Former CFTC Chairman Tim Massad
Tim Massad
Timothy Massad is a research fellow at the Kennedy School of Government at Harvard University, a nonresident senior fellow at Brookings, an adjunct professor of law at Georgetown Law School, and a consultant on financial regulatory and fintech issues.
Mr. Massad served as chairman of the U.S. Commodity Futures Trading Commission from 2014-2017. Under his leadership, declared virtual currencies to be commodities, introduced reforms to address automated trading and strengthened cybersecurity protections. Previously, Mr. Massad served as the Assistant Secretary for Financial Stability of the U.S. Department of the Treasury. In that capacity, he oversaw the Troubled Asset Relief Program (TARP), the principal U.S. governmental response to the 2008 financial crisis.
In this discussion we cover Mr. Massad’s reactions to President Trump’s crypto activities since his inauguration and some common sense ways to improve investor protection without creating new laws or regulations. Mr. Massad also shares some valuable insights into how to safeguard the growing stablecoin market and why he thinks that a national crypto stockpile is a bad idea for the U.S.
Forbes: When did you first come across crypto and what were your impressions?
Massad: I first heard about it when I was at the Treasury Department, when I was the Assistant Secretary for Financial Stability in 2010 or 2011. I don’t recall the exact context. I was quite busy then overseeing the Troubled Asset Relief Program, so I didn’t pay a whole lot of attention. But once I moved to the Commodity Futures Trading Commission (CFTC) in June of 2014, I really focused on it.
Forbes: What specifically did you focus on at the CFTC?
Massad: I was very curious about it and how it worked. I was soon focusing on what market participants under our jurisdiction were doing or thinking about, because that is the context in which we took action. There were market participants who were contemplating doing bitcoin swaps, and so that was one of the things that led us to focus on it.
Forbes: One of the big decisions that was made while you were at the CFTC was designating bitcoin and ether as commodities. I’d love to have you walk us through why and how you made that determination.
Massad: I had discussions with our general counsel’s office as well as our markets people. What’s important to understand is that the statutory definition of a commodity not only includes various things that we would all think of as commodities, such as wheat, cotton and corn. It also includes all services, rights, and interests in contracts for future delivery. Because bitcoin was the subject of swaps, that effectively made it a commodity.
Forbes: What do you see as the biggest gaps in investor protection right now when it comes to crypto? Where are the big information asymmetries?
Massad: We don’t have an overall framework for regulating crypto. That’s the basic problem. It’s been the basic problem now for over 10 years. I first testified about this before Congress in 2014. The biggest single gap is that there is no federal regulator of crypto tokens unless the token is deemed to be a security. The other obvious problem is that the issue of when you classify a token as a security or a commodity or something else has been the subject of a lot of litigation. And there is a lot of failure on the part of the industry, quite frankly, to comply with the law.
Forbes: Industry participants say that crypto cannot comply with traditional methods of disclosure like filing an S-1 at the SEC. What are your thoughts?
Massad: There were obviously a lot of issuers of crypto tokens in the ICO craze who were raising capital, and the SEC responded and shut that down. My own view is that we’ve spent far too much time getting bogged down on the issue of whether a token is a security or a commodity, however. The real issue is there is a lack of investor protection in this whole sector, and that’s what needs to be addressed. And that is why I have advocated ways of getting to some basic investor protection standards without getting bogged down in this debate. That doesn’t mean the debate isn’t important, but there’s been a need to provide for investor protection, and that hasn’t happened in part because of this debate.
Forbes: In 2023 testimony in front of the House Financial Services Committee you suggested that the industry could create a Self Regulatory Organization (SRO). Could you walk us through that logic?
Massad: I advocated that we should develop standards for investor protection that apply to the trading and distribution of crypto without getting caught in the issue of whether something is a security or a commodity. I’ve suggested that it could be done through an SRO. It could also be done simply by the SEC and the CFTC getting together. The point is that the basic investor protection standards we need, such as prevention of fraud and manipulation in trading, protection of customer assets, prevention or minimization of conflicts of interest on the part of trading platforms and other intermediaries are necessary, regardless of how you classify the token. I’m not suggesting we ignore the issue of whether it’s a security or not, because the security classification essentially triggers greater standards, if you will, or additional standards. But one way of doing this is an SRO, meaning the SEC and the CFTC would jointly create an SRO that would devise these standards, and that would pull in industry expertise. An SRO means an entity that is supervised by those agencies. It’s not the industry simply policing itself.
Another way of doing this is for Congress to say that any platform that trades bitcoin or ether shall be regulated by the CFTC, and that the CFTC shall develop rules in specified categories like prevention of fraud and manipulation, prevention of conflicts, and those rules shall apply to every token the platform trades. That is a way of quickly getting to market regulation that would still leave the SEC free to say a particular token is a security. It could challenge that any particular token is a security and should still comply with those additional requirements, but that wouldn’t delay the overall regulation of these platforms. So there’s a couple ways to get there. There are details that need to be worked out, but the point is that this issue of is it a security, is it a commodity, has arisen in part because we have this fragmented regulatory system and this has resulted in the lack of investor protection for many years.
Forbes: The industry has been asking for bespoke legislation, but laws are supposed to be technologically neutral. You also raised this point in your congressional testimony. Can you elaborate?
Massad: I think blockchain and tokenization should be considered technologies. They’re not asset classes. And so we should have rules that are technology neutral as much as possible, meaning they shouldn’t prohibit or favor any particular technology. I think we’re at a point where there are some rules that don’t accommodate tokenization and blockchain very well that need to be adjusted. Just as when I was at the CFTC, we had reporting rules that said, send in the report in duplicate copies or send it by fax. All those things were outdated.
And so we revised our reporting rules to make them technology neutral. The point is that we should be looking more at the substance of a particular token and its function than the fact that it is using this particular technology, and we should design rules that make sure our securities law framework works for this technology. But that’s different from saying, oh, let’s have a special class of rules for this technology.
Forbes: I’m sure you’ve heard a lot of the conversation about CFTC and whether or not, or how well equipped it is to regulate a spot market like crypto. What are your thoughts on that?
Massad: I think it’s an issue of, number one, giving an agency the authority, and number two, giving it the resources to do it. When I first started talking about this, I said either the SEC or the CFTC can do this if given the sufficient resources, and it doesn’t make sense to create a new agency. I think the public discourse has favored giving the spot market regulation to the CFTC, and I’m fine with that as long as the agency is given sufficient resources. I worry that they won’t be given the sufficient resources. It’s a small agency, it has a small budget, and it’s got a lot on its plate already.
Forbes: What are your thoughts on Acting Chairperson Caroline Pham?
Massad: I’ll be interested to see what she does. I don’t have a view yet on that because she’s just taken office.
Forbes: Let’s move to stablecoins and tokenization. What are the biggest questions that regulators need to address?
Massad: First of all, let’s define what we’re talking about. Let’s focus on stablecoins that are pegged to the dollar and backed by dollar assets and that don’t pay interest. I’m excluding ones that pay interest because that could change how we treat them. And I’m excluding ones that are algorithmic or backed by crypto. Dollar-backed, non-interest paying stable coins should be regulated as a payment mechanism, not as a security. And that means regulatory requirements that are similar to what we require of banks, but that are focused in particular on the payments function. I would require full reserves. I would say that there should be no intermediation or very little intermediation, meaning invest those reserves at the central bank, or HQLA like Treasuries, or bank deposits. I would have liquidity requirements. I would have capital requirements, because even with full reserves, you can still have losses that need to be absorbed by some layer of capital. I would have a variety of consumer protection measures such as a very clear right of redemption and adequate disclosures. And I would have a resolution framework or insolvency.
We don’t have any of those things as a federal law matter. We have some of those things in the New York State requirements, but I think we need a federal framework. But even with all of that, which are requirements we would impose on the issuer, we also need to address the fact that stablecoins are transferred on decentralized blockchains. You’ve got to address the risk that they can be used for financial crime and evasion of sanctions. And that’s perhaps the hardest part to address. Unfortunately, I’ve seen very little in the emerging frameworks around the world that to my mind, sufficiently addresses that. But I think that’s one of the big challenges.
Forbes: What are your thoughts on the flurry of activity from the new administration?
Massad: Let me say a few words first on Trump’s Executive Order on crypto last week. I think it’s good that the Trump administration is focused on digital assets and tokenization. I hope that this leads to the development of a framework that encourages responsible development of this technology as the Executive Order proposes, as opposed to simply allowing more speculative activity that doesn’t really have much social utility. I think whether and how it does that remains to be seen. The order calls for a review of regulations at various agencies, and a report in six months. So we’ll see what that report says. Otherwise, it has only a couple of specifics, including promotion of stablecoins. I’ve been saying for a few years now, we should have a framework that encourages the private sector to develop stablecoins, and that allows us to address both their opportunities and risks. So I’m happy to see that focus. I made some comments earlier about what that framework needs to look like. The other specific item it talks about is prohibition of a central bank digital currency (CBDC). There’s very little support for the idea of the Federal Reserve issuing a digital currency that all of us directly hold. But we’ve got to make sure that the payment infrastructure that the Federal Reserve operates works for tokenized assets. The other thing that disappointed me about the Executive Order is a lack of detail on how it will minimize the risk that this technology is used for financial crime or evasion of sanctions. The financial system today relies on banks as the gatekeepers to do that. The existing system has a lot of flaws. This technology doesn’t rely on banks, however. So we need to develop tools to minimize those risks.
Regarding the discussion about a strategic crypto reserve or what the order now calls a stockpile, I don’t see a good argument for creating that. It’s true that the government owns some digital assets that it seizes in the course of enforcement actions. I think we should continue to dispose of those assets the way we do all assets that the government seizes, meaning it sells them in due course, or in some cases, it actually gives back the assets to victims of the crime. I don’t see an argument for making an exception here, meaning I don’t see an argument for holding on to those digital assets. The arguments that have been made are essentially that, number one, it’s going to go up in price–but that may or may not be true. And number two, somehow it supports our goal of being a leader in this technology. I don’t see any reason to think that and there are much better ways we can achieve that goal. There’s no strategic purpose that I can see of having that stockpile. It’s not like oil where there is a purpose to having a reserve of oil. And frankly, I think having a stockpile like this, and certainly having the government acquire more, primarily benefits those people that already own the asset or who buy it in front of the government buying it. I don’t see a national interest there.
Regarding the memecoins issued by the Trump Organization on the Friday before inauguration, I think it was plainly wrong for them to issue these. I don’t think you need to be knowledgeable about crypto to understand why. To me, the Trump Organization took advantage of the president’s impending inauguration to make money. Additionally, they did so in a way that creates the potential for further conflicts of interest, because domestic or foreign firms or foreign governments might now buy these memecoins to curry favor with the administration. And I think it’s a black eye for crypto because it just exploits the most speculative aspects of the industry. I think it also undermines the effort to develop a responsible framework for crypto. The stated purpose of the Executive Order is to support the responsible development of digital assets in blockchain. I can’t imagine an action that is more contrary to that stated purpose than issuing these meme coins just as he takes office.
Forbes: Thank you for your time
