CFTC Commissioner Goldsmith-Romero Warns Against Regulatory Rollbacks
Commentary by Steven Lofchie
CFTC Commissioner Christy Goldsmith Romero warned regulators of the danger of regulatory complacency and not to rollback critical Dodd-Frank post-crisis reforms. She highlighted the need for vigilant management of emerging risks in the cryptocurrency industry and as to the deployment of artificial intelligence ("AI") in financial services.
In remarks before the Consumer Federation of America's Financial Services Conference, Ms. Goldsmith Romero argued that the bank failures in March 2023 should be a "wake-up call." She urged regulators to take steps to prevent the financial system from returning to a pre-Dodd-Frank "era of unchecked excessive risk taking[.]" On "affiliate risk in the cryptocurrency industry," Ms. Goldsmith Romero advocated for a "same risk, same regulatory outcome" approach, including (i) creating a foundation of customer protections and (ii) ensuring a market structure that promotes financial stability. She reiterated concerns about conflicts among crypto-related companies serving multiple functions. She pointed to FTX as an example of how in an unregulated market, the extent to which these conflicts are disclosed is unknown and can lead to "cascading losses and contagion risk." On AI, she advocated for strengthening governance and risk management, warning that algorithmic trading, trade settlement and margin calls could impact financial stability.
Ms. Goldsmith Romero offered proposals to (i) expand the scope of the definition of "retail customer," to include "regular customers" and to distinguish the types of protections they receive from those for professional and high net worth customers and (ii) establish the "National Financial Fraud Registry" to provide a comprehensive record of federal fraud convictions and civil fines available for public use.
Commentary
Perhaps it appears "safer" to consumers when regulators propose to increase regulation (and never to lessen it). But that is the wrong approach. The adoption of rules is inherently a process of prediction and those predictions may turn out to be wrong. Rules may become outdated or not have their intended effect or may be more expensive to implement than projected. Regulators should evaluate existing rules on an ongoing basis, just as they consider new rules.