Dec 16, 2024
On December 5, The Capitol Forum held a conference call with Mark Wetjen, Partner at Dentons in their Federal Regulatory and Compliance Practice, to discuss the impact of likely Crypto legislation in the Trump administration, particularly whether allowing betting on Crypto futures could extend to betting on commodity futures. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good morning, everyone, and welcome to our conference call today on how new legislation is set to shape competition in crypto and futures markets. I’m Teddy Downey, Executive Editor here at The Capitol Forum. And today, I am super happy to talk to my friend and former CFTC Commissioner Mark Wetjen, who is now a partner at Dentons in their federal regulatory and compliance practice. Mark, thank you so much for doing this today.
MARK WETJEN: Thanks for having me, Teddy. Excited to be here.
TEDDY DOWNEY: And before we get started, let me walk the audience through the format really quickly. First, I’ll interview Mark, and then we’ll get into Q&A. If you have questions—we have a few already—but if you have more questions, please enter them into the questions pane in the control panel on GoToWebinar. Or you can email us at editorial@thecapitolforum.com, and we’ll try to get to all the questions that we get today.
But first, Mark, I’d love to start with there’s a huge expectation that there’s going to be crypto legislation passed this Congress. And I think maybe the best way to start is, before we get into whether or not it will pass, what is kind of the base text that Congress is going to work off of? And if you could just walk us through at a high-level what’s in there, and then maybe that will set the table well for the conversation.
MARK WETJEN: Yeah, sure. So, just to touch first, Teddy, upon an issue that you alluded to, I think people in the marketplace believe that this coming Congress will be the best opportunity in the history of the digital assets sector for there to be meaningful, clarifying legislation passed by the Congress.
The industry has never been in a position like this before. You have an incoming president who is clearly supportive of the space, composition of the Congress where there’s a Republican majority (which has tended to be more supportive of the digital-assets space, I think it’s fair to say). This includes the Senate.
On the House side, you have majority of the House who are Republicans. The House already passed a piece of legislation that I’ll talk a little bit more about here in a second. So, the numbers there will change a little bit – Republicans aregoing to have fewer members in the majority. But this legislation was passed in a bipartisan way. So, for all those reasons, just generically speaking, the table is set here for meaningful action on the legislative front.
And as far as your question about what would or could that legislation look like, I think where my mind goes to immediately is the FIT21 bill, the Financial Innovation Technology Act of 2024. Some variation of that will be introduced, at least in the House. Again, that’s where it was already passed this Congress over the course of this past summer. So, it might not look exactly the same. In fact, I think we probably could expect that it won’t look exactly the same as the version that was passed. But whatever is introduced on the House side will look something like that, something pretty close to that.
Meanwhile, in the Senate, the Senate Ag Committee did not produce any legislation, and its key members were not on any legislation during the current Congress that’s about to end. But members of the Senate Ag Committee, in particular, were part of legislation that was introduced back in 2022. And so, that legislation did not look exactly like FIT21, but there’s a considerable amount of overlap, at least as it relates to the jurisdiction and authorities that will be given to the Commodity Futures Trading Commission.
So, all of that tells me that there is a good chance, and certainly the best chance there’s ever been, that Congress could pass market-regulation‑related legislation impacting the trading of digital assets in the United States. And that would be a huge development with all sorts of implications that we can talk about today, but I think probably would have implications that neither you nor I nor folks in the audience perhaps could even predict. But I think it could be profound.
Just rereading some of the key elements of the bill before this conversation, it really gets the mind going. Because it really—I don’t want to sound like I’m exaggerating too much—but it could have profound implications to not only the trading of digital assets, but also securities markets more generally and derivatives markets more generally in terms of how they are operated and supervised by the respective regulators today, the SEC and CFTC.
TEDDY DOWNEY: And I’m particularly interested in the exchanges and futures and derivatives. I’ve looked at, and written about, the CME for a long time as having sort of a vertically integrated monopoly when it comes to futures trading. And do you see an opportunity for that in this legislation, that monopoly to be subject to more competition? And are there specific provisions that we should be looking at to see if there will be an opening of competition in the futures market? And we can get to derivatives and I guess just crypto trading beyond that. But I’d love to focus first on futures because that’s the one I’ve spent the most amount of years wondering when that will be subject to real competition and if that’s coming potentially.
MARK WETJEN: Yeah, great question. I’ve thought about this issue too, as you know. And there is the one exchange that has a dominant position in the U.S. marketplace. Last I checked, it was around 75 to 80 percent of trading volumes of all listed derivatives in the U.S. So, that’s a very strong position, to put it mildly, for the operator there.
So, the question is how—let’s say some variation of FIT21 were to become law. How would that impact the derivatives or futures exchange space? I think it could be pretty significant.
But,to me, what’s the most interesting possibility that could come from legislation is that it would give authority to the CFTC to supervise operators of spot markets. You had asked about futures and derivatives, but what’s really exciting about the bill is that it would give the CFTC authority over spot markets. So, spot markets mean regular securities or regular commodities, not the futures or derivatives on those securities or commodities.
Why is that important? Well, obviously, on one level it’s important because it’s new authority for the CFTC that it’s never had before. But why is it especially important—and going back to your question about futures exchanges—because the holy grail of trading markets in the United States is to have a seamless set of markets where people can trade the underlying asset, but also trade the derivatives on that same asset, and to have a unified experience doing so and have one bucket of your collateral that supports your trading in both markets.
And so, if you game this out and start to think, and go back to some of the definitions in the legislation and what would be considered a digital commodity under the CFTC’s jurisdiction, both in this case for a spot market as well as a derivative market on that same asset, as those definitions get fleshed out and the rulemaking that would have to take place to get it fleshed out, you can imagine that there could be an end state where, again, you have one exchange for both spot and derivatives markets, made possible by virtue of this legislation and only possible if the exchange operator were operating markets related to digital assets. You could have one place for a trader to go, where you can trade the underlying spot market and you can trade the derivative on that same asset, that same digital asset, all in the same place.
This leads to massive margin efficiencies, and margin is required for the trading of derivatives. It presents the opportunity for a unified, more seamless trading experience, and this meansthe user experience element could be massively improved. And that paves the way for all sorts of other knock-on innovations on the product front, on the structuring of fees.
But again, it really would depend on, even under the basic contours of FIT21, it would depend a lot on exactly what the rulemakings would say. But that could be the end state, something along the lines of what I described. And if that were true, the incumbents who don’t have expertise in digital assets in the same way that perhaps a newcomer would, if they can organize themselves and get registered with the CFTC in the way that they would be required to under this bill and bring that expertise to bear, that understanding of the trading community in that space to bear, they could really, really compete with incumbents, I think, in a very, very meaningful way.
I mean, look, it wouldn’t happen overnight. It would take some time. I mean, look, if something like FIT21 passed at the end of this year, it would be two to three to four years before the framework really starts to become comprehensible because it would take that long for the rulemakings to be finalized. And then, however long after that it would take for the marketplace to just sort of evolve and allow for newcomers and disruptors to enter into the market.
TEDDY DOWNEY: And I would imagine CME, obviously, has spent lavishly on effective lobbying in the past. I’m sure when you were in the Senate, you got a glimpse of that at some point on both the legislation, but also on the rulemaking front.
So, it’s by no means a guarantee. But I think it’s fascinating when you’re writing new rules—and even though the rules are meant for crypto, if they’re creating new opportunity for entry into these markets, that we could follow a legislative and then a rulemaking process that ultimately creates a new competitor to a very, very enduring monopoly, I think that’s going to be fun to watch.
But again, getting back to some of these incumbents, we’ve talked about this. Some of the ways that the legislation or the rulemaking go obviously could favor the incumbents because they’ve got to get registered, right? They’ve got to prove that they can do this. And how do you see that playing out? I mean, again, we’re only going to see the legislative side of it. Is there anything in the legislation that would tip the scales toward incumbents that we should monitor, that we should keep an eye on, or anything? Or will that also be likely to sort of be fleshed out in the rulemaking around the law?
MARK WETJEN: Well, the legislation, it definitely leverages the existing building blocks at both the SEC and the CFTC. And it does that conceptually and even more directly than conceptually. And by that, I mean, the bill still envisions trading systems or exchanges. It envisions intermediaries of some sort. It envisions custodians. And it would have rules around how each of those three different types of entities would have to be licensed and register with one or both agencies, and would have to comply with the respective agencies’ other rules.
And so, to your point, if you’re an incumbent, you’re familiar with those building blocks already. And you’re going to be probably well-positioned to pivot to complying with some variation of those building blocks as reflected in new rules as well or better than most, because of the institutional knowledge and the infrastructure that’s already in place at incumbent organizations.
But I think it’s important to point out, over the last number of years, some of the digital asset native or crypto native exchange companies, names that are recognizable like a Coinbase or a Crypto.com have built up some of that muscle mass around how you work with your regulator as your stakeholder. Companies like that are familiar with the existing rules. Again, the new rules are going to be of a flavor that’s familiar to the existing ones. And so, companies like that are probably the very best position. Because, again, they’re digital asset native. They know the technology. They know the community. They know how to custody these assets better than the incumbent futures exchanges do.
And, for example, you mentioned CME. CME has a Bitcoin future that’s been listed for a number of years at this point. But that’s a cash settled future, meaning they don’t deal with Bitcoin itself to settle those contracts. They settle them—people who are trading those contracts settle them by exchanging cash, U.S. dollars. They don’t settle by exchanging Bitcoin.
So, again, what would be meaningfully different under a regime that will come after passage of new legislation, you would have the agency, the CFTC more specifically, having to deal with entities that are custodians and understand digital assets, these native assets, native to blockchain networks. And that’s expertise that the incumbent futures exchanges just don’t have. So, again, it presents all sorts of really interesting, exciting opportunities for market evolution and for new players to grab market share.
TEDDY DOWNEY: And I think there’s a lot of reasons to be very bullish about the legislation passing. We’ve talked about some of the things that will be tricky. One is with Loper Bright, with the courts getting rid of Chevron deference. Is it going to be trickier to delegate authority to regulators? You’ve got a lot of different stakeholders here. You’ve got national security. You’ve got banking regulators. You’ve got crypto companies. You’ve got a lot of different people who are, now that this is more likely to happen, going to weigh in. What do you think are some of the things that will be hardest to solve or some of the more contentious fights in terms of specific provisions in this legislation that we should keep an eye on in terms of like, all right, well, if the odds are like 70 percent, they would go down if there’s a big fight over national security or something like that.
MARK WETJEN: Yeah, great question. Well, again, we started this conversation with some semblance of a focus on how would digital asset legislation that could impact the futures industry and some of the incumbent players there, what would that legislation look like and what would it do?
But as you point out, in the context of that bill, but also in these adjacent policy areas, there’s all sorts of very difficult policy questions that would have to be solved, such as how to protect the national security interests? And that, historically, in the financial services space has largely been accomplished through the Bank Secrecy Act and implementation of the Bank Secrecy Act and the Foreign Corrupt Practices Act, bodies of law such as that. Those are areas I’m not an expert in. But here at Dentons, we have a lot of expertise, including people in my own group, that really focus on that area.
And issues related to the Bank Secrecy Act, Foreign Corrupt Practices, those will have to be addressed. And to be more precise about it, how do today’s statutes and regulatory framework treat immutable smart contracts, which aren’t really necessarily owned by anyone once they’re released onto a blockchain? And there was a case that was just decided here in the last week or so in the Fifth Circuit that addressed this question. OFAC had placed an immutable smart contract developed by the developers of Tornado Cash on a sanctions list. And in order to do that, it has to be deemed as property to be placed on that list.
And so, basically anyone who had been using that smart contract previously could no longer do it or suffer the repercussions of potentially being sanctioned by the U.S. Treasury. This is animportant case in the digital asset industry. Initially, the district court sided with Treasury. The Fifth Circuit just recently overruled it. That’s a huge case. And the Fifth Circuit said an immutable smart contract is not property.
And so, what does that mean? Well, those who are really focused on national security, I’m guessing, will want to reflect on this Fifth Circuit opinion and think about, well, do we need to redefine what property is? Or do we need to add a new category of something that also can be placed on a sanctions list? Or otherwise, how would they go about dealing with this issue of there being DeFi protocols, smart contracts, that are really, after released into the wilderness so to speak, are no longer controlled by anyone, and allow truly anonymous or mostly anonymous transactional activity, exchanging digital assets with others through these protocols? There’s a very, very clear national security interest there, but not at all a clear answer as to how it should be protected and addressed, while also balancing some of these other economic interests that not only the country and the public have, but certainly people within the digital asset space claim to have.
So, yeah, you and I have talked about this a little bit. I think this set of issues around validating users, understanding who they are, to what extent is information about users passed on to the government, all these questions are going to be the thorniest questions. Because the national security interest is very, very real. And it comes into collision with a whole bunch of other interests in the context of a smart contract in particular.
TEDDY DOWNEY: What do you think about banking regulators? I think part of the thesis of the SEC under Gensler was, we just need to keep these digital assets out of the banking system because there’s too much money laundering or whatever uncertainty around where the money’s coming from and what’s going on with the money. Keep it out of the banking system.
Now, if this legislation passes, they’re obviously going to be intertwined with the banking system. Have the banking regulators been active in the legislative conversation at all? I mean, obviously, national security might become more. But would you expect the same thing from banking regulators to say, hey, this is how banks will need to treat this, regulated banks? And how do you allow for the—you mentioned the Bank Secrecy Act. I mean, they have a lot of anti-money laundering requirements as well. Is that part of what you’re talking about? Or is that a separate conversation as well in terms of like dealing with OCC, FDIC, and the Fed?
MARK WETJEN: No, it’s very much intertwined. It’s very much intertwined. There’s a lot of ways to respond to that question or point. But one way to respond to it is, is a banking regulator going to allow the trading desk of JP Morgan to trade with others through a defi protocol in light of the obligations that a bank has by virtue of not only the statute, but the regulations implemented by their federal supervisor?
As it stands today, I think the answer would be no. So, would or could there be something in legislation next year that would make it easier for JP Morgan and their trading desk to interface with a defi protocol? Maybe. We’ll find out. In fact, FIT21 basically punts a lot as it relates to defi protocols generally. And I wasn’t involved in discussions around the development of FIT21 this past Congress, but I’m guessing part of the reason they did that is they might have been throwing up their hands and saying, “We’re not quite sure what to do here”.
So, that’s one answer. But another important consideration here, Teddy, is that the OCC has chartered companies that have taken custody or have expertise in taking custody of digital assets. There’s one company, Anchorage, which has a charter from the Office of the Comptroller of the Currency, which is a federal banking regulator, a national bank supervisor.
So that agency has shown already that there is a path under existing law to license and register custodians that want to offer that service to those who own digital assets. But one of the requirements that apply to those types of custodians licensed by or chartered by the OCC is they would have to comply with the Bank Secrecy Act. So, all that means is if you’re going to have custody of, let’s say, Bitcoin—you’re Anchorage, and you’re taking custody of Bitcoin on behalf of Teddy Downey—all it means is if you’re going to do that, you’re going to have to do all of the AML KYC checks on Teddy Downey before you onboard him as a client or a customer and start providing that service of custody to you. So, it’s achievable in that respect.
I think the harder question is there are certain use cases, and we talked about one of them, and that’s like a DeFi protocol, where sometimes the driving reason for the protocol in the first place is anonymity. To come back to the fifth-circuit case, Tornado Cash, that’s why it was developed, is so people could use it and transact anonymously.
And to be more precise, I’m not a real expert in exactly everything the Tornado Cash does, but it’s a mixer. They refer to it as a mixer. So, you transfer in 5 Bitcoin, and it gets released into the smart contract. Then 5 Bitcoin come out the other side. And the idea is that you don’t know which wallet that 5 Bitcoin ultimately came from before it went into the mixer.
And so, people use that for legitimate reasons. They want to obscure donations they might want to give to legitimate entities, and they just don’t want people to know about that. But obviously, it can be used for not so legitimate reasons too.
So yeah, I think that’s the tougher issue. But as far as the banking laws, there’s already a path. There’s already a path, even under existing law, I think, for banks to become more meaningfully involved in the digital asset space. It’s just a question, under the new administration, will the people appointed to chair those agencies and lead those agencies, will they really push the envelope and allow for some more registrants from that space to come in?
TEDDY DOWNEY: I’ve always wondered about if they do regulate crypto, whether or not they’ll put the same type of trading rules on crypto. In regular exchanges, you have wash-sale rules. You have all sorts of rules that make it so that you’re not just selling something to yourself. You really do have true price discovery in a functioning regulated financial market. Would you expect those types of rules also to be added? So that this goes from an unregulated to a regulated market and all of a sudden who’s trading what, or at least you know that they’re not trading with themselves. You have better confidence in that. But you also have potential real price discovery, which there’s been a question around whether or not you have that with Bitcoin.
MARK WETJEN: Absolutely, those types of rules would apply to a licensed and regulated digital asset exchange if the bill becomes law, and these authorities are given to the CFTC and the SEC. There’s not a scenario where that doesn’t happen in my mind. So yeah, we can take that to the bank. There are good reasons for it. Why in the hell would you allow, let’s say, a market for Bitcoin, the trading of Bitcoin – whywould you allow that market to operate without some of the supervision you just described, such as market surveillance to detect spoofing and other manipulative activity, regular reporting of transactions? Why wouldn’t you apply that to a trading market for Bitcoin? What would be the policy reason to not apply those rules? I can’t think of a good one.
And the other problem, if you didn’t apply similar rules, you introduce all sorts of arbitrage opportunities. Why? Because the other thing that could happen is the way an interest in even a company gets traded—which today, again, is trading in the form of trading shares in the company—that could very well look very, very different in 20 years. Something like the FIT21 bill could transform how interests in “companies” are sold and traded. And so, you don’t want a set of markets or marketplaces that have totally different rules and aren’t abiding by the same attempts to keep trading there very, very orderly and transparent and so on.
TEDDY DOWNEY: And I’ve always been fascinated by Tether, which just like magically makes more tethers and sort of has this like kind of important role in the crypto market. How would you envision that being regulated as sort of the money supply entity in some respects? Would that get special rules just given how they issue tethers and things like that? Whereas, Bitcoin has got this whole different system of how they get created. And Tether’s just become – also, I’ve read a bunch of articles and books. It seems like they’re deeply connected with criminal activity as well. How do you see a company like that ultimately being brought under more regulatory scrutiny? And I’m curious how might the Fed, again, banking regulators or others, think about Tether once this bill like this passes?
MARK WETJEN: Yeah, well, again, if we just go back to our base case here, the base text of what legislation could look like, if it’s something like FIT21, the way that bill reads is you can’t be a permitted payment stablecoin issuer—that’s a defined term under the bill—unless you are an issuer regulated at the federal or state level.
So, there’s your answer right there. In other words, unless Tether comes into the United States and become registers at the state level or at the federal level under some regime, the Tether stablecoin itself, USDT, would not be allowed. It wouldn’t be allowed to be a source of collateral or a means of collateral or a means of payment within the trading environments envisioned by this legislation.
And if you’re Tether, you’re going to have to think really hard about what you’re going to do at that point, right? Because the holy grail for all international market operators is to have access to the U.S. market. I can tell you from firsthand experience that if you want to be a real legitimate big player in the exchange operating space, you want to be in the U.S. It’s the biggest market. And so, a company like Tether that historically has not registered here in the U.S. in any way, they would have a pretty important strategic decision to make.
TEDDY DOWNEY: And let’s talk about the people that are going to be doing this regulating. We don’t have all the names in yet for Team Trump, but we do have Paul Atkins at the SEC. I would love to get your take on him and what you would expect his role to be as particularly this regulatory rulemaking and everything unfolds should this legislation ultimately pass. And if he has any role in providing insight or input into the legislation itself.
MARK WETJEN: Yeah. So, personnel will be critical in all of this over the next two years, as you and I both well know. And Paul Atkins is a personal friend. I’ve known him for more than a decade. He’s the founder of a financial services consulting firm called Potomak Global Partners. I’ve been affiliated with Potomac for over a year and a half. Great organization.
Paul’s a terrific guy, extremely high integrity, very high intelligence, deep, deep experience, not only with securities markets generally, but with securities regulation. He’s a former SEC commissioner. He’s been diving in the particulars of SEC rules for basically the entirety of his career at this point. So, I mean, you couldn’t find a more knowledgeable person to select as chair.
Now, the next piece of the analysis, of course, is, well, what’s the person’s point of view? What is their view about the role of government or the SEC in these markets? What’s the overall context of the incoming administration? And some of the answers there we already know. We have President-elect Trump talking about this DOGE entity, Department of Government Efficiency. And so, clearly, one of the goals of the incoming administration will be to find efficiencies.
And what does that mean? That means probably looking at staffing. But it also is going to mean looking at unnecessary, arguably unnecessary, or not entirely useful rulemakings. And that hunt or search for efficiency, I think, based on my working knowledge of Paul Atkins, is something that I’m sure he’s given some thought to. And he probably has a pretty informed view about where he sees efficiencies and where he doesn’t see them at the SEC, again, just given his deep background and experience with the agency and the market.
And I also think and know that he has a point of view on digital assets, meaning he’s worked with companies in that space. I think he understands the friction points between operators in the digital assets industry and the SEC. He probably understands that better than most. And I’m guessing—he’s never said this to me—but I’m guessing that he probably sees digital assets as something relatively unique and different enough, anyway, from securities. And so, the regulatory treatment shouldn’t be expected to be exactly the same.
Even though digital assets perform some of the same functions that a security does in some instances, just based on how they’re issued alone, the fact that they’re –I use this colloquially—tethered to a blockchain, that automatically makes them something a little bit different and makes it harder for existing securities laws to apply perfectly. So, I don’t know. I’ve not talked to him about what his plans are, but I would guess that he would come to the role with some sensitivity to those friction points and probably would be looking to figure out a way to address some of those frictions. How he would do that, I have no idea.
TEDDY DOWNEY: Going back to the question we had before, do you think he has any kind of view in terms of the different—when we talked about before the way these definitions and rules ultimately get defined through rulemaking, following legislation, would be sort of outcome determinative for whether or not there’ll be favorable situations for incumbents and just the incumbents get bigger or if the rules will allow for new entry. Do you have any sense of whether he would want there to be kind of robust competition at all in these markets? Or if he has a view when it comes to sort of creating markets what kind of—I don’t know if that’s an ideological perspective, but would he want to make sure the incumbents aren’t guaranteed to win, depending on how these rules get written? Or what would you think his view would be on something like that when we’re talking about CME or we’re talking about one of the crypto incumbents?
MARK WETJEN: I would say, and I would guess, that fairness, this concept of fairness, I think is important to Paul. And I haven’t talked to him about the specific things you just asked about there in your question. But I would say my strong sense of Paul is that fairness is important, and treating everyone the same is important, and allowing the market to sort itself out as much as possible without unnecessary government intervention, I think, is important to Paul.
So, I think those principles, to the extent that’s an accurate or appropriate way to describe them, would animate his approach to the role. And so, fairness to me is—again, I can’t say whether Paul would put it this way. I just don’t know. But fairness to me definitely means, okay, can everyone have an equal shot at success, in this case, within the securities markets? Okay, there are basic rules that everyone has to follow and abide by, and there’s some costs associated with following them. But beyond that, are they fair? And are they implemented fairly? And are they enforced fairly? And I would guess that he would be looking to do just that, to the extent there’s implementation, doing it very fairly, pro-competition, and to the extent that existing rules are being enforced, same approach. That would be my expectation.
TEDDY DOWNEY: And who are the other regulators that we should keep an eye on? Obviously, CFTC. We mentioned Treasury, I think, at some point, national security regulators, banking regulators. Is that who we should be watching? Do we need to be looking at all those? And do you have any expectation of how Trump might be thinking about it? Or maybe you don’t know exactly how Trump’s thinking about it. But are there names being rumored for any of these roles that you think are particularly crypto-friendly or what have you? I would love to get your take on the personnel of some of these other regulators.
MARK WETJEN: Right. So, at the Fed, obviously, Chairman Powell. And it seems like, based on everything we’ve heard since the election, he probably will remain there, at least for the next couple of years.
For the FDIC, I don’t really know. I don’t know who’s being considered there, I just don’t. Same with the OCC. But all three of those are super important. And then the other agency involved, because they’re a board member at the FDIC, as you know Teddy, is the CFPB. And I’ve read different names, but I don’t have a strong—I don’t have a good view into who really is a serious contender and who’s not. So, I’m really not sure there.
But there’s one other person that has been nominated that’s worth bringing up, and that’s Gail Slater, to lead the Antitrust Division of DOJ. And she has a really interesting point of view because she spent time in the cable and broadcasting space. but she’s also worked for, basically, the Internet search industry. There used to be an organization called the Internet Association. I think that’s literally what it was called. And the main members were companies like Google and the like. So, she knows very much about that industry and those companies and what their interests are and so on and so forth, and what kind of market power they have as well.
And she also more recently worked for Senator Vance, the incoming Vice President, who I think has been pretty clearly critical of the largest social media and search companies.
So, I think that’ll be very fascinating to see. Because, meanwhile, I would imagine they’re going to try to find some balance, including Gail. How do we focus where we need to, where there’s too much market power that’s harming the public? As opposed to how do we maybe allow for more M&A activity, let’s say, if that’s useful economic activity that’s going to ultimately create jobs or make products cheaper or services more efficient for the American public?
That seems to be how they’re approaching the competition space, which is, I think, Teddy, I think you’ve focused on the competition agencies maybe a little more than I have in recent years, but I think that approach is a little bit different. I think the approach of the existing administration, they’re looking at anything and everything, it seems. And trying to see whether or not there’s market abuses by virtue of size or power or whatever, however you want to describe that. But I think the new administration would probably be a little more selective and especially focused, again, on the social media and search companies.
TEDDY DOWNEY: How do you think that plays out into this crypto regulation fight? Just that it’s meaningful in that they’re going to want to have a mind toward establishing the rules that promote competition and it’s an indicator that they care about that. Because there is a little tension between totally laissez-faire and getting rid of all regulations in a way that would allow the incumbents to run amok effectively or win, right? Like winner‑take‑all sort of market versus a competitive market.
And so, I sort of envision there being a lot of tension among all of these different things. There’s tension between the DOGE and the antitrust. It’s like who thinks that a pro-competition rule, some people will think that that’s an inefficient layer of government bureaucracy. And some people will say, no, that’s just how we have to structure these markets. And really what you’re getting is you’re getting a structure of a new market. Like that’s what the bill is. And so, I think it’s interesting. I’m curious to the extent that they will weigh in—or the DOJ or any of the other agencies will weigh in—on any of these rules or if they’ll be consulted. That would be interesting.
You know, there’s obviously a lot of dialogue among DOJ and the banking regulators on bank merger policy. And obviously, if you have a whole new industry that’s being created, that will apply obviously at some level to crypto. Well, if you’re a bank, can you buy a crypto company? That type of thing. So, to that extent certainly. But it feels like definitely more questionable to me. Or, well, I would sort of wait and see how all these pieces fit together, right? Gail is sort of one indicator. But you could get very pro-consolidation bank regulator. And then, all of a sudden, there’s tension there.
So, it sounds like we’re kind of in agreement. We’re looking at all of these regulators to see what their history is, what their ideology is, and how that fits into not just the legislative part, but the regulatory part afterwards. And I would imagine—do you expect them all to be in dialogue when these regulations will be written? Like the Fed, the Treasury, OCC, CFTC, SEC. Will they each have their own regs, do you expect? Or will they all be kind of weighing in on the SEC and CFTC regs?
MARK WETJEN: Yeah, so before I answer that, I want to go back to something that you also just alluded to, on the topic specifically of competition. You raised a really interesting and good point, which is what if a dominant player in the traditional derivatives exchange space, after seeing legislation pass, the rulemakings passed, what if they were to want to acquire the largest digital asset exchange that gets registered under the new regime by the CFTC, let’s say? How would someone like a Gail Slater take a look at that? How would the CFTC take a look at that?
There was some M&A activity among exchanges last year. And some of the current CFTC commissioners made some public remarks about the process by which exchanges can be acquired by other exchanges licensed by the CFTC. And there’s not a lot of clear, specific authority that the CFTC has to step in and either stop a transaction or not. The agencies have never issued guidelines on that, in a way that we’ve seen the banking agencies do.
So, that could be really interesting. And I think, not only interesting, but that would also be really important to watch. And it makes me wonder, Teddy, I mean, hell, if they’re going to be looking at new authorities under a digital asset bill for the CFTC and the SEC, should there be some consideration to new authorities for both agencies as it relates to competition? Maybe/maybe not. Maybe there should be specific tools that the SEC or the CFTC has to look at merger activity among market operators. Or maybe that’s overkill.
Maybe it’s enough to have DOJ and its authority, and to some extent here the FTC, I suppose, to be able to look at these transactions and step in or express a view that could add a lot of friction to a transaction and keep it from happening. I don’t know the answer here, but I’m glad you brought it up. Because that could be especially relevant as to whether or not that holy grail end state that we talked about at the very beginning of this conversation actually materializes in, let’s say, five to ten years.
TEDDY DOWNEY: Absolutely. Because I think the CFTC does have some competition authority, I mean, just in terms of how they write the rules, obviously, but not, I think specifically you’re talking about M&A here, right, like banking.
MARK WETJEN: Right. And it’s completely analogous to what we’ve seen the likes of a Google or Apple accused of by DOJ and some of these recent litigations, right? Like Google has gobbled up a lot of companies that were competing on a particular product. And look, on the one hand, that’s probably pretty exciting for the shareholders of those companies who were bought, but has it been better for the American public? Not sure. I guess DOJ has said “no” in some instances as of late.
So, the same thing applies, right? If you have a dominant exchange operator and there’s a new regime for a new asset class and the dominant incumbent in the traditional space gobbles up all the innovators and newcomers by virtue of the new regime that’s been laid out. I personally would want someone, whether it be DOJ or the CFTC, with maybe potentially more authority, to be looking at that very carefully.
TEDDY DOWNEY: Yeah, there was this like fungibility. There was some litigation or rulemaking process or some proposal at some point to allow—was it derivatives? Certain contracts to be—like there are rules right now that specific trades have to go on the CME, right? Like you can’t have fungibility of like, all right, you initiated trading over here and close it back over here, which has kind of been viewed as a barrier to competition. You know, I sort of look at the crypto legislation as reopening all these conversations.
Well, if we’re going to create new rules, ostensibly you’re going to have an opportunity to address some of these things that have prevented competition. But would you think that there’s any way that—or is CME so entrenched that they would never—like, I mean, this has never really been seriously considered to roll back some of these rules that actually protect CME’s market power. But if you’re looking at, could you see like the DOGE or some of these other initiatives as actually sort of taking a look at like one of these rules really actually we could get rid of some of these rules that protect CME. I’d be curious if you think that that could be something they would look at as a sort of deregulatory thing. And then we’ve got one question here from a listener that we’ll get to after.
MARK WETJEN: Well, I mean, I think the short answer is sure, right? I mean, of course, there could be consideration of rules that address this point around the vertical integration between exchange, clearinghouse, and the proprietary nature of the products listed by the exchange and cleared by the same company—that’s the issue, as you know, you’re talking about.
And look, another exchange operator could license a product from another exchange and say, hey, we want to list your products too. So, that’s one way to get around that. Maybe you could create a rule that forces this – that would be one way to, I think, address the point you’re making.
But the short answer, and the higher-level point is, yeah, of course. I mean, all these things are, I think, fair game. Because it has to be fair game in the sense that if legislation is going to be addressing digital assets and how they fit into the supervisory functions of the SEC and the CFTC, that automatically means that any related question is fair game. Now, whether or not it gets considered and addressed and legislated on is a different matter. But yeah, it makes for an interesting opportunity to have some renewed, revived debates.
TEDDY DOWNEY: Yeah, it sounds interesting. Here’s our question. We’ll end on this. I’ve taken so much of your time and you’ve been very generous. Here’s the question. Have you given any thought to the question of market definition in these industries? There are hundreds, if not thousands, of tokens, coins, currencies, NFTs, and presumably they are not all competing with one another from a substitutability perspective.
I mean, we’ve talked mostly about exchanges, which I think is probably a little bit easier to kind of define markets. But what’s your thought on market definition? I’m guessing this is ostensibly a question around whether or not it would be okay for some of these coins to merge or coin companies to merge currencies. I don’t know.
MARK WETJEN: Maybe what the questioner is asking is—well, let me put it this way. So, as you said, we’ve been kind of talking about markets and substituting exchanges for markets. The more precise way to think about it is that an exchange operator, like a New York Stock Exchange, they operate a whole bunch of markets. Or a better example, let’s use a futures exchange. They operate a whole bunch of markets.
Let’s say CME. CME has a market for a euro-dollar futures contract and they have a different market for corn futures and a different market for cattle futures. Like, every one of those distinct commodities or the futures on those commodities is its own market. And then, the exchange operator operates all of those markets.
So, with that understanding, and thinking back again about the question, I’m not sure exactly what they’re asking. It could even be that they’re asking about the differentiation between the various tokens. And that’s a function of what each blockchain that has issued the token is designed to do, right? Or layer of the blockchain. And I don’t know. I mean, some of these networks are not going to take off because what they claim to do is not interesting or what they intend to solve is not going to be solved by that network or whatever the case might be.
So, there’s that piece of it. And then, the other, I think, piece of the answer, if I’m understanding the question right, is will every digital asset related to every blockchain network be certified under this new legislation? Because there’s a process for that. There has to be some touchstones that are met and sufficient to decentralization and things like this that lead to how the token is treated. And so, that’s another piece of this.
And as you look at how those definitions are worded, a network operator, a blockchain operator, will have to think about what kind of digital commodity they want to have or whether they’re comfortable having a “restricted digital asset,” which is another defined term under the FIT21 bill that has distinct regulatory treatment.
TEDDY DOWNEY: Yeah, I wonder also it’s like the antitrust laws are really focused on businesses and like the businesses around crypto are exchanges the big ones, right? They’re not the coins really. Like the coins, I mean, I guess it’s really like what is the business it’s trading? The trading is the business. It’s not the underlying coin that’s actually the business. Maybe I’m thinking about this wrong. But when you’re talking about markets, you kind of have to have a business. And so, those little individual trading markets seem—or the coins, the currencies, the tokens NFTs, what-have-you, are just things that are traded, right? The trading is the business. So, we’ll see how that unfolds great.
But Mark, thank you so much. Obviously, you are intimately knowledgeable about all these topics and it sounds like you know a lot of these people as well who are going into power. So, I’m excited for all the work that you’re going to be having heading your way and look forward to keeping the conversation going with you going forward. And I can’t thank you enough for doing this. This is super interesting.
MARK WETJEN: Yeah, this is a lot of fun. Thanks for inviting me. Fascinating topic and love to keep talking about it.
TEDDY DOWNEY: Awesome. And thanks to everyone for joining in the call. And this concludes the call. Bye‑bye.
MARK WETJEN: Bye.
