Just months after being named a CFTC commissioner, Caroline Pham emerged as one of crypto’s most important defenders last week when the SEC filed insider trading charges against a former Coinbase product manager and two other people. Pham criticized the move as “a striking example of ‘regulation by enforcement.’”
“Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input,” she wrote in a statement. “Regulatory clarity comes from being out in the open, not in the dark.”
A CFTC commissioner speaking out against an SEC move was striking, and pointed to a widening turf war between the SEC and the CFTC, two agencies that could be tasked with figuring out a division of labor for regulating digital assets under one prominent proposal for crypto regulation.
Both agencies are gearing up to regulate crypto more closely. The SEC under Gary Gensler has been beefing up its ranks for what many fear is a major enforcement offensive against crypto companies. On Monday, a top CFTC official said it was setting up a new Office of Technology Innovation to enhance its ability to monitor the crypto market.
The regulatory establishment is a small world: Pham interned at both the CFTC and SEC early in her career, then worked as a special counsel and policy adviser at the CFTC when Gensler chaired that agency.
In an interview with Protocol, Pham explained why she felt the need to speak out against the SEC action, the importance of the SEC and the CFTC working together in regulating crypto and why that’s not happening.
This interview was edited for clarity and brevity.
Can you talk about the decision to issue a statement reacting to the SEC’s legal action against the former Coinbase product manager?
First, I have to say that my views are only my own views and don't reflect those of the CFTC or any other commissioner.
As a general matter, I can't speak about investigations, or enforcement actions. But what I can say about this is that when I found out about the SEC complaint, and once I read the complaint, based on the broad implications that this case could have — that you could have a judge determining, at a fairly preliminary stage, legal precedents as to the application of the securities laws to certain digital assets, given the open questions around utility tokens — I felt very strongly that anything that implicates or impacts the CFTC's jurisdiction, the CFTC should be there at the table.
The commission has been charged with upholding the Commodity Exchange Act and, in Dodd-Frank, the CFTC was granted insider trading authority. The CFTC has jurisdiction over commodities and commodity derivatives. So in my mind, we should be vigorously enforcing the law and upholding the Commodity Exchange Act and our jurisdiction because that is our job.
Did you have any conversations with the SEC or with Chair Gensler himself on what they did?
I can't talk about investigations.
How common is it for the SEC and the CFTC to have major differences of opinion on a regulatory issue?
In my experience — and I was previously at the CFTC during the Dodd-Frank rulemaking when Gary Gensler was the CFTC’s chairman — there are areas, particularly with Dodd-Frank, where the SEC and the CFTC have jurisdictional questions that get worked out.
So in my experience, even if there are differences of opinion, there is a collaborative and cooperative approach between the SEC and the CFTC. In fact, that's why SEC Commissioner [Hester] Peirce and I co-authored an op-ed where we said we thought that, in the long tradition of the SEC and the CFTC working together, we should have joint roundtables to look into the crypto crash and the events surrounding it and come up with a thoughtful approach towards crypto regulation and providing regulatory clarity that engages the public through these roundtables.
Where do you stand on the debate over whether crypto assets are securities or commodity tokens?
The determination whether a particular digital or crypto asset is a security or commodity is a very complex legal analysis that's really based on the specific facts and circumstances surrounding that particular token. So there's not a way to come out with a broad blanket statement. Each one needs to have and deserves to have its own tailored analysis to determine whether or not it's a commodity or a security.
But I will say that the CFTC, starting first in 2015, came out and said that bitcoin was a commodity. Since that time, the CFTC has brought a number of cases where we have said that various digital or crypto assets are commodities. For example, we have in our cases said that bitcoin is a commodity as well as ether, litecoin, I think also dogecoin. And there might be a couple other ones that we have over the last couple of years, in our cases, that are commodities.
How should the crypto industry react given that two major agencies have different classifications for different types of digital assets?
Well, I can't advise anybody. But I do think it is very unfortunate that we are in this position where we have a lack of regulatory clarity, instead of working together with the public to come up with clear rules of the road so that people can invest, grow and build compliant digital asset markets, and we can keep the investment in American innovation here onshore, and not have it leave the United States because of an unclear regulatory environment. I think that's very disappointing.
You worked at the CFTC when it was being led by Gary Gensler. How would you compare the way he led the CFTC and the way he's leading the SEC currently?
I don't think it's appropriate for me to discuss any conversation between the SEC and the CFTC. I would rather keep it to what's in the public domain.
You said in your statement, “Regulatory clarity comes from being out in the open, not in the dark.” What prevents the CFTC and the SEC from holding a public process to settle these issues and come up with clear rules?
Nothing stops the SEC or the CFTC from following the Administrative Procedure Act and engaging with the public in a transparent way that goes through a rule-making process or even a process just to have public roundtables. That's why I felt it's really important to make a statement.
Why isn't it happening in your view?
I think the best way to answer that question is the way that the SEC and the CFTC are set up with a bipartisan commission of five commissioners each, but only the chair has the ability to set the agenda for the agency and to direct the staff.
I believe that Commissioner Peirce said this previously as well in her interviews. It is only the chair of each agency that can, for example, call for an open meeting or … call for a vote on a particular matter. Really, that question lies with the chair of each agency. I can't speak for either chair.
When you joined the CFTC early this year, the crypto market was starting to slide after going through a time of spectacular growth. What lessons are top of mind for you as a CFTC commissioner?
When I look at what's happening in the crypto market, what you see really is a failure of risk management. A lot of what's happening now is not something that is unknown. It's not something that we've never seen before, that we don't know how to deal with, not only as regulators or policymakers, but also as responsible industry actors.
This is just basic risk management. It's basic credit management. Any time you're a financial institution, which many of these crypto firms are, there are minimum standards around risk management, capital, liquidity, underwriting and other things that need to be undertaken.
It's just going back to basics and having the right prudential regulation or minimum financial resource requirements and minimum standards for risk management in place.
Beyond that, I think there certainly needs to be strong protections in place for the retail public. Sometimes, many people don't understand what they're getting into. You've had news reports where people didn't understand that their money wasn't protected or that, in the event of a bankruptcy, their money wasn't gonna be coming back to them necessarily.
Has anything changed in the way you view the need to regulate crypto given how some companies have gone bankrupt and many consumers have lost their savings and been really hurt by this downturn?
Well, absolutely. What I've said before is that with these horrible losses and really very personal and tragic stories that come out of this, you know, regulators cannot fail to act. But when we take action we need to do so in a responsible way that is inclusive of the public and their views.
The approach that we should take in dealing with this, as we have with other financial crises in the past, is we need to make sure that there is appropriate risk management and minimum financial resource requirements, that there are sound prudential or other requirements around how these firms are assessing their business.
Equally, there needs to be strong protections in place. Those protections, particularly for retail, can include things like disclosures, suitability requirements, education requirements, fair dealing and fair communication requirements, market conduct rules. And of course, conflict of interest is something very important that I think really has been called out in these particular market events.
The SEC made its move against the Coinbase ex-product manager shortly after the Supreme Court issued a decision related to the EPA and climate change-related regulations. Many believe it potentially weakens the authority of regulators like the SEC and the CFTC. How do you think the Supreme Court decision will impact the efforts to regulate crypto?
I can't specifically comment on that case. I will say that my general perspective is that it is Congress who makes the laws of our country. It is Congress' responsibility to make the laws and each regulatory agency can only act within the bounds of this statute where Congress has clearly delegated authority to that agency. I think it's very important for regulators to be mindful of their mission and their purpose and the authorities that they have as well as don't have to make sure that we are acting in a way that is upholding the law and serving the American people within the bounds that Congress has granted the authority to us.
What do you think of the Lummis-Gillibrand bill?
I think it's great that Congress has been working on so many different proposals, including the Lummis-Gillibrand bill, which is very comprehensive, on what's the right way to delineate the authority and to provide greater clarity over digital assets. That is why I'm surprised that the SEC is taking this route to again essentially determine what is a security or to lay claim to various digital assets or types of digital assets as securities without having that direction from Congress through the various proposals that they are working on or through engaging with the public.
Sen. Lummis told me in an interview, to clarify that the CFTC and the SEC will both play key roles in regulating crypto based on their proposal, that while two of the biggest cryptocurrencies today, bitcoin and ether, will likely be considered commodities, most other cryptocurrencies will likely have to be regulated as securities. What's your reaction to that?
I don't disagree with that comment on its face. But I think what's really important and the point that I was trying to make with my statement is No. 1, if we're going to be coming up with rules for the public to follow, it needs to be done through the right process, which is through the Administrative Procedure Act, or through some other form of guidance that engages with the public.
My second point is where the CFTC has jurisdiction, the CFTC must vigorously enforce and uphold the law. It is incumbent upon us that if we see wrongdoing in our markets, we need to go and prosecute it with all the tools that we have. That includes our new Dodd-Frank authority, which we've used multiple times, for insider trading. If there is something that is implicating the CFTC’s jurisdiction, the CFTC should be there at the table. We should not just be standing to the side.
You played a part in coming up with rules for segments of the Dodd-Frank Act. That process underscores how making these rules for a new law can take a very long time. How do you reflect on how this process can take a long time given how fast crypto is known to be growing and evolving?
I think that we have tools right now that we can use to provide greater clarity to the crypto-asset markets without needing to take a long time. There are ways that agencies can work more quickly. It certainly does not need to take 10 or 12 years to come up with more regulatory clarity for the industry. We have tools right now. We can use them right now to provide more clarity.
One of the lessons from Dodd-Frank is how important it is to get it right the first time. What is unfortunate, what has been going on, is that there have been a number of no-action letters and other efforts to sort of tweak the Dodd-Frank rules because they didn't quite work when they were first put out. The confusion, the lack of clarity, the market fragmentation in the cross-border space, the challenges that the U.S. had with non-U.S. authorities over our overbroad approach to Dodd-Frank really has resulted in loose ends that we still need to tie up and we are continuing to tie up.
That's why I think that when it comes to the digital asset markets, we need to be taking a proactive, forward-looking approach so that we're building the regulatory framework the right way the first time and not unnecessarily creating overly burdensome or costly requirements through, frankly, confusion or because the rules aren't workable.
A lot of the debate related to crypto is playing out in social media, especially Twitter. Many of the attacks against Gary Gensler, the SEC and others critical of the industry have been pretty harsh. What are your thoughts on how a lot of this is playing out in the open, on Twitter and social media?
It's really important that we have these public forums for people to share their opinions and to debate important issues. That's one of the greatest things about democracy and about America, is that you can have a voice, and we have freedom of speech, and that's so critical. But I don't believe that there should ever be bullying. I don't believe in having hateful speech or no common decency in some of these Twitter wars. In civil discourse, there's no room for bullying and just unbelievably inappropriate comments.
What is your biggest worry related to crypto, the way it's evolving and the efforts to regulate it?
Process is very important. When you have good process, you have good outcomes. When we think about digital assets, more broadly and the United States approach to digital assets, the things that I'm concerned about are, first and foremost, national security and the implications that go together with that. Making sure that we are supporting robust digital asset markets that uphold the U.S.’s and the dollar’s place in the world — that's very important for us as a country. It is incumbent upon us and it is part of the CFTC’s mission and mandate that we have responsible innovation and fair competition.
