TECH TUESDAY: The Regulatory Future of Digital Assets

TECH TUESDAY is a weekly content series that covers all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.

Just as the modernization of traditional securities markets brought great benefits to market participants, so too can digital assets be transformative – as long as regulation keeps pace with the development.

That’s according to Caroline D. Pham, Commissioner of the Commodity Futures Trading Commission, who spoke June 28 at the Nasdaq Technology of the Future Conference in New York.

Caroline Pham, CFTC

“Nasdaq’s all-electronic markets – and the electronification of markets from equities, to FX, to rates, fixed income, and more – has led to more transparency, more access, more competition, more cost efficiency, more liquidity,” Pham said. “Digitalization and digital asset markets have the promise of all these benefits and more. But we must have guardrails to avoid the pitfalls.”

Pham noted that while digital asset markets are unique, the broad principles of market regulation and market conduct are the same: “Don’t lie, don’t cheat, don’t steal, be responsible.”  

For its part, the CFTC, which regulates commodity derivatives and oversees exchanges, clearinghouses, dealers, and other market participants, has a regulatory framework in place for many digital assets. Pham characterized this framework as “relatively asset- and technology-neutral.”

“Our focus on principles-based regulation, customer protections, market integrity, risk management, price discovery, and transparency has worked well for our markets for decades,” she said. 

Pham specifically addressed market infrastructure providers, i.e. operators of exchanges, clearinghouses, and central securities depositories (CSDs), as being aligned with regulators in terms of having their own rulebooks, operational requirements, and experience in implementing and enforcing them. “Core principles and codes of conduct and decades of running highly regulated businesses are good tools to have and use for any new asset class or technology,” she said.    

The CFTC Commissioner outlined ten fundamentals for responsible digital asset markets, including properly identifying the product or service; ensuring the product or service is within the regulatory perimeter; mitigating systemic risk; protecting customers and retail investors; and promoting transparency. 

For next steps, Pham said regulators need to gather all relevant information, learn as much as possible, and then find pragmatic solutions. These solutions should incorporate regulatory harmonization across borders and jurisdictions, as well as ‘future-proofing’, such that rules set forth today will endure through technological change and market evolution.   

“We have to be pragmatic. Wheelbarrows work on the moon,” Pham said. “In the 1990s, Nasdaq’s Technology of the Future built ‘the stock market for the next 100 years’. Today, with our Regulation of the Future – and with some nudging by the CFTC – we can build the global financial markets for the next 100 years and beyond.”