The Exchanges

Q actually conform to an outcome. And that creates these two sides. I just want to get your thoughts on prediction markets. What role do they play? How do we balance the capital formation that the market creates versus the investor protection, the insider trading that may be happening? It's a very complicated space. I'm not going to hold you to any of it. I just want to think out loud.

A Well, these markets aren't new. We've had them since the nineties. They started off with the electronic market in Iowa where Folks were predicting the political outcomes on elections. We've been surveilling and monitoring and policing fraud and manipulation in these markets for a very long time. And to the extent that there are contracts in certain markets, for example, what color Gatorade's gonna be, you know, dunked on the, the coach at the Superbowl. Some of this stuff is potentially at risk of being manipulated. And there's a risk that somebody on the team is able to go trade because they have special information about The Gatorade they put in the cooler. We have standards to make sure that those contracts should not be listed, and it's on the exchanges as the first line of defense, as self-regulatory organizations, to evaluate each contract and certify to us, the regulator, the CFTC, that those contracts are not readily susceptible to insider trading, manipulation, fraud, and the like. And we saw, actually, recently, a call sheet, one of the prediction markets, brought two enforcement actions against participants. One involved A contract, uh, related to Mr. Beast's YouTube channel, where one of his employees insider traded based on information of when a video was going to launch or what was in the video. And the same sort of authority that you have at the SEC around a duty…

AI assessment note: “to the extent somebody insider trades on information, we police that.”

Q that one blind spot everybody has is to these bilateral swaps. I mean, I've done certain bilateral swaps with certain counterparties. It's not clear to me that you know that on the back end of it. Can you talk about that and how you think that that should stay the same change? What that is, whether that keeps you up at night, whether it should keep us up at night?

A Sure. Well, I'm not a huge fan of Dodd-Frank, but in the wake of Dodd-Frank, we got Swapdata reporting. And these bilateral over-the-counter swaps are now generally all, there are some exceptions, but sent to Swapdata repositories where we're getting information on a daily basis, as well as these third-party Swapdata repositories that compile that information. So the markets are much less opaque. We have transparency today. But my concern about the swap data reporting regulations is that they have really been a tool for enforcement divisions in the past where you've got so many different fields. It's really difficult to characterize each different type of swap. I'll tell you when I was in private practice and folks started entering into Bitcoin swaps and crypto swaps, characterizing that as a type of a derivative relative to cattle and wheat and other commodities really was a whole lot of legal advising and a lot of wasted money Frankly. So we need to simplify. We need to make sure that our swap data reporting regime is rational and coherent and makes sense for the everyday participant in the markets. You shouldn't have to go hire a high price law firm just to enter into a risk management tool. But these markets, these, uh, these developments post.frank, some of that makes sense. Some of them don't. A big priority of mine is going through, uh, rule by rule to make sure that all…

AI assessment note: “We need to simplify. We need to make sure that our swap data reporting regime is rational”

Q don't know what that's like every day, but what are the couple of things that the two of you think about at night? What are the critical risks to this experiment that you just know you have to get right or the critical issues that in the next year or two, you must get right for all of this to continue? Maybe Mike, we'll start with you and then Paul.

A Two big things concern me. The first has been this push of innovation offshore. We've got to get it back Back here in the United States. That's really what's built this country over the years. Thomas Edison didn't have to go ask for permission to go innovate. We need to make sure that our builders, our visionaries, our entrepreneurs have the courage and the confidence to come and develop new things and build here in our financial markets. And that means blockchain. That means artificial intelligence. That means prediction markets. We'll set the rules for it and make sure that it's possible to do it, but we don't want Everyone fleeing to the Cayman Islands and the Bahamas and, and Russia to go do this stuff. So that's really concerning to me. I want to make sure that the folks are back here in the US. The second piece, of course, is the, the risk to our system. If we've got too much manipulation and center trading fraud, I mean, why not trade, uh, you know, elsewhere and, and there's real risks to our investors. And so making sure that we have the right controls, customer protections, Uh, we can't have another FTX in the United States where funds are lost and, and there's, uh, an absolute fraud on, on our American people. So, so that's a really critical concern. Balancing innovation with our financial system, the integrity of our markets, and we're gonna do it, but it's, it's de…

AI assessment note: “Two big things concern me. The first has been this push of innovation offshore.”

Q Can you think of Michael, any reason that we should restrict Americans from being able to participate in venture capital? Is there any argument here? If there were some basic level controls as I've Outlined here. Sophistication. Taking a test or a cap. You can only put five K and you make a 150 K a year. You can put in 15 K per year. What are your thoughts, Michael?

A I'm a believer in free markets, and I really think that allowing more access to our capital markets is, is really a powerful thing for everyday Americans. We saw the ICOs, you know, the initial coin offerings where things just kind of moved into crypto, and you had all sorts of investments in different projects, and they were attempting to, to get under the radar of the securities laws, even though there are capital raises with different tokens. And I think the markets always find a way. So allowing for more access, decreasing some of the requirements around accreditation. I think that's a really great thing for the American people and, and really will just allow for people to, to have some skin in the game and maybe they lose sometimes, but other times they really hit it big and it's a great thing for, for everyone.

AI assessment note: “decreasing some of the requirements around accreditation. I think that's a really great thing”

Q Mike, what are your top priorities for twenty-twenty-six in the CFTC?

A Well, like Paul, I started off working in private practice at a law firm, and right around twenty-twenty-one, twenty-twenty-two, every week my clients would get a subpoena from Gary Gensler or from the CFTC, and were faced with this onslaught of regulation by enforcement. They were faced with regulations that did not work for their business models, and these were crypto firms, prediction markets, artificial intelligence firms, As well as our traditional financial market participants, they were just relentlessly attacked by the, the federal government under the prior administration. So I really came into government to help right the ship, to help make sure that we have purpose fit rules and regulations for new innovative technologies and financial products. And so a big piece of my agenda has been crypto, uh, our crypto asset markets, as, as you all I'm sure tracking, there's some legislation that we're really hopefully, uh, Working with David Sachs to get across the finish line and the president. Um, but, but that's going to be a key piece. So the CFTC would have a broad amount of authority over the spot markets, and we're getting ready to implement those rules should the legislation get across the finish line. Another key piece of our agenda has also been modernizing and upgrading our rules and regulations for on-chain software systems, blockchain networks, and other types of …

AI assessment note: “a big piece of my agenda has been crypto”

Q to it. I think it's totally democratic. It's the free market. It's like, let's figure out what's going on there. And on the other hand, I asked myself the question, where's the kill switch? Or where's the circuit breaker, if you will? And I just want to give you both a chance to talk about how you see these markets converge, and both the positives and the negatives of it.

A We need to be considering these risks as we're developing rules. And this to me is is the whole reason we need to have a purpose fit regulatory framework for these products and and autonomous agents and all of that. Uh, up until now, I think the approach has always been, let's apply the old rules and regulations, and, and that's gonna work out and make sure that, uh, nobody can actually innovate and, and create something new. So we are embracing these opportunities in the markets. We need to study them and make sure that we understand the risks, uh, but we can develop rules that accommodate that. So having a regime in place that says, go build, don't ask us for permission, but we need to study that work with the market participants, understand the risks and On our end, we need to set up guardrails. So I do think there are unique, uh, risks when you have the ability for an agent to go out and deploy capital on, on basically an autonomous basis. Uh, and, and that's gonna be something that our markets we've really, really never seen before as regulators, but that doesn't mean we have to stand in the way and block it. I, I think we need to really understand the risks, make sure that we have the right guardrails, whether that is Us operating nodes on blockchains or, or really having technologists that are studying the contracts and the code. Uh, but I don't think there's any reason …

AI assessment note: “we need to set up guardrails.”