WBD120 Audio Transcription 

Brian Quintenz on How the CFTC Regulates Cryptocurrencies

Interview date: Friday 21st June 2019

Note: the following is a transcription of my interview with Brian Quintenz from the CFTC. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I chat with Brian Quintenz, a commissioner at the CFTC. We discuss the difficulties in regulating the Bitcoin Futures markets, whether the current US government’s regulations are outdated and the history of the CFTC and Futures markets.

“You look at credit card companies, their biggest expenses are branding, and on fraud, well you don’t have the branding issues around Bitcoin, and you have a pretty robust anti-fraud detection system with the decentralised nature of the verification process.”

— Brian Quintenz

Interview Transcription

Peter McCormack: So I did 20 years in advertising, have you ever watched Mad Men?

Brian Quintenz: Yes!

Peter McCormack: So I love Mad Men. I love old school creative, beautiful art direction, great copy and that was taken out of the industry and it became very much programmatic and all about the data. Then the data became quite sinister and I had enough. So I ended up writing a kind of manifesto called "Online advertising doesn't work" and quit the industry and had a year or two off and then two years later, I'm here at the CFTC!

Brian Quintenz: The intersection of Mad Men and Jerry Maguire.

Peter McCormack: Yeah, it was that Jerry McGuire moment actually when I did it. It was totally that we were conning ourselves and we were conning our clients and I couldn't do that anymore. It didn't feel right. So I ended up having to find something new to do.

Brian Quintenz: Well isn't it amazing to have a job where you have motivation and enjoy thinking about it regardless of what time of day it is or if it's a work day or not. I mean it's a blessing.

Peter McCormack: I was listening to Joe Rogan the other day and he was saying some jobs shouldn't be called a job. This isn't like a job! I've been to Boston for a couple of days, I'm now here with you, I'm going to go to Florida. The only sad thing is that I have some time away from my kids, but it's not like a job. I love doing this and I'm sure you love doing what you do!

Brian Quintenz: I feel same way about this.

Peter McCormack: So we actually have something in common as well. So I read your opening statement to the nominee to the Commodity and Futures Trading Commission.

Brian Quintenz: Oh, when I was being considered as a nominee on Capitol Hill?

Peter McCormack: Yes, so I read your nomination and you thanked all your family. My son is also called Conor.

Brian Quintenz: Oh really? Fantastic! How old is he?

Peter McCormack: He's 15.

Brian Quintenz: Okay, my son's 12.

Peter McCormack: Teenage is coming!

Brian Quintenz: Yes, it's sprouting!

Peter McCormack: So you think it's teenage at 12, because it's changed and then the day 13 hits, everything changes. So be prepared.

Brian Quintenz: Well, luckily I have a 10 year old daughter, so I'll just focus on her for two more years!

Peter McCormack: I've got a nine year old daughter. But my Conor is spelled differently. So he is with a single n, because the American spelling is two n's. My father's Irish and he lives in Donegal, so the original Irish spelling is one n.

Brian Quintenz: Well I'm not Irish, I'm German and Norwegian. But Connor was just a name that we liked.

Peter McCormack: But you've always lived in America?

Brian Quintenz: I have, yeah. My family is American, our ancestors moved here in the middle 1800s, actually kind of right around the time of futures trading that started taking hold in Chicago, in the Midwest, in the middle 1850s, which is what the CFTC was founded to regulate. The Chicago Board of trade was incorporated in 1848. It became chartered by the Illinois state government and the 1850s, and it got self regulatory powers and started actually enforcing standards for the future delivery of commodities. The CFTC was officially created in the 1970s, but there were prior iterations of it that were part of the Department of Agriculture since the 1920s.

Peter McCormack: So this is in your genes?

Brian Quintenz: Yeah. I guess you could say that, mid-western, 1800s.

Peter McCormack: Is that why you and Hester get on, because you're both buckeyes?

Brian Quintenz: Of course! Anybody from Ohio likes each other. I think Ohio is the home of everything great.

Peter McCormack: Well when I interviewed Hester, I was dating a girl from Ohio.

Brian Quintenz: Well I think better of you already!

Peter McCormack: Yeah, she's amazing and a great person, but she wanted me to go there for Thanksgiving, because you have the big game, is it against Michigan?

Brian Quintenz: Yeah, the Ohio state football game! Actually I just took my son there, it was his first college football game and I took him back this last November for that and it was in Columbus at the Horseshoe Stadium.

Peter McCormack: I think I prefer the college football now from the NFL.

Brian Quintenz: So I grew up in Columbus and Columbus did not have a professional football team. Cleveland in the north has a professional football team and Cincinnati has a professional football team, but Columbus never did. So I was always partial to college football myself.

Peter McCormack: Have the Cleveland Browns got it back together yet, because they're on a bad run?

Brian Quintenz: I mean I guess you could still debate about whether or not it's a professional football team! So I'm lucky to be able to cheer for the Buckeyes. Hester says hi, I was with her yesterday. She wanted me to remind you that she's listening and that Crypto Mom wants you to watch your language.

Peter McCormack: I'm imagining like it's when I'm in the car with my dad, I have this filter, I can switch off my swearing. So I'm going to do my very, very best! Don't you have to do your disclaimer?

Brian Quintenz: I do! So because we are an independent commission and there are five of us, we operate on a majority basis, so therefore nothing that I can say or nothing that I do say represents the commission itself, it only represents my views. The commission again acts on a majority basis. So I only represent my own views and not those of the other commissioners, the chairman or the staff. So thank you for that reminder. Hester reminded me to do that too! She's the lawyer, I'm the markets guy.

Peter McCormack: You don't know what though? Whilst she's very official and straight down the line and she warns me repeatedly to stop swearing, she's also very approachable, like yourself. Actually I find that with the disclaimers, I understand why you have to say it, but I like this ability that you have to come on a podcast and be open and share your personal opinions. I think that is a very progressive way to work.

Brian Quintenz: Well, it is somewhat liberating that you can think about things outside of the box of having them have to represent an official policy position of a bigger agency. I think the chairman of our agency, or of the Sec, whoever they are, may have different responsibilities there, because they really do have the power of the staff to formulate opinions in some regards without the... But I view it as very liberating.

I always try to confine my comments to our jurisdiction and I try not to get into politics because I think we have a professional, political class up on the hill that does that every day and is very good at it. So I try to stay in my lane and think about what we do. But I love talking about it, I love thinking about it, I love hearing about it.

Peter McCormack: I think also similar with Hester and the SEC, some of us here in our little Bitcoin bubble think that's all you think about, but you obviously do a lot of things outside of Bitcoin, but I'd be interested to know how much of your time is this taking up and also are you seen as the crypto guy within the CFTC amongst the commissioners or is it everybody kind of sharing information and knowledge, who've got equal interest.

Brian Quintenz: Well, I think everybody does have an equal interest. I think obviously Chris Giancarlo our chairman, has taken on a very prominent role, given the reception to his testimony in front of the Senate, I think late 2017, early 2018, I can't remember the exact date. That really set a standard for how, I think, he would like the agency to view innovation and to be opened innovation specifically around Bitcoin and the advancements and developments of new crypto assets. 

But I actually have the pleasure and honor of sponsoring a technology advisory working group at the commission, that has specifically looked at issues around Bitcoin, cryptocurrencies, DLT, in ways that they could challenge our regulatory structure, focus us to rethink how we approach certain regulations or maybe even propose new ways of doing things to address challenges or to provide a better on-ramp for that innovation.

Peter McCormack: How was the journey for you, because I obviously had to look back at your career. You started out and you left Duke, what was it? You mastered in public policy and then you were a policy advisor, but then you set up a fund essentially and then you've come back into say a government role. How has that journey been? Was it all a plan?

Brian Quintenz: No, it wasn't, it was fairly random. But I think very broad interests linked all of those areas. I've always had an interest in public policy obviously since I majored at Duke, college football and college basketball fan and it was great to go there. At that point, they had one of the only, if not the only undergraduate public policy majors in the country. So I was really attracted to that and my goal was to get into policy work for the federal government.

I worked for a member of Congress from Ohio for six and a half years and ultimately I decided that I wanted to try something else, that kept that view of policy relevant, but that also capitalized on my interest in financial markets. I was actually almost a undergraduate economics minor, but I didn't quite get enough classes, I didn't calculate that the right way. So I always had an interest in economics.

I've always had an interest in markets and there were times when I was on the Hill where I knew that the government, the Congress was going to take a certain action, not because of insider information or because of my specific point of access, but because I knew the political landscape, I knew the legislative landscape, I knew how the procedure operated. I knew that that inaction was going to be taken or it was very highly likely to be taken and I saw the market completely missed that opportunity.

So I was fascinated by asymmetries of information, regulatory arbitrage, political based arbitrage investing, but I didn't have a background in finance, so I wanted to get that. So I went to MBA school over Georgetown, got an MBA focused on finance and was trying to pitch myself as kind of a political arbitrage, investment strategist to all of the big banks. That happened unfortunately to be right in 2008 during the financial crisis.

Peter McCormack: Do you know what, that's when I bought my house.

Brian Quintenz: Was it really? That's when I bought my house then too! I'm lucky I bought it here in DC And DC was fairly immune to the market.

Peter McCormack: Bedford wasn't, where I am. London was immune. But yeah, where I am in Bedford, it's a small town north of London, it wasn't immune and I think my house lost a third of its value within a year or two. It's back up now.

Brian Quintenz: Well so you take the same approach to your house as you do to Bitcoin.

Peter McCormack: I'm reckless with everything!

Brian Quintenz: I meant holding!

Peter McCormack: Yeah I hodled my house, but I didn't have a choice.

Brian Quintenz: So I got that experience and I couldn't necessarily... All the investment managers and banks that I was looking at, weren't really interested in that. They weren't interested in creating a new opportunity. They were interested in streamlining their roles in certain spaces. But I was able to get this great job with an upstart hedge fund that had just started up in Maryland that was focused on the banking sector and investing in the banking sector during the financial crisis.

I learned how to evaluate the largest banks in the world from the ground up, through a in depth analysis of the financial disclosures, model them in Excel and became, I thought, a really good predictor of their future earnings, capital levels and potential valuations. I decided to move on from that into more of a algorithmic trading strategy and formed my own investment fund that was registered as a commodity pool with the CFTC, because I was investing in S&P 500 futures contracts.

Right after I got that launched off the ground, I got a call for some folks on the Hill, some of whom I had known in my prior role, but were in positions of leadership and said, "we've been following your career. You were policy guy. We know that you know the policy, we know your political philosophy. Now you're a markets guy. We know you follow the banking sector, we have this opportunity that's open and we'd like to consider you for it, because we think it's a great combination of all those different sets of experiences." I said, "absolutely. It sounds amazing."

Peter McCormack: That was when Obama was in power?

Brian Quintenz: That was actually in 2015. So the procedural dynamics of how these slots are chosen is somewhat complicated, but the independent agencies have commission structures. The commissions are bipartisan, which means that in a five-member commission like ours, there are usually two Republican seats, two Democrats seats, and a chairman appointed by the President.

So the President's party has a majority control. But in a situation where, as was the case then, a Republican seat on the commission opens up in a Democrat presidency, is the Republican Senate leader that selects that candidate and forwards them on to the White House, for the White House to nominate back to the Senate for consideration. So I was selected by Senate majority leader McConnell in 2015, I was vetted by the White House and nominated by Obama as a Republican Commissioner in 2016.

The election happened and kind of threw a bunch of nominations sideways and I ended up having to be re-nominated by President Trump, which I'm very grateful and was able to finally get into the role in August of 2017. So it was a two and a half year process to get into the job. I'd do it all over again.

Peter McCormack: What an honor though! So I guess you can't do this role if you're a libertarian or independent, has that ever happened? Must you be a Democrat or a Republican?

Brian Quintenz: So I say that it's a Democrat seat or a Republican seat, but what that really means is that it's up to the leader of the Democrats if it's the President or if the President's Republican, in the Senate or vice versa to select the nominee for that spot and that nominee could be an independent or a libertarian.

Peter McCormack: Has that ever happened?

Brian Quintenz: Well I think, I'm not sure about this, but I think Jay Clayton is a registered independent.

Peter McCormack: Oh really?

Brian Quintenz: I believe so.

Peter McCormack: So you're term, does it last until the next election?

Brian Quintenz: So the terms are calendar date set by law and so the calendar end date for my term is actually next April, April 2020. So I'm going to work as hard as I can until then and then we'll see what happens.

Peter McCormack: And can you serve a second term?

Brian Quintenz: That would be up to the White House, if they decided to nominate me and obviously it'd be up to me to consider that as well. But if I'm interested in that, hopefully it'd be a possibility.

Peter McCormack: Okay. Long-term, is there a political journey here? Could you become a senator?

Brian Quintenz: I don't know, I kind of like the appointed role. So if you could get appointed to be a politician, I wouldn't mind that. I spent six and a half years in Congress and there was so much I liked about it. But being up for election is a grueling process and I'm not sure I have the stomach for it, even though I heavily believe in accountability, especially on the House of Representatives side where they're up for election every two years and there's kind of a continuous fundraising cycle. It's a grind and I think you really have to enjoy that aspect of public service in order to thrive in that environment. I learned that I love the policy, but that side wasn't really my strength. So this is a good role.

Peter McCormack: Well, listen, we here to talk about Bitcoin. So were you aware of Bitcoin before the role? How long have known about Bitcoin?

Brian Quintenz: Well, so when I was in the financial markets at the hedge fund, I was reading my Bloomberg terminal newsfeed and kept seeing it discussed and kept hearing about the reemergence of the Winklevoss twins and their acceptance of that and followed along with it. I never really took the opportunity to dabble in investing in it, reluctantly and now I'm basically precluded from doing so. But I'd always been fascinated by it, that a 11 page white paper could be the basis for forming, in my view, what is I think, the first instantaneously purchasable, globally accessible commodity. I don't know anything else that has that characteristic and I think it's fascinating. I think it's absolutely fascinating.

Peter McCormack: It is a rabbit hole that you go down of education and I think you go in levels as well, because you first hear about it and most people are like, "well this just sounds like some made up internet money." It doesn't seem real. Then you start to go down the rabbit hole and you learn about the impact on how people use it and then I think your opinions change. I think it's very hard to get people from that first point of knowing very little, to actually really understanding a lot about Bitcoin. You have to do that with a lot of people, I imagine?

Brian Quintenz: Yeah, we do. I think it's important for regulators to not impose value based decisions on assets, especially market regulators. I think it's the job of market regulators to abide by their mandate of market integrity and to the extent they have the mandate customer protection, but I don't view that it's the regulators job to tell investors what to buy or why they should or shouldn't buy certain things. I think that's the market's job. But me personally, I've always said there can be a very strong debate about what the value of Bitcoin is, but to me it is unquestionably worth something, that to be able to cryptographically prove that a digital item has unique ownership, is valuable.

Peter McCormack: Well, it's worth $9,809 as of now. That's what people are willing to pay for this.

Brian Quintenz: That's right! Even when the price was much lower than that and there were plenty of folks that were saying, "see, we told you so!" My response to that was, "what did you say?" Because it's still worth $3,000. Name another commodity in our space that's worth $3,000

Peter McCormack: That was worth a Dollar nine years ago!

Brian Quintenz: That's exactly right.

Peter McCormack: And it's a period of adjustment as well because it's like nothing we've ever had before and it's taking some time, it's taking some adjustment. Also, even though it has a lot of liquidity compared to other markets, it doesn't have enough liquidity to get the price more stable, but it's a real shift in the way people think about money and think about assets. Like I said, we've not had any decentralized form of money, which nobody can control to a certain extent before. So I think it's just a period of adjustment.

Brian Quintenz: And that's an interesting point and I think in this day and age where we're so used to getting instantaneous information, I think our degrees of patience have shortened and we're all becoming a little bit more impatient for success.

Peter McCormack: Have you read Saifedean's book "The Bitcoin Standard?"

Brian Quintenz: No, I haven't.

Peter McCormack: So he talks about that we have low time preference.

Brian Quintenz: Yeah I think that's true. But you look back across history, especially in the markets that the CFTC regulates and there are contracts that trade now on Euro/Dollar futures, treasury interest rates, the S&P 500, they didn't start trading with the volumes they have now.

They started trading with very little liquidity. They grew over time, they grew with retail and institutional adoption and now they are standards of the most liquid contracts in the world. I think there are as many people that know about Bitcoin, as probably know about a lot of those other types of products. I mean, you don't have a branding problem!

Peter McCormack: I was in Norway recently. Have you been to Norway?

Brian Quintenz: I have!

Peter McCormack: So that was my first trip. I went to Oslo and I loved it and instantly fell in love. Everything works perfectly! I was at the Oslo Freedom Forum and I had a panel about Bitcoin around the world and I asked people to put up their hand if they've not heard of Bitcoin. I know it's not a Bitcoin conference, but it's an audience that certainly should be engaged and heard of it.

Not one hand went up, not a single hand went up. Then when I asked who owned some Bitcoin, half of the hands in the room went up. Like you say, there isn't a branding problem. I think there's a broader education problem, but yeah, that comes!

Brian Quintenz: Well of course and that's important because you want people to do that on their own. You want people to be informed about their investment decisions and I think that's a good challenge to have. As I think about Bitcoin and other forms of payments, which isn't to try to limit what I think Bitcoin is, but you look at credit card companies.

Really their biggest expenses are on branding and on fraud, marketing and fraud. Well, you don't have the branding issues around Bitcoin and you have a pretty robust anti-fraud detection system with the decentralized nature of verification process.

Peter McCormack: Well, not a single fake Bitcoin has ever been created.

Brian Quintenz: Exactly right!

Peter McCormack: So let's talk a little bit about the CFTC and the intersection with Bitcoin, because this is useful. You've listened to my shows, I always want people to understand the basics. So can you start by telling me about the CFTC's history and can you also use your Trading Places analogy, which you told me before, which I love because I love that film. It's a film I grew up on.

Brian Quintenz: Well, it'll give us a chance to maybe remind a whole new generation of that film and then go back and enjoy a classic.

Peter McCormack: For the Dollar bet!

Brian Quintenz: For the Dollar bet! We'll have to go offline at some point. Actually, there's a true story that that film is based upon.

Peter McCormack: Oh really? Well, I'll tell you something that's come off the back of that that's quite funny. So my brother has made a similar bet with me about my podcasting career. So he said, "you seem to get any interview you want", so he's bet me £10 I can't get an interview with Tom Cruise.

Brian Quintenz: Oh really?

Peter McCormack: It'll probably cost me as a journey flying around the world doing it, tens of thousands to do it, to win £10!

Brian Quintenz: Well I take your side of the bet. I think you're on your way.

Peter McCormack: Do you know him?

Brian Quintenz: No, he hasn't come through the CFTC!

Peter McCormack: I'll give you £5 if he did!

Brian Quintenz: So the movie Trading Places, there's a classic scene at the end where they're actually on the trading floor, trading futures and options on frozen concentrated orange juice. There's a crop report that comes out, people think that they're cornering the market because the crop report is going to be good. It turns out being bad, prices sink. But those are the markets that we regulate. We regulate markets that are derivatives on commodities and those derivatives were traditionally futures contracts.

They were setting a price to be paid for the future delivery of a commodity at a certain point in time and that commodity had to be a specific grade and delivered to a specific location. The history of futures, what are actually broadly referred to as forward contracts, date back 8,000 years to the Sumerians. They first used kind of a system of jugs with actual tokens to represent what they were growing or what they were selling and then they would trade their tokens back and forth.

Then at the time that they were supposed to be delivered, they would make good by delivering their commodity against the holders of those tokens. Even in the 1500s when spices were in such a large demand, especially in Europe, salt, pepper and other spices, there'd be ships that would be chartered to travel around the world in search of salt. Well, you weren't going to spend all that expense and the risk of sinking in weather or being attacked by pirates, if you didn't know exactly what price you were going to get for the salt.

So there were a lot of forward contracts put on salt, to incentivize the exploration and production of salt. You come forward to the United States in the 1800s, the center of kind of the commodity markets became Chicago and the Midwest, as the home of farms and agriculture. The Chicago Board of Trade was originally formed in 1848 as a spot market for the exchange of corn and wheat, but almost immediately, there were forward contracts for the future delivery of those products too.

The ancestor agencies of the CFTC came about in the 1920s to try to establish a regulatory structure and have a view on speculation in those markets. But it wasn't until 1975 when the CFTC itself was formed and it has existed in that state since.

Peter McCormack: It's really the role of the investor to take on the risk for futures contracts and they have the opportunity... Do they have the expertise within each... I guess there's different markets within each market to analyze what's going to happen and create their own risk profile. I always think of the example of the farmer. The farmer doesn't want to have the risk of a bad crop. So they take on the risk for the farm and the farmer has what, a lower yield because of that?

Brian Quintenz: So I describe these markets as risk transfer markets or hedging markets. They allow the farmer to gain certainty over price and transfer that price uncertainty to someone else who's more willing and able to bear it. Sometimes that's a bank, it's an investment firm or it's an individual speculator or maybe it's a consumer, maybe it's the purchaser, but rarely do the producer and the purchaser of the same commodity, meet at the same time in the market places at the same price.

There's a vital role for speculators and intermediaries to play, to try to take the other side of those trades, try to distribute them through their network of other clients in a risk appropriate way, that links both the demand of each party, as well as the time difference of each party.

Peter McCormack: So with Bitcoin, I guess the futures contracts are great for the miners?

Brian Quintenz: Yeah, I think that's a really interesting point. Actually, it's not something I've thought much about, but I think it could help to lock in some level of a mining premium. I think there are really interesting dynamics when you get into Bitcoin futures contracts. There are interesting dynamics from a potential manipulation perspective and there are interesting aspects from a custodial perspective, that we haven't necessarily dealt with before.

There's been a lot of discussion in the regulatory sphere and in the political sphere around the potential manipulation of Bitcoin prices on certain platforms or globally or at least maybe even an uncertainty as to the validity of any given price. The way that the CME Bitcoin futures contracts are settled is they're settled against an index of prices over an hour window and those prices are across multiple exchanges.

That hour window is broken up into five minute increments and then there's a volume weighted, average price across all those exchanges in each five minute increment. So could someone have enough resources to go out to every exchange and place enough trades where they volume weighted impact the price, in each of those five minute increments? Maybe?

Would we know about it? Absolutely. So the point of that is that there are mathematical ways to help ensure the integrity of a settlement index and therefore a futures contract, that doesn't necessarily have to rely on any individual platform being completely immune from manipulation.

Peter McCormack: And it's within the interest of the exchanges to work together to share information

Brian Quintenz: I believe it is. We have a really interesting landscape in terms of the regulatory structure in the United States. The SEC regulates securities and regulates security based derivatives, individual or narrowly tailored security based derivatives and the CFTC regulates commodity based derivatives. We also have very limited jurisdiction over the commodity spot market itself. If you kind of think of what regulatory powers actually mean, I divide them up into oversight powers and enforcement powers.

Oversight powers are kind of preemptive. They set capital standards, they set disclosure obligations, record keeping obligations, codes of conduct, things that we could go out and examine a registrant and hold them accountable for. Then there are the enforcement powers, where we can come in after the fact and say, "you've committed fraud, we're willing to take you to court."

Peter McCormack: Is that generally on an individual level, you're looking for somebody who is actively trying to manipulate the market?

Brian Quintenz: It could be an individual level or it can be an entity, if there are individuals in that entity that are engaged in that activity. We do both. But the point of that bifurcated set of powers, is that the CFTC only has enforcement powers over the spot commodity market, the actual transactions of commodities, not derivatives, the actual transactions of commodities. We only have after the fact fraud enforcement powers. We actually just brought and finalized a case this last week, where there was someone that stole basically $147 million of people that wanted to invest in Bitcoin.

That would be kind of a spot market type of transaction or a spot market based commodity pool and we have the enforcement capabilities to go and prosecute that individual. So we don't have the oversight powers over the spot exchanges, the spot platforms. Exchange means something in particular, it means a registered entity with the government that are held to certain standards. That's why I always call the online platforms, platforms as opposed to exchanges, because they aren't registered with the federal government.

They do have money transmitter licenses, but they are not held to the standards of national exchanges. I've actually called for those platforms to get together and develop some type of self regulatory structure.

Peter McCormack: I saw that yeah. So you don't think there should be more formal oversight?

Brian Quintenz: I think that's a different question. That's really a decision for the policy makers in Congress. They would actually have to take a proactive step and introduce and finalize new legislation, to give a federal agency those types of powers. I think my point in calling for that type of self-regulation was that in the absence of any agency getting those powers, this would be a market benefit and I think it would be helpful if I, as a regulator, helped to push everyone towards that conversation. I think there's been some progress there.

Peter McCormack: I certainly agree there should be more co-operation. It's just within the interest of these exchanges/platforms to work together because Bitcoin does have a tainted image as well, and it's within the interest of the exchanges to try and get rid of that. So I kind of agree with you, but then I sometimes think without formal oversight, is there really always the incentive?

Brian Quintenz: Well, I think the incentives are hard. The incentives of potential increased trading and increased liquidity because you have a market with integrity, can feel like it competes against the existing dynamics of the marketplace and the ability to make money off of an un-federally regulated structure. I've maintained that the reason you've seen such a growth in nationally regulated futures and derivatives and stock security exchanges, is because they have developed markets with integrity. They have levels of federal oversight that have promoted that. The idea of trying to achieve higher standards for market integrity I think is an additive and it's in everyone's interest. Even though if in the short term, it may feel like it's giving something up.

Peter McCormack: I guess also, more formal oversight is in some ways kind of antithetical to Bitcoin, because Bitcoin is about less government, less control, less power in some ways.

Brian Quintenz: Yeah, I think that as a regulator, I value that, but I think we also have an obligation to treat things similarly and fairly. Otherwise we end up picking winners and losers and I don't want to be in that business. So I think that just like we have federal government standards for money laundering and know your customer, I think we have to apply those standards to entities that are willing to transact things for Dollars.

I think that that's an appropriate use of the federal government's authority. But if Congress and the President in signing any legislation, were to give an agency more oversight powers over platforms, I wouldn't necessarily think that that affects Bitcoin itself. I think it affects the trading environment of Bitcoin and helping to either legitimize further or provide more security or transparency around the environments in which a retail market participant can access.

Peter McCormack: What powers do you have and what's the full extent of the penalties you can impose on people? Is it prison or is it just financial penalties?

Brian Quintenz: Yeah, so we don't have criminal authority, but oftentimes if we're investigating something that is significant, we will refer it to our Department of Justice and the Department of Justice will prosecute criminally. If that person or entity is found guilty, the appropriate consequences could involve jail time.

Peter McCormack: $147 million sounds serious!

Brian Quintenz: If we ever find that person, then yes, I think that they and the Department of Justice are going to have a relationship!

Peter McCormack: Well, you've got your whistleblower campaign?

Brian Quintenz: We do, oh you've got your whistle!

Peter McCormack: I do, I got this at Consensus! I thought that was brilliant by the way.

Brian Quintenz: Yeah, that team does a great job. I think it's a great program and not a very well understood program. There are significant potential financial awards for legitimate whistleblower activity. I think it's up to 20% of recovered funds can go to a whistleblower and we have given out individual whistleblower awards in the tens of millions of Dollars, because they have been invaluable to contributing to a significant fraud investigation.

Peter McCormack: These aren't small amounts of money!

Brian Quintenz: They're not small amounts of money, but they relate to the size of the fraud. Obviously you're not going to get a $20 million award for someone that stole $20,000. But we want to incentivize people coming to us and reporting what they think are frauds or what they think is bad behavior. Does it mean that everything people report is legitimate? It doesn't mean that everybody that reports something, is going to earn the largest whistleblower award.

But it helps us in terms of our information flow and our ability to be aware of market dynamics. We're a small agency. We have 750 people. We have a $250 million budget. The SEC has thousands of people and they have a $4 billion budget. We have jurisdiction over a $400 trillion derivatives market, let alone what people would consider the size of the fraud in the spot commodity markets. So we'll take all the help we can get!

Peter McCormack: So you, as you mentioned earlier, you sponsor the Technology Advisory Committee at the CFTC and what I've noticed in that, is that you are covering topics outside of Bitcoin. You are also considering smart contract platforms. So obviously you're considering other cryptocurrencies and you will be aware in the space that there is this view that there are people who are Bitcoin maximalists, who believe Bitcoin is the only thing and everything else is nonsense.

But there are other people who believe in other cryptocurrencies. I guess you guys can't really take an opinion on that, because that would be, as you say, selecting winners and losers. You have to let the market operate and treat every cryptocurrency the same?

Brian Quintenz: Again, I don't think we want to make value judgments on any potential commodity or asset, but what it's incumbent upon us to do, is to understand the dynamics of those commodities in considering exchanges listing derivatives contracts on them. So if someone wants to come to us with a derivatives contract on X, Y, Z crypto currency, we really want to make sure we understand how that's mined, how that's verified, what the dynamics are, how liquid it is, where it trades.

Peter McCormack: Do you know that there is actually an X, Y, Z cryptocurrency?

Brian Quintenz: No, I didn't know that.

Peter McCormack: There's a ticker. I think it might be Tezos. I'll have to check.

Brian Quintenz: Oh really? Well what letter should I use?

Peter McCormack: I don't know, because it's probably something for everything!

Brian Quintenz: I didn't mean to reference that, so thank you for informing me. You should come to talk to the Technology Advisory Committee! It's been engaged in a wide variety of presentations. We heard Peter Van Valkenburgh give us a great presentation, on really just the basics of the difference between proof of work and proof of stake. It's probably something that the folks that are heavily involved in Bitcoin and other cryptocurrencies know a lot about. It's something that was really useful for us to hear.

Peter McCormack: Did it click for you straight away? Because some of it's mind boggling to get your head around, the different consensus mechanisms.

Brian Quintenz: Yeah, it did click because I think Peter is very talented and very knowledgeable and he's got a great way of distilling that information into a very usable and approachable format.

Peter McCormack: He's tough to debate against!

Brian Quintenz: I wouldn't do it.

Peter McCormack: I moderated between him and do you know, Angela Walch? So she's a lawyer. She wrote a paper about developer liabilities and whether should they be considered as... I can't remember the term off the top of my head, but I moderated a debate with them in New York and I've got to publish it actually. I would not debate Peter.

Brian Quintenz: No, Peter's Great. It was interesting you mentioned that because I've done some work with Coin Center on my own views around the liabilities in this space, because it's something we are dealing with and are going to be dealing with more and more and more.

Peter McCormack: I've read your article on the website.

Brian Quintenz: Yeah and that article was basically in response to a speech I gave in Dubai, where I had really tried to think about all of the different parties involved in this space that could potentially violate our rules and whether or not what the standards were for that. I used some language that I regret using, in terms of a liability standard that I didn't mean and that was way too loose. I talked a lot about it with the Coin Center folks and I was really pleased they gave me an opportunity and a platform to further detail some of that, in a way that I think really gets to the idea of intent.

Peter McCormack: Because Peter's concern is that it would be a blow for innovation and freedom of speech.

Brian Quintenz: Absolutely! If you're going to hold a developer liable for any potential illegal use of whatever they produce, that's not what I believe and I think that that would be detrimental to any innovation or any industry. I think we need to have a high bar when we charge someone with illegal conduct and I think that that high bar needs to have a level of intent associated with it, if the person themselves wasn't actually committing the violation.

Peter McCormack: I think it goes back to, I'll quote you here from one your articles, but I think that just goes back towards what you said, "you need a robust, pro innovation, do no harm posture" and it seems that you are echoing that.

Brian Quintenz: Well I would hate to ever see a regulator, let alone the CFTC, through a lack of action or through an affirmative action preclude the development of innovation and technology. There are some things that I think I'm seeing across the regulatory space and even a few things within the CFTC, where I fear for that, but I really think it's incumbent upon regulators to take a high bar to prosecuting our rules to ensure that really only the people that did something wrong are being held accountable and that the folks that want to take a risk, can take a risk.

I'm not against people taking a risk. I'm not against people losing money. I think that's a part of every market and every entrepreneur and it's an education. It's a great way to learn! If the federal government is trying to get in the business of preventing people from losing money, we are going to preclude an enormous amount of innovation and future efficiency.

Peter McCormack: But investor accreditation rules do preclude people from losing money?

Brian Quintenz: I think they preclude people from losing money in certain ways, I agree with you. I think that those are things to look at, although, it is also interesting that there is kind of a sweet spot in the frauds that we see, in terms of the amount of assets that individuals invest. There are very few cases where we're prosecuting someone for raising $100,000 off of 10,000 people. We're prosecuting people that raised $50 million off of 100 people, $20 million off of 200 people.

Where you do the average investment per investor and it is a significant sum of money, which to me means that, if we are going to have an idea of a sophisticated investor, what does that mean and are thresholds appropriate? Or do we go on the opposite direction and say, by having somewhat arbitrary levels of determining sophistication just by a blunt red line test of assets, are we precluding people from gaining access to very profitable investment strategies, that correspond to a lower risk profile.

In many cases, I think that's been exhibited and we don't necessarily see people with higher assets, not being scammed. So I think there's a really good debate there, but I don't think you're ever going to get it right.

Peter McCormack: No. How much do you work with the SEC and how much coordination is there? Are there cases where enforcement is required and the jurisdiction is unclear? Or is it always very clear? Is there a very clear separation between what is a security and what is a futures contract?

Brian Quintenz: So yeah, you bring up a really interesting point and I think it's something that a lot of folks have become familiar with recently, which is the Howey test, the Howey Supreme Court case in the 1930s and what really makes something an investment contract. That's really come to bear on this space, where there has been a tremendous amount of innovation and activity with the new design of different types of tokens that represent different things.

So if we're bringing a case where there's outright fraud, for the solicitation of something. Someone's creating or saying they're going to create their new crypto assets, but they steal all that money. If that crypto asset would have been a security, it would probably be in the SEC's jurisdiction. If that crypto asset would have been a commodity, that's probably in our jurisdiction. So we want to have discussions there to make sure that we're doing it together, if their line is too blurry or if it's clearly in one space or the other, the right agency is leading that.

But the CFTC also is a little bit bound by our ability to affirmatively engage in that definitional space, because essentially under our statute, under law, everything's a commodity and the SEC regulates security commodities. Does that make sense? So we don't have to make an affirmative decision about something being a commodity, but they have to kind of make a firm decision about something being a security commodity that then they would ultimately regulate that would to be traded on a securities exchange.

I'm not a lawyer as I said, but I kind of have my own views on the Howey test and I think that there's some really interesting questions about whether or not something that was received in exchange for an investment contract itself is a security. The Howey test was based off of orange groves in Florida, but it was investors buying land, but then they hired the Howey Corporation to manage that land, pick the oranges, process it, sell it, and then the Howey Corporation distributed on a pool basis, those profits to their investors.

I think that if we were to look at that now, I think that would be more towards an extreme, of what is considered a security than what's more in the middle. I think what we're talking about now would be scenarios where someone bought the land and they hired the corporation to pick the oranges and send them to them. If that were the case, would that have been an investment contract? I'm not sure. Would the oranges had been securities? I'm not sure they would have been.

Peter McCormack: But similar to investor accreditation regulations, these laws seem to be quite old now and quite outdated. Times have changed. We have a little chat with Chris Giancarlo beforehand and he talks about... He struggled to get his relatives, his nieces and nephews, children interested in the stock market. But Bitcoin, they know, they get, they love it and they understand. So do you have that feeling that there needs to be a review of the regulations or do you think the regulations are still right within the CFTC?

Brian Quintenz: So the Howey test was a Supreme Court case and the Supreme Court decision laid out some principles and it's the interpretation of those principles that I think everyone is discussing. Has the interpretation of those principles been appropriate, overreached, under-reached, provided certainty, allowed for flexibility and I think that you can't say that something that's lasted for 80 or 90 years hasn't really worked because I think if it's principles based, it's stood some of that test of time.

But as with anything, there's always the chance for a lawsuit to get back to that level and allow whoever's sitting at the Supreme Court to reconsider that if they don't think it's a good standard. Otherwise, until that happens, we have the Howey test and the SEC has a lot of expertise in trying to administer it.

Peter McCormack: I tell you one of the things that was interesting over the last week, with regards to Facebook Libra coin, because one of the things that I found very interesting I mentioned to you beforehand with Bitcoin, is it's very hard to control Bitcoin. It is decentralized. Yet my dealings with yourself, with Hester, with various regulators in the US, it seems the US is actually still quite pro Bitcoin, pro innovation. I guess one of the fears is if you try and ban it, this innovation will go to other markets, which I understand.

But at the same time, what was quite interesting in the last week is the House Financial Services Committee chairwoman, Maxine Waters called for Facebook to halt development. Now the Senate committee on Banking, Housing and Urban Affairs has scheduled a hearing to cover both Libra and Calibra privacy issues. You can't do that with Bitcoin. You can't call the hearing, because there's no one to call! You can have a hearing and have someone like Peter Van Valkenburgh and Nouriel Roubini debate it, but you can't really do anything about that.

But you can regulate Facebook and it's not really even a question. It's more of an observation of the differences of things that you as regulators are having to deal with, when you've got something centralized versus something decentralized.

Brian Quintenz: I think there's always an interest by people in whatever profession they're in, regulatory, legal, media to try to lump things together. But the fact of the matter is there's a huge diversification of innovation in the space with pure decentralization at one end and then kind of a centralized token at the other. That other extreme may sound innovative and it could have a potential global reach given Facebook's presence around the world, but to me they are incredibly different things.

But I think what you've seen is exactly what you said, which is the limits of government capabilities over the regulation of something that's decentralized, because there is no entity to regulate, versus the government's power to regulate something that is centralized that's associated with an entity that is existing right now in a very charged political environment. It's interesting that they decided to do that now, given the political environment in which they themselves are operating.

But with anything, I think we would look to the underlying features if something like that ended up trading and some exchange wanted to list a futures contract or derivatives contract on it, we wouldn't take a value judgment on it. We wouldn't say it's better or worse than any other type of product. We would look to see what is the contract settling against or if it's physically settled through the exchange of the underlying token. How was that token delivered to finalize that contract, to settle that contract?

It's all the rage to talk about what that's going to turn into or what its involvement is. I think from the press releases that have come out from both the House and the Senate side, to me what it speaks to is an increased appetite to form a regulatory regime around crypto products. We'll see if that evolves and if so, how? If it evolves more from that centralized side of regulating the entities that are promoting centralized based products or if it is comprehensive around all things and how that would work.

Peter McCormack: It presents a real headache for people, the Facebook Libra coin, I think. But I was also surprised at the reaction from chairwoman Maxine Waters because I've made the assumption, and maybe that's incorrect, but I've made the assumption of Facebook were considering creating a global currency, I know the foundation is registered in Switzerland, but they are a US based company, my assumption is that they would have already had the high level conversations within government?

Brian Quintenz: Well I haven't met with them. That doesn't mean they haven't been in the building, because I don't know whether or not they have, but I haven't met with them. I would assume that they've had some conversations, but I did read part of the white paper and their portion on compliance with a global regulatory financial complex, is a page and a half long! I think they might need a little more than that in terms of the regulatory regime that currently exists, let alone the one that may or may not be created if they launched that product.

Peter McCormack: Do you have an opinion on what's going to happen with it next?

Brian Quintenz: No. I think the questions and the environment of those hearings on the Hill, will be illustrative of where I think maybe legislation could go. I'm not sure that without legislation, anyone has the power to specifically stop something. But obviously, if someone asked for something to be stopped and you go forward, you're picking a fight and that would have to be that entities decision.

Peter McCormack: Something else I saw you talk about and that I thought was quite interesting, was zero knowledge proofs, in that obviously they cause significant problems with AML regulations. But at the same time, as you noted, it's fascinating technology. So I struggle to see how any government department would accept any form of privacy coin, which can't be tracked. I think it's why we've never seen Monero on Coinbase. We see Zcash, but they don't allow for the shielded transactions. I guess this is one of the scariest and biggest headaches because, I was speaking with Caitlin Long recently about Facebook and the new FinCEN regulations where they said, "it only costs up to $600 for someone to create a vest and buy the right equipment to cause some kind of terrorist activity that could kill hundreds of people." Any form of privacy currency, which allows you to not track who it is or where it is or what's happening with it, it must be a huge headache for government.

Brian Quintenz: Well this is wading pretty far outside of our own little siloed regulatory regime. But I think you go to the heart of a debate that's been present in the United States significantly over the last 15, 20 years, which is the line between civil liberties and public protection. How do you allow for freedom while allowing the government to try and do its job to protect to the population? I think that there has to be a balance there and I see the government trying to try and find that balance.

I think things like zero knowledge proofs, push that balance one way and there may have to be a recalibration of where that line is, but I think the underlying technology could be really interesting to us because one of, and I don't know very much about it, and something I would like the Technology Advisory Committee to further explore and if I have individual time, maybe do it myself. But we ask our registrants, our regulated entities, to send us a tremendous amount of data and it's data that is highly confidential, very valuable, extremely proprietary and I think we do a very good job of protecting that data.

But it would be difficult for me to say that it is completely immune from any danger. I don't think anybody could ever give that a type of assurance in the world in which we're living. But I'm fascinated by some of the initial conversations I've had around that technology. Whether or not it could apply to the transmission of highly sensitive data from a government perspective, whether or not we could use it to validate that an entity is holding that data itself and not changing it and therefore when we need it, we can access it, because we know it's there and it hasn't been altered.

I think that's a really interesting, maybe offshoot, of that technological construct that isn't necessarily involved at all with the crypto assets side of it. Maybe people know a lot more about that than I do and would immediately dismiss it because it's not the right use case. But from the little I know about it, I think there could be some fascinating outgrows there.

Peter McCormack: I don't think you would struggle to get someone to come here and talk to you about it. I think people would come with open arms and love to talk to you about it.

Brian Quintenz: Well it's a big deal. We regulate multibillion Dollar asset managers and private funds and their intellectual property is sacred. I think that they worry consistently, not because they don't have confidence in the CFTC, but just because they know the environment in which we live that is at risk.

Peter McCormack: Do you find the space exciting?

Brian Quintenz: I find it fascinating! Chris and I were talking about this a while ago, when I was originally preparing for my confirmation hearings, I had to go and testify in front of the Senate committee that oversees our agency twice, when I was being considered as a nominee. When I was preparing for that testimony first in 2016 and then again in 2017, I didn't do any preparatory work on crypto assets or cryptocurrencies, because it wasn't really something that people were associating with our space.

Now I think because of Bitcoin futures contracts and because of Chris Giancarlo's leadership and because of the positioning of the CFTC with it's LabCFTC arm that has been very proactively engaging in technologists and innovators, especially in the crypto asset and DLT space, we're at the forefront of that. I think it's enormously exciting, but it feels like I'm drinking from four fire hoses instead of just the one that I thought I was going to be drinking from!

Peter McCormack: Is it coming up in a lot of conversations?

Brian Quintenz: Oh yeah. But again, I think our role is somewhat limited in that we don't necessarily have to be involved in further legitimizing or adding to the market integrity of the spot transactions of crypto assets. That's for now, for the private market to figure out. But we do get involved when an exchange wants to list a derivative on one of those assets and then we need to be diving headfirst into it. 

I think we've been doing a lot of groundwork, in terms of trying to get up to speed on a lot of the different landscapes, but it really comes to a head when there's a regulated exchange, what we call a DCM that wants to come forward and list that contract. We did that with Bitcoin and we're doing it with a few others right now.

Peter McCormack: And Chris has got three months, three weeks left now before he steps down?

Brian Quintenz: That's right yeah, July 12th will be his last day.

Peter McCormack: What's it like been working with him, because obviously us people in the Bitcoin space are a huge fan of his and as I said earlier, his Senate testimony was fantastic and forward thinking.

Brian Quintenz: He is such an open minded person, but that also has, in my view, just an incredibly brilliant way of thinking at a high level and at a deep level and describing both of those to you in straightforward terms. I'm not surprised at all that he said what he said at the Senate hearing with such eloquence and it was received with such open arms by the community that really cares about this innovation and I see that every day in all aspects of what we do.

We deal with an enormously diverse marketplace, agricultural contracts, energy contracts, metal contracts, financial contracts, the entire global swaps market of interest rates, credit default swaps, the markets are global, they're local, they affect every industry and all the parts of the economy and there are always issues there for us to consider and think about and potentially have to address with our fellow regulators, who are with folks on the Hill. He's probably the most thoughtful person I've ever met and gotten a chance to learn from.

Peter McCormack: He's very friendly as well and very approachable!

Brian Quintenz: The best attribute! He's always interested in meeting people, always interested in learning, always interested in sharing his views in a way that's not confrontational and certainly doesn't assume that you have to agree with them. It's just been a joy to be able to be here while he's been here.

Peter McCormack: Great! All right, well this has been fantastic. I just want to say thank you again for allowing me to come here. I've really appreciated how all the different regulators I've met have been so open minded to coming on and being on my podcast. So firstly, thank you for that and as we close up, do you have any final thoughts and how do people keep an eye on the work that you're doing at the CFTC? Do you want people to get in touch with you directly or not? If so, how do people stay in touch with you?

Brian Quintenz: Thank you Peter. First of all, I applaud you for wanting to do your podcast in person. I think it really adds to the conversation to have you here. So I compliment you for taking the expense and doing it. It's great to sit down with you and I know Hester is applauding in her mind at your control over your language!

Peter McCormack: I've not sworn once!

Brian Quintenz: You have not, good job, don't ruin it now! To your point about regulators sharing their views, I have a tremendous respect for accountability in these positions. I believe everybody needs to be held accountable for their views and for their decisions and you taking this role on and wanting to engage with regulators, I think adds to that public dialogue and adds that level of accountability. So I compliment you on that.

This is just such a privilege to be in this position and to be able to think about these things. I don't want anyone to ever think that I've closed my mind or I've made my mind up or I'm not going to change my view, if I'm confronted with a different perspective or new information. So the first thing I would say is that I try to be very accessible. I don't think I've ever turned down a meeting request that has come into our office. All of our speeches, testimonies, statements are posted online on the CFTC's website.

There is a lot of information there. It's amazing how much information is available everywhere you look, but if you really want to learn about what any of the commissioners think about specific topics or about what the CFTC is doing or currently working on, our website's a great resource. We have five different advisory committees, four other ones besides the Technology Advisory Committee. All of their meetings are webcast live and they are archived on the website and the presentations are put up as well.

So if anyone has an interest in seeing Peter Van Valkenburgh's presentation, they can go watch it on our website or look up his presentation or anything else that we're working on. I'm happy to solicit ideas for future meetings or future points of discussion and I just really hope that I continue to learn about this space and we can continue to have conversations and that you'll see the CFTC expand into monitoring new contracts on new digital assets. Hopefully we'll see the integrity of the spot markets continue to grow and I think continue on the trajectory that we've already seen.

Peter McCormack: Great! Well listen, thank you for everything you've done and again, appreciate you allowing me to come in and do this.

Brian Quintenz: Yeah, thanks a lot Peter!