One Regulator

Don Wilson Thinks It Is High Time

In a Bloomberg article, Don Wilson opined that the way we regulate financial markets is outdated. He is right that there is a thicket of regulatory bodies that can upend your business plan. He isn’t a bomb thrower. He is one of the most objective and strategic people you will ever meet. We were acquainted for years on the trading floor.

It’s not just the SEC and CFTC. The Dept of Treasury has a say. Treasury will use FinCen and other sub-agencies to exert pressure or its will on regulation. Credit card companies have their own regulation. So do banks and insurance companies.

Regulators and the politics among regulators kill great ideas and innovation all the time. Single Stock Futures is one example. The NYC community, the CBOE, and the SEC gutted it after it was approved to trade. They thought SSFs would kill the option business. They used all kinds of scare tactics to muddy the water.

Don felt the sting of the lash when the regulatory whip was used. Gary Gensler had a personal vendetta against him and used the CFTC when he headed that agency and the SEC when he headed that agency to go after DRW’s business interests. Bloomberg cites a 2012 effort by Congressman Barney Frank and Congressman Mike Capuano to redo our regulatory structure. At the time, it was a non-starter for market participants.

The turf battles and the framing that all the different federal and state agencies take on regulation are very different. The two major ones, the SEC and CFTC are almost 180 degrees different. A lot of that stems from when they were born. The SEC was born under FDR in the 1930s. The CFTC in the 1960s as commodities became a more integral part of the financial system. Oversight of the SEC is executed in the Senate Banking Committee and the House Financial Services Committee. The CFTC gets its oversight from both Agricultural Committees.

You can see why there might be big-time turf battles if you understand Washington DC and politics.

This is not the first time the subject has been broached. In 2000, Jack Sandner presented a plan to Congress to redo the regulatory framework for finance in America. Jack passed away in 2021. I don’t know if his family still has his proposal in his papers but if they did it would be interesting to open up and read.

I remember Jack doing an entire presentation about it to our board at CME. I also remember a lot of people in the room being uncomfortable with the idea. It wasn’t just traders in the room but industry people like Gerry Corrigan and former Senator Paul Simon. The itchiness around the idea had its roots in trust. Chicago and the commodity exchanges didn’t trust New York and the SEC.

Jack also understood the mountain it would take to climb politically. The idea went nowhere.

Is it the regulatory structure, or is it one bad actor in Gary Gensler? Gensler should go down in history as the worst financial regulator ever. He did everything he could to expand the power of government over every area of finance. He will color it as “doing good so people weren’t hurt” but the true fact is he hurt everyone and killed a lot of companies who were highly innovative. How many ogres like Gensler exist within the US regulatory community? Is it good enough just to get rid of them?

Is it time to redo the regulatory architecture of the United States Financial system?

Milton Friedman was correct when he said there is no difference between the Soviet commissar and the American bureaucrat. They have the same economic incentives. Neither are objective King Solomon who rule in an angelic way inspired by the divine.

Certainly, the advent of cryptocurrency gives people a reason to think about redoing our entire regulatory structure. There was not any product in the past that had the properties cryptocurrency does. I happen to agree with Wilson that if crypto is going to be regulated, it’s the CFTC that ought to be regulating it. The CFTC has a principles-based vision of how products should be regulated. They are more comfortable with innovation and variability than the SEC which worries about if the period or comma you used in your application is in the right place.

But, that will expand the CFTC footprint into all kinds of financial areas that it currently holds no sway in. It also means the Agriculture committees become even more powerful than they currently are. Take that up with Banking and Financial Services and see where it goes.

I think the case can also be made that regulation is holding innovation back. Holding innovation back in products like crypto hurts people who cannot access markets more than it hurts people who have access. The reason is the marginal cost of production for crypto is significantly cheaper than regular financial products, so it is my opinion that crypto can fill in the cracks that regular financial products do not. One example would be the unbanked.

I have disagreed with people like Fred Wilson who have advocated for “some” or “the right” regulation. They also have advocated for guardrails. The problem is once the government gets its nose under the tent, big players go for regulatory capture as soon as they are able and those guardrails pick winners and losers. Or, big players kill the innovation as soon as they can because they feel threatened. I’d much rather let the market decide.

Crypto is a tough one. The entire sector has a huge market capitalization built entirely on speculation. “It’s going to happen someday.” I can see the argument for some regulation because of its credibility. If you are a C-level executive or on the board of directors of a firm that decides to use crypto instead of fiat currency and something screws up, what is the result? You won’t have a job and your reputation will be permanently stained.

At the same time, I have felt the sting of overly zealous cryptocurrency regulation on the part of the SEC especially. One company I am invested in, Bitnomial, is highly innovative and the SEC is taking the whip to them. Another company, OpenFinance.io, spent millions in legal fees to get through the regulatory thicket. The company got approval to trade security tokens on the Ethereum blockchain. It was revolutionary, and the company was going to do this with REITs. Almost one day after, the SEC said they weren’t going to allow for trading in security tokens. Reminded me of Single Stock Futures. The license was so valuable that we were able to sell the company to a more well-capitalized company that had time to wait.

Bitnomial spent years going through the process at the CFTC to become a regulated futures exchange on par with CME, ICE, or any other regulated US futures exchange. They did things correctly but they sure paid a price not only in dollars but in time spent going through the process.

Maybe the best first step is gutting existing regulations. Dodd-Frank was a horrible idea put into law and gummed up the works for lots of companies. Sarbox made it impossibly expensive for private companies to go public. The result of Sarbox is that private companies build wealth for people who are accredited and can access that market, while the rest of the schmucks have to settle for an S+P 500 ETF. There are plenty of other meaningless and stupid regulations that exist which get in the way of capital markets. The end result is they make them far more expensive for people to use because of the friction they create.

Don Wilson might be correct. I’d welcome any sharing of a plan or idea on how to actually execute the steps to get to one financial regulator. If done correctly, it will unleash competition and innovation which will be great for not only America, but all of mankind since the US economy is the straw that stirs the drink. But, as you can see, the mountain that Jack Sandner faced in 2000 is still there and more entrenched than ever.