The transcript below is auto generated by an AI. Although the transcription is largely accurate, in some cases it is incomplete or inaccurate due to inaudible passages or transcription errors. Please excuse any tpyos.

Olta Andoni
Hello this is all explains we are recording our second podcast. Ah and we're very excited about this new sort of narrative that you're trying to build here with the podcast. I have here with me today commissioner Mercinger. Thank you so much commissioner for being with me today. Ah we would like to start with some simple questions and we're ah very excited to jump on in the narrative about what we're doing with our our our I'll explain and also. To proceed with some other ah questions about the cfdc's role commissioner meringer ah you joined the cftc if I'm not mistake on March of last year can you tell us a little bit more what it means to be a commissioner at Cfdc and what is the organization mission and how does.

Summer Mersinger
Yeah.

Olta Andoni
The cfdc role as Market Regulator impacts the digital assets markets.

Summer Mersinger
Um, yes, thank you? Um and happy to be on I'll I explains um, especially because it is kind of my 1 ne-year anniversary as a commissioner I was sworn in on March thirtieth of 2022 so I've had a full year under my belt. Um, and hopefully that has has given me some insight into you know the various. What's going on in the markets and also kind of where we see um regulation um and and legislation. Going in some of the spaces that that your listeners are interested in. Um I do always have to start with a standard disclaimer that the views I share today are my own and they do not reflect the views of the entire commission or my fellow commissioners. So with that I will explain a little bit about the commission. Um. We're a 5 member bipartisan commission. Um, all 5 commissioners are appointed by the president and confirmed by the United States senate we have staggering terms each 5 year terms that that um.

Summer Mersinger
They they expire at different times so that we have some continuity. The chairman is always a member of the party of the president. So um chairman Benham current chairman is um, a member of the of the president's party and the commission is is always. 3 to 2 3 um commissioners from the party of the president and 2 minority commissioners and I'm one of 2 minority commissioners. But what's interesting about our work is it's very, um, it's not partisan work as regulators in the markets we regulate. It's really not a a partisan um commission or the work we do is is really not partisan. Um, which is great so we work very closely. We're an independent agency and really. Our our regulatory remit is regulating the futures and derivatives markets and these are really just secondary forward looking markets that are mostly used for price discovery and risk management and and hedging by a lot of institutional. Um. Players large businesses banks. Um, and some other you know people who are looking to hedge risks that they have in their business. Um, and our mission is.

Summer Mersinger
You know to to quote it. It's to promote the integrity resilience and the vibrancy of the Us derivatives markets through sound regulation. Um, ah our governing statute which is a commodity exchange act actually has a list of some other purposes. Um, or. Goals that they set out including you know, deterring and preventing manipulation and market disruptions. Um ensuring financial integrity protecting market participants um, and one that I quote. Most often is that we were directed through our statute to promote responsible innovation and fair competition among markets and market participants. So I think that is really an important goal that was put into our statute. You know back when we started in in the 70 s and. It. So it's kind of the foundation of our agency and one that I I always say you know we can't lose sight of we really need to always have that in the back of our mind with whatever we are. We are doing um or whatever we're thinking about. And you know with respect to digital assets. We're kind of involved in two ways. Um, first we're the market regulator over trading facilities clearinghouses and market professionals that are trading in derivatives on digital assets.

Summer Mersinger
So these are like futures contracts on bitcoin ether. Um, it's it's like any futureturist contract on some of ah you know we have a lot of physical commodities whereas. There's also future kind of contracts as well. And really, we just need to make sure that that those secondary markets are operating. Free and manipulation. Um that they the price discovery or the pricing that that is resulting from these markets reflects the underlying spot market ah, and just make sure everyone follows the rules. Ah. Kind of a secondary role. Um through the enforcement the congress gave us um, additional enforcement authority in the Dodd-frank act to go after fraud and manipulation in commodity markets. So what that means is when a digital asset is considered a commodity. We have. Special enforcement authority where if we find fraud and manipulation in those markets we can bring charges for that fraud and manipulation now. There is you know, kind of this the the unfortunate side of that is. That's after the fraud and manipulation has occurred so by the time we're stepping in with enforcement something bad has probably happened There's been some bad behavior people may have lost money and you know we'll do our best to try to catch the bad actors and recover as much funds as of the funds as we can.

Summer Mersinger
But again it's It's not a forward looking regulatory role. It really is an after the fact after something bad has happened roll. So that's kind of that's a lot um is for of overview and and what our age is about but I just want to give you that background.

Olta Andoni
So super helpful no super super helpful commissioner meringer and I think this probably is a perfect segue into our next question because the. Cfdc's ability to to police the digital assets markets has been called into question by some members of the congress and I'm sure you're very much aware of that and others could you.

Summer Mersinger
Um, yes.

Olta Andoni
Could you speak a little bit more on how the Cftc's role in supervising this complex actually financial products is going to enable or would enable ah Cftc to oversee digital assets markets right now.

Summer Mersinger
That's a great question and I think it's an important um point that I I often bring up but I think others bring up as well when when asked about why would the cftc be an appropriate regulator. Um, over these these markets. Um.

Summer Mersinger
Anyone who has spent any time looking at derivatives products Swaps um they were very complex financial products and the markets that they trade in are are complex and that's what we do. We oversee very complex. Markets and contracts and that's just kind of our bread and butter. So You know, certainly we are used to Seeing. We're used to seeing new and innovative um trading in in in our markets where you know I yeah. I Think others other agencies probably do as well but not to the extent where ours is pretty fast moving. Um, we also are a principles based regulator which means we set out broadbased principles for um, our market participants and registrants to follow and they can kind of. Fill in the blanks on specifics as long as they meet those overarching goals. What that means is we're a little bit more flexible, um and nimble. So I think innovation is able to. Thrive in our markets. Probably a little bit more so than in some of the more traditional markets because we don't have this this bespoke regulations that you may see in other markets. Um, and you know the other.

Summer Mersinger
Thing that that we bring to the table that I often point out is all our markets are are very global everything we do at the Cftc we have to bank and really, um, interact with our our global regulatory counterparts to make sure we're not somehow causing problems for um. The markets globally so you know because digital assets are clearly global markets and there are so many global participants and it's something where you know you, it's crossing borders. Um, you know you want a regulator that. That understands that dynamic and how to work within those um you know, kind of those associations with with other regulators in other countries. So I think that's what we bring to the table I know some people say that maybe our rules aren't strong enough because they're principles based um, but. I I actually think that having more prescriptive regulation in in ah in an in space where there's new technology and innovation is actually not as good of regulation because the regulation is always going to leg behind the innovation. When you have principles-based regulation. You are more technology neutral and so it it can keep up because you are looking at the overall you know, kind of purpose and principle versus a very specific way that something needs to be done so that's kind of the way I view it and and.

Summer Mersinger
But I try to share with you know whether I'm talking to folks on the hill or or speaking publicly. It's what I try to explain to folks as to why the Cftc is you know would be an appropriate regulator of the digital asset spot market.

Olta Andoni
Absolutely And I think this kind of brings us um to our all explains we have created our. Ah, tree of web 3 which we just launched recently and I'm very excited as one of the co-founders of this campaign I'm very excited about our tree of web 3 wisdom and we have included their 5 branches to kind of guide our policymakers. Ah, thinking when approaching the regulation and we'll touch on this I mean during ah the rest of the conversation but I would like to start with branch 3 which refers or encourages policymakers to Classify tokens sensibly. And I think this is probably 1 of the big principles that we have but I think it it definitely gets to the heart of that work of jurisdiction that you kind of referred a little bit previously between the cftc the scc and the cfdc. Ah, if we were. Classifying this token sensibly according to the nature and according to the purpose of a token. Do you think that would be helpful in creating that sort of regulatory framework that is going to move our industry. Forward.

Summer Mersinger
Yeah, absolutely I think it's absolutely essential that we do create some sort of framework. Um, that is something I've I've been trying to um when when I'm talking to the legislative branch as they're working through different ideas. You know I often suggest. We can't ignore that first piece of this puzzle which is a framework to classify digital assets. Um, you know whether whether it's requiring the various agencies to sit down and do a joint rulemaking or you know coming up with a flamework. Framework through a working group. We really do need to give that market certainty to players in the space. You know? what's so interesting to me about digital assets is you know people people want to say that's cryptocurrency. But it's anything you know anything can be a digital asset and you know helping. I think that the other kind of important piece of a framework is to make sure people understand that even you know even if the regulatory structure. You know it's legislatively changed and 1 federal regulator is appointed as kind of the. Main um, regulator of the ah digital asset spot market I don't think that changes the fact that you know if say you register. But then you want to offer a security that's clearly a security as a digital asset. That's not going to get you out of.

Olta Andoni
An absolute text.

Summer Mersinger
Oversight by the scc or other regulators. So you know making sure people understand that you know because these assets can be anything they can transform as well. Um, giving people the certainty to know that you know if this is the asset you you are bringing to market. You know here's how it's going to be regulated or who here's who you're going to have to work with for regulation and and that's really step. 1 We could be doing that right now. Um I don't I don't think it's going to happen organically I do think that you know it might take congress telling us we have to. Um, but we can. We can certainly do that with the scc and and we've done it before through joint rulemaking. Um so it wouldn't be ah, a new concept where there might be some overlap um between where an asset falls between the 2 regulators. So I hope that's kind of step 1 in this process that that we come up with some sort of clear framework.

Olta Andoni
Absolutely And and I know that ah there are so many questions about daws right now and I'm curious your thoughts are on the uki dow I know you've been very vocal actually about this and.

Summer Mersinger
Yeah.

Olta Andoni
I Always loved your feedback and ah everything you had to say about this case because it's such an important enforcement Case. So How do you seek to to to regulate dows in the future I mean do ah, do you have any particular thoughts on whether or not developers should be liable and. Especially as as members of ah dows and those that as we have seen from I mean this action so far. It seems like those that simply hold governance tokens I mean it seems that the court considered them liable so I would love to hear your thoughts on this.

Summer Mersinger
Well I'm not afraid to admit that I don't have the answer but what I do know is not the answer is for an enforcement um an enforcement case to. Tell us how we're going to look at um these organizations. That's not the proper way to do this So I've I've encouraged the Chairman and and I would hope that we go through a rulemaking process where we say we put out Publicly. How should you know, asking the asking. How should we regulated a dao. You know how should they be held liable um you know that gives us public input allows us to go through notice and comment. It gives us a stronger legal standing because and I I always have to be careful when I'm talking about. The ukidawd case because it's still active litigation but I always I can talk about what I said in my my dissent and my dissent was surrounding the fact that we were we were using a state unincorporated association. Um, you know law that. We kind of just decided fit and that's how we were going to look at the liability moving forward and to me that's bypassing a lot of important steps that need that need to happen um to provide.

Summer Mersinger
Proper public notice of how we're going to consider liability. What's very hard here is um, especially in this case is clearly they're violating. Um our act they they were you know offering? um off there. Offering trades in in a product that was a violation of our act the 2 gentlemen that we settled with initially um, who kind of started this actually said they were going to create a dow and transfer kind of the.

Summer Mersinger
Governance so that they it could be kind of Cftc enforcement proof. So. It's a very uncomfortable situation because there's a violation a clear violation and clearly somebody intended to set this up in a way to try to avoid being. Held liable under our governing statute but to me that doesn't mean we just find a way to make it happen. We. We really do need to go back and say okay, how are we going to consider you know dow's. Under our statute. How are we going to hold them liable and the best way to do that is through notice and comment um rulemaking and and we can do that we can use our current statute. We don't we don't need legislative authority to do that. That's something we could do right now and it's something I keep suggesting and and pushing for.

Olta Andoni
Nice.

Summer Mersinger
Ah, because I do think we're going to see more cases like this and um, we just need to make sure the public is on notice of how we're going to consider those who are involved with the dao whether it's toket holders or those who are are trading through that that system. Um, people deserve to understand their liability going forward.

Olta Andoni
Absolutely and I mean just to reemphasize again I'm a big fan of of your descent. So thank you so much for all the knowledge that you drop in these descents as well. I think it's very important for our industry especially for myself being general counsel of ah.

Summer Mersinger
Um.

Olta Andoni
Decentralized and centralized exchange and I know that we have spoken and I we're not against the regulations. So We appreciate the regulators just helping us out there understanding these principles I'm just curious to hear from your perspective. Ah, so do do you think or I would be curious whether or not crypto firms are going to be able to get any cfdc licenses in the future I mean so far I think is Ledger X. But do you have any sort of prediction on that or what the cfdc is going to be looking for.

Summer Mersinger
Silent.

Summer Mersinger
Yeah I think there there is a lot of interest. Um, and there's certainly a demand for derivatives products based on um cryptocurrencies and and those contracts actually exist that a number of our current. Um. Exchanges but we are seeing crypto companies themselves come into our space some of it's through Acqui acquisite acquisitions of existing um registrants or new applications. So you know what it will look like. You know there's kind of two ways to go so one is the what we call the intermediated model where we have what's called a a futures commission merchant and fcm who really does a lot of the kind of frontend. You know, onboarding making sure that they. The customer is able to you know goes through the the you know Aml K Y C process you know understands that these are risky markets has the margin um and the capital to to really take positions in these markets and you know has. Disclosures that are appropriate to participate in the futures markets and so that's one way that that we'll see crypto come through kind of our door so it'll be a very traditional model where you know they they have maybe they're going to be the.

Summer Mersinger
The exchange or the clearinghouse. But they're going to have these Fcm players be the way that customers access that clearinghouse. Um, and that right now is really the only option if they want to have margin transactions. Now The other way we are seeing it is crypto companies and and this is what Ledurex has you know you can have these crypto derivatives and you can have direct access to the customers. But it has to be fully collllaterized so you're you know you're holding. Full amount of Capital for for that position. Um, and that's you know that's hard. It's it's something that you know there's not as much demand as we are seeing um for the leveraged transactions. Um, and so that's why a lot of companies are looking at how can we do this through the intermediated model so we can provide leverage transactions to our customers. Um, but it it brings up a lot of interesting Issues. You know because of our core principles and because they were they were created and based on a very different system. We. We see a lot of um, vertical integration now where you may have one entity. That's you know the parent company that's running a crypto exchange who now has a.

Summer Mersinger
Dcm license wants to be a clearinghouse then also wants to be the intermediary and we have to ask ourselves. How's that going to work. Um because especially with the clearinghouse. They have some self-reulatory responsibilities and so you have to ask? Okay, how does that.

Summer Mersinger
How does that entity regulate itself essentially in the market. Um, you know what protections are in place and and are the current current. You know guidelines really address that and I think that's something you'll see us talk about a little bit more at Cftc. You'll see us probably. Put something out requesting some input publicly on this matter. Um, because it is a trend that we are. We are definitely experiencing and it's it's new and and just not new is not bad. Um, we we like new.

Olta Andoni
I Absolutely yeah.

Summer Mersinger
But it's that it goes to responsible side where you know it's a new model is great as long as we are comfortable that we can you know that it can work responsibly and that we can regulate it in a way that is protecting the customers. Um and ensuring that they are not being harmed. By um, by this vertical integration.

Olta Andoni
Absolutely this makes perfect sense and I appreciate the fact that you are going to consider also some comments from from the public and I know or kind of running out of time but I would love to hear your thoughts. And let's talk a little bit about global coordination because that's a big part of branch or element 5 or item 5 of the tree of wisdom for all, ah, explains which encourages and I think this is very important for all the policymakers all around the world. You kind of to kind of think globally.

Summer Mersinger
Yep.

Olta Andoni
I know some time we try to compare where we send from ah innovation perspective here in the United States but honestly I mean we're very happy to ah to not only support innovation here but we appreciate all these efforts especially from Cftc recently and. And other regulators in order to support us in this ah March toward innovation. So what do you think about this firm or or some of the first principles that you would have regulators in different countries to kind of concentrate on. Or are there any some sort of first principles that you would highlight or you'd like to highlight for us.

Summer Mersinger
Yeah, yeah, absolutely and and and it has been very interesting I've done some international travel and I've I've met with some um regulators across the globe and crypto is what everybody is talking about and everybody's kind of in the same boat where you know they're just trying to find the right regulatory structure. To make sure that the markets can continue to thrive but that people are protected and they're not going to um you know lose their money and have you know, have it all disappear overnight. So. It's definitely a a global issue that everybody's looking at and trying to address. You know in a way that that allows these markets to continue to thrive you know I think 1 thing I always try to you know encourage other regulators or that I've I've said works well for us is obviously principles-based regulation as I mentioned before having some. You know structure but not prescriptive rules because prescriptive rules just can't keep up with the innovation and the technology and you're going to the rules are either going to fall behind creating gaps or you're going to keep some of the best innovation out of the market. Because the rules are too prescriptive so principles-based regulation I think is an important principle not regulating the technology you know regulating the activity um is another one.

Summer Mersinger
Um, and and this is something we deal with in the the futures markets as well. But protectionist policies you know, understanding that these are global markets this money needs to be able to flow freely throughout the throughout the globe and you know when one country Puts regulations. On these markets that are protectionists or um, you know trying to bolster the Market market within their home Country. You end up with market fragmentation and that to me is is a ah necessary risk you know part of having global markets is understanding. Global size and the impact and if you start fragmenting these markets then you you never truly understand the size of the market and the risk of the Market. So I think you know we have to be careful not to um. To protectionist and and cause Market fragmentation and I think the last thing is just promoting kind of responsible innovation. That's free of fraud and Manipulation. So As long as there are bad actors out there taking advantage of customers that. Continue to kind of give this um you know give the industry a bad name I don't you know it's hard to move forward from that So as much as possible trying to weed out the bad actors. The people who are trying to take advantage of people um going after those individuals working together again.

Summer Mersinger
You know, coordinating as regulators to find and um, weed out the fraud and manipulation that's going to be key to ensuring that we have kind of longstanding success in in the digital asset markets.

Olta Andoni
I absolutely commissioner Mercinger this has been amazing. Thank you so much. It's a real honor to have you on our second podcast actually for our explains and. I really appreciated all your input all your feedback, especially all your knowledge I'm a big fan of yours as you already know. But thank you so much for joining us today.

Summer Mersinger
Now thanks for having me. Um I love what you guys are doing I love the tree of wisdom. Um, so I'm I'm happy to be a part of this and I look forward to seeing what the third fourth and fifth you know beyond podcasts. Um what they bring.

Olta Andoni
Absolutely thank you? So so much.

Summer Mersinger
Thank you.