Today’s episode is from a 2017 conversation with Aaron Brown, crypto derivatives expert and former Managing Director at AQR Capital Management, one of the world’s largest hedge funds. We discuss the differences between the CFTC, the SEC, and the rest of the government when it comes to regulating Bitcoin and other cryptocurrencies. For the full conversation, check out Flippening episode 3.
Links Relevant To This Episode
- Nomics on Twitter
- Clay Collins
- Nomics API
- Nomics’ Fully Customizable Daily Crypto Newsletter
- Aaron Brown
- AQR Capital Management
- Bitcoin (BTC)
Clay: Welcome to Daily Wisdom from the Flippening Podcast. These episodes feature short, to the point clips from our full-length interviews. We talk to the men and women behind the trades, crypto exchanges, and regulations with the goal of helping you become a better, more informed investor.
Michael: Hi I’m Michael Kaplan, editor of the Flippening Podcast. Today’s episode is from a 2017 conversation with Aaron Brown, crypto derivatives expert and former Managing Director at AQR Capital Management, one of the world’s largest hedge funds. We discuss the differences between the CFTC, the SEC, and the rest of the government when it comes [00:00:30] to regulating Bitcoin and other cryptocurrencies. For the full conversation, check out Flippening episode three.
Without further ado, here’s our conversation with Aaron Brown, crypto derivatives expert. Enjoy.
Clay: What are the differing agendas of the CFTC and SEC? Is this a step along the way? What happens to these derivatives markets when an ETF opens? Is there a potential that people just flee them and go towards SEC-regulated products?
Aaron: [00:01:00] I’m talking in general here. The CFTC, think of them as like the boxing referee. They just want to make sure there’s a fair fight. They’re not interested in protecting the fighters, they just want to make sure that things get fair. The SEC, think of them as they’re the ones who want to make sure nobody gets hurt. They’re not so concerned about whether there is going to be a fight at all or is it going to be fun for the fans, anything like that. There’s a third regulator here—two which we talked about—which is the fed or the Department of Treasury, or you can think of it as the US government. I’m not really just talking about [00:01:30] the US here.
I think in every country in the world, every developed country anyway, you have the same three sorts of consideration. The CFTC says, “Can we treat Bitcoin as a commodity? Is it well-defined enough that people can make bets on it and we know how to settle on them? We’re not going to get all kinds of clearinghouse collapses and bankruptcies and lawsuits? Is it something people can bet on?”
We’re talking about experienced people who can look after themselves. We just want to make sure that the gain is something that can [00:02:00] be well-defined. I think that battle has been won. The CFTC has come out and said, “Okay, you can either, if you do what LedgerX did and you do 100% collateralization or if you’re a well-organized exchange with policies and procedures with an infrastructure we trust, you can treat Bitcoin just like a commodity, just like it’s gold and oil or anything else.” It’s a real thing.
If you wanted to set up a futures contract in monopoly money, they wouldn’t let you do it. It’s not a real thing. Anybody can create it. As long as [00:02:30] it’s well-defined, the CFTC has pretty much said they have no problem with it. I think this is generally true of exchange regulators throughout the world. In terms of investor protection, the SEC’s kind of “Who can invest in it?” The SEC is never going to stamp out Bitcoin or outlaw it, but it might say, “Look, you really can’t use this in institutional portfolios.
You can’t have an ETF. If you put it in pension funds, it’s not illegal. We can’t stop you from doing it, but you’re going to run into all kinds of [00:03:00] problems.”
Unless the SEC comes and says “Okay, here’s what Bitcoin is. Here’s how it’s regulated. Here are the rules in terms of knowing your customers, in terms of market manipulation. What’s insider trading with Bitcoin?” Nobody knows. All of these things you have to define for an institution to be really comfortable holding it.
Again, this is an international thing. If the SEC defined it, that would probably be taken as an international standard. It’s possible the SEC will decline, but you’ll be able to trade them as freely in London, or Tokyo, or something like that if those regulators are more accommodating to it. [00:03:30] Those regulators have basically so far said no. Basically, no regulator has stepped forward and said “Okay, we understand Bitcoin. It can be traded in a protected regulated space where individuals can buy it. You can put it in pension funds, things like that.” That’s not required. There’s no law that says you can’t do it without that approval, but institutions are not going to go forward without some regulatory encouragement.
Finally, the Central Bank, [00:04:00] the Fed, the government, the Department of Treasury, the Department of Justice, their concern would be that the coin can undermine currency regulation, can help tax evade, and can help illegal transactions and so forth. So far, basically, the government seemed to be saying, “It’s okay.”
They have taken enforcement actions. They shut down the Silk Road. They put the founder in prison for his life. They’ve taken enforcement action against individual uses of it. But countries like [00:04:30] Argentina, Venezuela, where a lot of the citizens are using it because their local currency is basically very unreliable. Those countries have pretty much allowed it. They seem to be taking the attitude that it is better to let people have this safety bell for it.
At the moment, it seems like that third leg of regulation says Bitcoin is okay. In the long run, that’s the most important one. In the long run, if countries really decide Bitcoin is illegal, Bitcoin is a way of evading taxes and currency controls and [00:05:00] all the other things we want to impose, then, Bitcoin definitely becomes a sort of an outlaw currency. That makes it more valuable to some people.
The more government crackdown on things, the more valuable it is to be able to evade those controls. It also means probably 95% of people are not going to dare touch it because it could screw up the rest of their lives. You almost have to kind of decide are you on the underground economy and use Bitcoin? Are you on the above-ground economy and you avoid Bitcoin?
Clay: Right. Are you a cypherpunk? [00:05:30] Are you a crypto-anarchist? That kind of thing.
Aaron: Those are people who would do it for political reasons perhaps, but there are also people who want to do it because they don’t want to pay taxes or anything. Not for political reasons because they don’t want to pay them. Or they want to do transactions that governments make illegal.
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All opinions expressed by podcast hosts or guests are solely their own opinion and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be [00:06:30] relied upon as the basis for investment decisions.
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