On November 13, 2023, Commodity Futures Trading Commission (“CFTC”) Commissioner Kristin Johnson delivered a keynote address to the Atlanta Economics Club titled “Policing the (Token) Economy: Introducing Corporate Governance and Market Structure Reforms in Crypto and Environmental Commodities Markets.”

The speech is an excellent resource for any market participant looking for a survey of both the historical context and potential future regulatory and enforcement landscape of the markets for digital assets and environmental commodities.

To the casual observer of the derivatives markets (should such an observer exist), the two asset classes may seem to be unrelated. However, they share several common attributes.

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  • First, and perhaps most fundamental, is the fact that the two asset classes are “intangible commodities”—essentially, electronic record-based assets that can be bought and sold, and are capable of being consumed, by the record owner of the asset.
  • Second, the asset classes generate a significant amount of “buzz” for their potential to affect monetary and environmental policy, respectively and collectively, in some sense. In this regard, it should be noted that there are critics who raise valid critiques of the asset classes from a wide range of political and economic disciplines, suggesting that the current iterations of these intangible commodities are not likely to be a panacea for society’s major woes—economic, environmental, or otherwise.
  • Third, there are real world implications in terms of value gained and value lost for users and investors, recognizing that opinions vary widely as to the “reality” of the value and utility of these emerging digital asset classes.

Undoubtedly, there are other common attributes. Yet, in considering just these three characteristics—intangibility, popularity, and value—it seems reasonable that Commissioner Johnson’s immediate policy concerns center on the presence of fraud in both markets, and the need for corporate governance and market structure reforms.

The historical context of regulatory and enforcement activities demonstrates that Commissioner Johnson’s policy concerns are not simply unwarranted fear, such as that exhibited by Dorothy, the Scarecrow, and the Tin Man in proclaiming “lions and tigers and bears, oh my” in the 1939 film The Wizard of Oz. (More about that in the postscript below. Query: Doesn’t the presence of flying monkeys always warrant fear?)

But, rather, Commissioner Johnson is raising genuine policy concerns that she believes warrant a “whole-of-CFTC” approach, even if a “whole-of-government” approach remains far off in the future horizon.

What would this “whole-of-CFTC” approach look like? According to Commissioner Johnson…

 

I am advocating that the Commission begin to immediately develop regulation to directly address custody-centered and other market structure concerns.

 

 

There are certain principles that must guide the development of market structure for each of these novel asset classes including the introduction of transaction reporting; secondary market regulation including, where relevant, clearing and settlement guidance; accountability standards for intermediaries to ensure integrity and reliability (and in the context of environmental commodities additionality); business conduct standards, including standardized documentation (and requirements for certification of environmental commodities); and appropriate guardrails for any retail market participation.

 

 

Similar to our leadership in bringing critical enforcement actions, the CFTC must lead in issuing advisories, guidance, and begin developing rule makings that introduce transparency and market structure reforms in crypto and environmental commodities markets.

 

Returning to the 1939 film, “Toto, I’ve a feeling we are not in Kansas anymore”…assuming that such an idyllic state of Kansas ever existed in the marketplaces for these emerging and novel asset classes.