Ryne Miller: CFTC shifts to regulation by regulation, digital assets now classified as commodities, and the need for US perpetuals on equities

Key Takeaways

• The CFTC is shifting from a strategy of regulation by enforcement to regulation by regulation, indicating a more structured approach.
• Public comments are being sought by the CFTC on prediction markets, suggesting a move towards more inclusive rule-making.
• Major digital assets being categorized as commodities provide regulatory certainty, aiding market participants in product development and capital allocation.
• Chairman Selig’s agenda may lead to more substantive rulemakings from the CFTC, reflecting a shift in agency productivity.
• The CFTC’s funding model limits its capacity, impacting its ability to meet market demands effectively.
• The US must develop a parallel product for perpetuals on equities to stay competitive in the global market.
• Dual registration of entities poses significant regulatory challenges, affecting hedge funds and asset managers.
• Joint regulation by the SEC and CFTC could enhance oversight of prediction markets, offering a collaborative regulatory approach.
• Certain prediction market bets, especially those related to public company performance, may fall under SEC jurisdiction.
• Existing laws on the use of confidential information in trading are likely to extend to prediction markets, ensuring regulatory compliance.
• The CFTC is signaling potential rule-making on prediction markets, indicating a proactive regulatory stance.
• The dual registration issue highlights inefficiencies in the current regulatory framework for financial entities.
• The CFTC’s transition to regulation by regulation could lead to more predictable and transparent governance of digital assets.
• The need for a US parallel product for perpetuals on equities underscores the importance of innovation in regulatory adaptation.
• Joint SEC and CFTC regulation could resolve historical tensions and improve market oversight.

Guest intro

Ryne Miller is a partner in Morrison Foerster’s Financial Services Group, advising global trading and markets businesses. He previously served as General Counsel of FTX US, where he played a crucial role responding to the company’s collapse in November 2022 after discovering an 8 billion to 10 billion dollar liquidity hole in customer deposits. Miller also has prior experience as a CFTC staffer, bringing deep regulatory expertise to discussions on crypto policy and enforcement.

The CFTC’s evolving regulatory approach

• The CFTC is moving from regulation by enforcement to a more structured regulation by regulation strategy.

• There is an intentional transition from regulation by enforcement to regulation by regulation

  — Ryne Miller

• This shift could lead to more predictable governance of digital assets.
• The CFTC is signaling potential rule-making on prediction markets and seeking public comments.

• They’re putting out guidance… they’re putting out proposed rules

  — Ryne Miller

• This proactive approach involves engaging with the market to shape future regulations.
• Public comments are crucial for the CFTC to develop inclusive and effective rules.
• The transition reflects a significant change in regulatory strategy with potential market impacts.

Implications of digital assets as commodities

• Most major digital assets are now categorized as commodities, providing regulatory certainty.

• The headline item is most major digital assets are now clearly in the commodity side

  — Ryne Miller

• This categorization aids in product development and capital allocation with certainty in the US.
• Regulatory clarity can influence market dynamics and investment strategies.
• The classification of digital assets as commodities marks a shift towards clearer regulatory frameworks.
• This move could encourage innovation and growth within the digital asset market.
• Market participants can now operate with a higher degree of confidence.
• The commodity categorization aligns with global regulatory trends for digital assets.

Chairman Selig’s agenda and CFTC productivity

• Chairman Selig’s agenda may lead to more substantive rulemakings from the CFTC.

• You might see a transition back into really substantive meaty output from the agency

  — Ryne Miller

• This reflects a shift in agency productivity based on leadership changes.
• Increased rulemaking could enhance regulatory clarity and market stability.
• The CFTC’s historical context of rulemaking output is significant in understanding this shift.
• Leadership changes often bring about new regulatory priorities and strategies.
• Enhanced productivity could lead to more frequent and impactful regulatory updates.
• The CFTC’s agenda under Chairman Selig indicates a commitment to effective governance.

Funding challenges and operational capacity

• The CFTC’s funding model limits its staffing and operational capacity.

• The agency always is a funding issue… they can’t spend more than their budget

  — Ryne Miller

• This impacts the CFTC’s ability to respond to market needs effectively.
• There is ongoing debate about whether the CFTC should switch to a fee model.
• Funding limitations pose structural challenges in fulfilling the CFTC’s regulatory role.
• Adequate funding is crucial for the CFTC to maintain its operational effectiveness.
• The CFTC’s capacity constraints highlight the need for sustainable funding solutions.
• Addressing funding challenges could enhance the agency’s regulatory capabilities.

The need for US regulatory adaptation

• The US must develop a parallel product for perpetuals on equities to remain competitive.

• There will be perpetuals on equities in the global on chain to reverse market

  — Ryne Miller

• This highlights a critical need for regulatory adaptation in the US.
• Perpetuals are significant in trading, necessitating regulatory innovation.
• The US’s ability to compete globally depends on its regulatory agility.
• Developing parallel products is essential for maintaining market competitiveness.
• Regulatory adaptation is crucial for the US to keep pace with global market developments.
• The focus on perpetuals underscores the importance of forward-thinking regulation.

Regulatory challenges for dual registered entities

• Dual registration creates significant regulatory challenges for hedge funds and asset managers.

• Some of the biggest pain points over the years are dual registered entities

  — Ryne Miller

• This affects the efficiency and feasibility of financial products.
• Different examination programs for the same regulation create operational inefficiencies.
• Harmonizing regulatory frameworks could alleviate challenges for dual registered entities.
• The issue highlights inefficiencies in the current regulatory landscape.
• Addressing dual registration challenges is crucial for regulatory effectiveness.
• Streamlining regulatory processes could enhance market efficiency and innovation.

Potential benefits of joint SEC and CFTC regulation

• Joint regulation by the SEC and CFTC could lead to better oversight of prediction markets.

• If we can figure out a way to do it jointly it’s very encouraging

  — Ryne Miller

• This collaborative approach could improve market operations and regulatory clarity.
• Historical tensions between the SEC and CFTC could be resolved through joint efforts.
• Joint regulation could enhance oversight and reduce regulatory gaps.
• Collaboration between agencies is crucial for effective market governance.
• The potential for joint regulation reflects a strategic viewpoint on improving oversight.
• Enhanced collaboration could lead to more comprehensive and effective regulation.

SEC jurisdiction over certain prediction market bets

• Certain prediction market bets may fall under SEC jurisdiction.

• There are certain kinds of bets that probably are under SEC jurisdiction

  — Ryne Miller

• This includes bets related to public company performance and transactions.
• Understanding the regulatory frameworks governing prediction markets is crucial.
• The SEC’s jurisdiction highlights the complexities of regulating prediction markets.
• Clear regulatory guidelines are needed for prediction markets to ensure compliance.
• The intersection of prediction markets and SEC oversight reflects regulatory intricacies.
• Ensuring proper jurisdictional alignment is key for effective market regulation.

Existing laws and prediction markets

• Existing laws on confidential information in trading will likely extend to prediction markets.

• There’s gonna be frameworks around who is not appropriate to participate in certain contracts

  — Ryne Miller

• This indicates a trend towards stricter oversight in emerging markets.
• Insider trading laws are crucial for maintaining market integrity and fairness.
• Extending existing regulations to prediction markets ensures a level playing field.
• Regulatory frameworks must adapt to address new market practices effectively.
• The application of existing laws to prediction markets highlights regulatory foresight.
• Ensuring compliance with existing laws is essential for the credibility of prediction markets.