This week, The Daily Bit interviewed Daniel Gorfine, Director of LabCFTC and Chief Innovation Officer at the CFTC. Although the conversation covered larger macroeconomic trends in the digital asset space, we forgot to ask whether we should buy the dip. If anyone finds themselves asking that question, we suggest heading over to the CFTC’s Bitcoin learning page to answer some basic questions.
Huge thank you to Daniel and the CFTC for speaking with The Daily Bit!
1. Can you talk about the atmosphere at the CFTC and how it has changed since cryptocurrencies became more prevalent?
Response: The Chairman and his fellow Commissioners have been incredibly forward-looking regarding the role that technology and innovation are increasingly playing in our markets, and the need for the agency to keep pace with inevitable change.
For this reason, the Commission launched the LabCFTC initiative during the summer of 2017, and I have been fortunate to have the opportunity to build-out the effort during my time here. LabCFTC is a cross-divisional effort focused on facilitating market-enhancing innovation, informing policy, and ensuring we have the tools and understanding to stay on top of market developments.
Given the significant uptick we have seen in terms of public interest in virtual currencies since the latter-half of last year, the Chairman and Commission look quite prescient in creating LabCFTC when they did, and working to foster a culture focused on careful understanding and balancing the benefits of innovation with the uncompromising need to ensure market integrity.
2. Recently, Tyler and Cameron Winklevoss proposed the creation of an industry sponsored self-regulatory organization for the U.S. virtual currency industry, specifically virtual commodity exchanges and custodians.
Has the CFTC released a statement on the Winklevoss’ proposition and do they foresee the creation of such a regulatory body in the future?
Response: Chairman Giancarlo has testified on the current regulatory framework for virtual currencies, and in his formal testimony on February 6, 2018 to the Senate Banking Committee, he expressed the view that policymakers should explore potential improvements to the existing patchwork approach to regulating spot markets for virtual currencies.
Any such effort should be thoughtful and deliberative, however, which means that there is an opportunity for industry participants to develop standards that could inform policy discussions and benefit retail market participants. We would accordingly view proper, effective and balanced self-regulatory efforts favorably.
3. Reddit, Facebook, and now Google have announced that they will be banning cryptocurrency-related advertisements, along with anything concerning cryptocurrency wallets and virtual currency trading advice. Scott Spencer, Google’s director of sustainable ads, said that “We don’t have a crystal ball to know where the future is going to go with cryptocurrencies, but we’ve seen enough consumer harm or potential consumer harm that it’s an area that we want to approach with extreme caution.”
Those unfamiliar with the space believe that this is an appropriate response given the highly speculative nature of cryptocurrency investments and widespread fraudulent activity in the market. And many individuals familiar with the space agree. However, this risks suffocating innovation in the space and cuts of key avenues to educate individuals about the space.
What is the CFTC’s stance on the ban and the use of advertisements in the future?
Response: I will not speak to specific cases, however, if an advertising platform does not believe it is capable of filtering out commercial speech that has a high likelihood of being false or misleading, then it would appear to be a reasonable decision to choose to reject such advertisements and their related advertising dollars.
Of course, as the ability to filter good actors from bad actors — or tailor restrictions narrowly — improves, I would imagine there would be many responsible advertising platforms willing to sell ad space regarding new products or services.
4. The Venezuelan Petro has been a major focal point of discussion in recent weeks. Not only is the Petro one of the earliest installations of a central bank digital currency (CBDC), but it is also a direct challenge to sanctions imposed by the United States. It is also problematic in the sense that many believe that the Petro is not backed up by oil like it claims to be.
Two sources familiar with administrative plans indicated that President Trump will be imposing new sanctions against Venezuela that restrict financial transactions involving the digital currency. What are the CFTC’s thoughts about the Petro, it’s longevity, and the installation of other CBDC’s that are intended to circumvent traditional regulations?
Response: As recently stated by the Treasury Department’s OFAC division, efforts such as the Petro intended to circumvent regulations or trade restrictions will not be permitted.
5. As the use of digital currencies becomes more prevalent in society, it is expected that more governments will implement their own digital currencies. Does the CFTC anticipate that the United States will launch their own digital currency in the future to harness the benefits of blockchain technology?
Response: The Federal Reserve and other global central banks are exploring blockchain technology, and will continue to assess the merits of the technology as well as risks and limitations.
I personally believe that we are quite a ways off from solving significant scalability, security, operational, and economic challenges with the concept of a digital fiat currency, but I also recognize the hypothetical benefits of enhanced efficiencies, development of new financial architecture, and proliferation of new economic applications that could result from such an effort.
6. The U.S. Department of Energy and their National Renewable Energy Laboratory (NREL) partnered with blockchain startup BlockCypher to test the use of peer-to-peer energy transactions involving distributed energy sources over the dash cryptocurrency network at the NREL’s energy facility.
If possible, could you touch on other projects being conducted in conjunction with the CFTC and other U.S. government agencies at blockchain and cryptocurrency research labs?
Response: We currently lack statutory authority that would permit us to work iteratively on a proof of concept model with an innovator. That said, we will continue to leverage our LabCFTC initiative to explore application of DLT and blockchain models to capital markets infrastructure that could drive market efficiencies and improve future regulatory reporting frameworks.
Through our Technology Advisory Committee (TAC) sponsored by Commissioner Quintenz, we are seeking feedback from market participants regarding application of DLT in our markets, and whether our existing rulesets are permissive of such new technologies.
7. One of the dangers of the cryptocurrency markets is that they remain heavily manipulated, with one outspoken figure within the cryptocurrency community, known as Bitfinex’ed, claiming that an entity known as “Spoofy” is heavily manipulating the markets.
The CFTC announced a bounty for whistleblowers who provide “original information that leads to a successful enforcement action that leads to monetary sanctions of $1 million or more”. Has the CFTC seen any success in this field and are there any additional routes that the CFTC has taken to dampen widespread manipulation in the cryptocurrency markets?
Response: We rely on our whistleblower program as an important source of leads regarding potential fraud or manipulation in markets, and urge folks with credible information to help us find and pursue bad actors.
The CFTC has limitations on what it can discuss publicly about whistleblowers. As has been demonstrated by recent enforcement actions brought by the CFTC, we will work to ensure market integrity and pursue those who attempt to harm market participants with illegal scams.
8. The People’s Bank of China has long opposed the use of cryptocurrencies, having announced several bans in past months, banning cryptocurrency exchanges and ICO investment activity in September 2017. More recently, China announced a ban on cryptocurrency mining within the country as well as imposing a “Great Firewall” to curb the presence of cryptocurrency related content on social media platforms and chat applications.
Despite this, the government remains open to the idea of a digital currency, as long as it is ‘efficient and safe’. Furthermore, the PBoC announced that the central bank is developing its own digital currency called DCEP (digital currency electronic payments). What are the CFTC’s thoughts on that announcement?
Response: As previously noted, I expect that central banks around the world will continue to explore the merits and potential use-cases for digital fiat currencies. That said, innovation will emanate primarily from the private sector, which has made the American economy resilient, dynamic, and a model for the world.
This interview was originally featured in The Daily Bit newsletter.