless it's often influenced by What's happening inside the mom and father I really feel We're fortunate that no one reached into Ledger x's coffers and tried to Misuse purchaser funds in methods wherein we Believe purchaser funds may have been Misused in numerous parts of the ecosystem At FTX nonetheless it doesn't indicate we should always all the time Rest on our Laurels we should always all the time not give In hand over any flooring that's the time To double down on what we count on are the Most important values and guidelines in Our markets and to strengthen these Values and guidelines in a Full-throated method Are you confirming that misused funds Was happening with Ledger X or the FTX
Us entity At this stage we're engaged in an Enforcement investigation and inside the Context of the persevering with investigation I Would refer you solely to the courtroom Documents for data regarding uh our Enforcement divisions enforcement movement I really feel the knowledge in that grievance Speak for themselves they outline a extremely Clear Artic they outline and articulate A very clear uh description of what the Cftc believes was occurring at FTX that Is problematic in accordance with our Statutory and Regulatory framework I Won't divert from that on account of I take into account Our grievance amongst those that have been Filed was primarily essentially the most fulsome and Articulated uh in primarily essentially the most clear and Descriptive method the problems we now have Regarding software program program code protocols and Other mechanisms that let for backdoor Reaching uh to entry purchaser funds so Commissioner a number of of the methods wherein the Cfdc has suggested growing oversight Is conducting on account of diligence on any Firm worldwide stick looking for to purchase a Minimum of 10 p.c of a share of Equity curiosity in a cfdc registered Market participant and allowing the CITC To provoke and spot and comp course of For proposed Acquisitions are there Other tips that you simply're suggesting So that's that's really important and I'd want to parse that out first I'd
Like to easily emphasize that what I'm Proposing is at this stage uh the cftc Needs to work together in a dialogue with Market members to know Effectively one of the simplest ways to modernize our Regulation it's not merely inside the Context of this one area I really feel certainly not Letting a superb catastrophe go to waste means We acknowledge the need to modernize Regulation in a lot of areas I've talked About it inside the context of the sale of a Registered Market participant I've moreover Talked concerning the necessity to modernize Regulation inside the context of contemplating About intermediated versus Disintermediated purchaser Protections in The intermediated home the place fcms or Broker sellers often operate Facilitating transactions on behalf of Clients we now have a plethora of Regulations and statutory protections That ensure the separation or Segregation of purchaser belongings and Provide for protections limiting the use Of funds requiring that the company That's working as as an fcm or vendor Dealer have Financial positive Financial Resources cyber security safeguards Etc In the context of non-intermediated Trading which is the form of shopping for and promoting That ledger X is facilitating we don't Necessarily have these Provisions or Protections constructed and through statute And regulation so I'm suggesting we would like
To have a extremely environment friendly and thoughtful Dialogue about one of the simplest ways to modernize Regulation and produce it right into a spot Where it's match for objective in gentle of The evolution in our markets the Introduction of revolutionary and financial Innovative financial and Technology Oriented merchandise that's to get our House in order should you'll on the cftc And to be sure that as markets evolve and As curiosity in using fully completely different Market Structures evolves that we're Effectively prepared to ensure or arrange The related purchaser protections all through the Board agnostic as to asset programs Agnostic as to asset class agnostic as To the platform on which you're Trading Commissioner speaking of Non-intermediated entities have you ever ever Given some thought to defy I indicate these FTX Other crypto lenders you talked about these Are centralized entities and there is a School of thought that really Decentralized Defy platforms should be oh a yard That should be allowed to develop on their Own they often don't comprise centralized Intermediaries what are your concepts on That So I've I've heard the theories of the Theory of allowing a thousand flowers to Blossom I really feel that's what you're Referring to there and the notion that
We ought to tell apart between C5 and Z5 Platforms on an psychological diploma as Someone who's deeply involved about Financial markets historic previous and evolution I really feel there's fairly a bit to be said about That as a regulator and carrying the Hat I at current placed on and sitting in my Current seat what I'd share with you Is the protections I'm advocating for Really should be in place no matter C5 Or defy nonetheless the protocol or API constructed on the protocol the purpose proper right here Is to be sure that if there are Protections for purchasers in our markets In positive areas we uncover the way in which wherein a fashion To code these protections to assemble these Protections into any experience or with Respect to any asset class that's Operating in markets so I'm going to Give you a particular occasion inside the Context of CFI I agree the matchbook Order or the tactic for matching buy And promote orders operates very Differently I understand from sitting With Folks at Uni swap or at completely different Platforms that describe to me how D5 Protocols operate I'm thrilled to have Had that education I had engaged in a Deep dive evaluation mission exploring This very question ahead of being Confirmed as a commissioner and so I Acknowledge and acknowledge that there Are infrastructure variations Operational variations that Merit
Acknowledgment regarding these two Different approaches to facilitating Trading and settlement processes or Matching Buy promote orders on the same Time I really feel it's important to not Mistake what experience is doing or can Do with what we aspire to have it do at Some stage ultimately so the cyber Security system safeguards that I Mentioned a second up to now these cyber Security strategies safeguards these Customer protections in the event that they're constructed In efficiently maybe it's engineering Through coding perhaps it's a singular Approach however when these security are Built in that is the really important Question we now need to be centered on it Isn't um that if we take a particular Tact in crypto markets we'll stay away from the Need to think about this or we don't Have to stress about this I really feel that's One of my largest points about this Nascent uh area of financial markets It's that all too often folks want to Disregard or discard all of our learning From all of the crises that we now have Witnessed in markets to date and I Actually want to ship that learning Forward I really feel there is no such thing as a such factor as a enterprise That doesn't revenue from having Independent neutral directors on the Board of directors I really feel there are a Few corporations that wouldn't revenue From having expert expert uh Chief menace
Officer and expert compliance officer Chief compliance officer few corporations Wouldn't revenue from having a board With an audit committee and a nominating Governance committee partially on account of These infrastructural firm Governance mechanisms are designed to Mitigate conflicts of curiosity they're Designed to be sure that administration Act In accordance with the expectations of Those who're investing inside the enterprise You talked about due diligence earlier and I merely emphasize I'm proper right here in Miami at an MFA conference a managed funds Association conference centered on Digital investing and one in all many points I talked about yesterday is consumers And the necessity to efficiently work together In due diligence and the place we see some Failures in that context in in with Respect to FDX and I mentioned very Specifically the Ontario lecturers Pension fund a public pension fund that Invested 90 million {{dollars}} in FTX and Shortly after ftx's chapter closing yr Had to place in writing that funding proper all the way down to Zero due diligence applies in a number of Contexts and there are many methods wherein This type of governance gate holding Mechanism facilitates and ensures the Integrity of the businesses that make investments In the businesses that operate in Um the markets that we serve Commissioner you've clearly been
Thinking by way of these factors very Carefully we because of your time we Got quick there though that was cftc Commissioner Kristen Johnson