CFTC Strategic Plan Offers a Carrot and Stick for Fintech Industry

On July 8, the Commodities Futures Trading Commission (CFTC) released its 2020-2024 CFTC Strategic Plan that describes five strategic goals and objectives that will guide the CFTC over the next four years. Two of these goals – encouraging innovation and being tough on those who break the rules – are particularly relevant to the Fintech industry. Here we take a closer look at the CFTC’s Strategic Plan and recent actions, which shed light on how the agency aims to harmonize these twin goals, and offer valuable guidance for the rapidly growing digital asset space.

Encouraging Innovation

The CFTC aims to encourage innovation by increasing transparency of decision-making and by reducing burdens that serve no regulatory purpose. The Strategic Plan specifically addresses digital assets, referred to as “21^st century commodities,” and commits to “develop a holistic framework to promote responsible innovation in digital assets.” To accomplish this, the CFTC will emphasize the “principles we expect industry to adhere to” to help markets remain “fair, innovative, and vibrant.” The CFTC will also aim to “avoid rules and approaches reflective of business practices long gone” and to reduce burdens that are “disproportionate to the regulatory purpose served.”

The day after CFTC announced its Strategic Plan, LabCFTC announced concrete actions to encourage innovation. LabCFTC is “the focal point for the CFTC’s efforts to promote responsible Fintech innovation.” On July 9, the CFTC announced that LabCFTC would present “Empower Innovation 2020,” a series of interactive virtual events focused on Fintech, throughout the fall. “Empower Innovation 2020” will consist of fireside chats, digital roundtables/panels, and presentations from foremost industry experts. Registration will open in August and a detailed agenda is forthcoming. Members of the public can sign up here.

Enforcement

The Strategic Plan also reinforces the CFTC’s commitment to strong enforcement and its objective to “be tough on those who break the rules.” The Strategic Plan makes clear that the CFTC will direct enforcement efforts to “maximize deterrence against future violations” on the view that deterring bad actors is the best way to preserve market integrity.

“Certainty, consistency, and transparency are key criteria in guiding CFTC enforcement,” as they must be to accomplish a deterrence objective without chilling the innovation the CFTC hopes to encourage. The CFTC identified a number of steps that it would take to accomplish these objectives, including:

1. Provide fairness, consistency, and predictability across enforcement matters, including by implementing its recently published Enforcement Manual.
2. Leverage the CFTC’s expertise and resources by coordinating with other criminal and civil enforcement authorities.
3. Where necessary and appropriate, create bright line rules to prevent market manipulation.
4. Focus market surveillance on areas where fraud and manipulation are most likely, including using sophisticated data analytics to identify potential violations.

Even before the Strategic Plan, the CFTC has demonstrated its commitment to these principles through its actions and numerous other recent milestone announcements.

At his July 2019 swearing-in ceremony, Chairman Heath Tarbet made clear that “under his leadership, the CFTC will be tough on those who break the rules.” Consistent with Tarbet’s promise, in 2019 the CFTC filed more actions alongside criminal authorities than in any prior year, and the monetary relief the CFTC obtained increased 39 percent from the prior year to $1.3 billion.

The CFTC has also demonstrated its commitment to transparency. In May 2019, the agency published its first-ever Enforcement Manual. (By contrast, the U.S. Securities and Exchange Commission publicly released its Enforcement Manual in 2008.) On May 20, 2020, the Division of Enforcement issued new civil monetary penalty guidance, clarifying the factors it considers before recommending civil monetary penalties for the first time since its penalty guidelines were published in 1994.

Time to Reevaluate Your Compliance Programs

The CFTC’s new plan and recent enforcement actions reflect a conscious effort by the agency to be both tougher and more transparent. This is both an opportunity and a warning to the Fintech industry: now is the time to consider proactively engaging with the CFTC, reevaluating compliance programs, and developing a response plan to minimize the likelihood and potential impact of any future enforcement action.