The state of crypto regulation with Cboe Digital

Cboe Digital is a Chicago-based regulated exchange and clearinghouse for crypto spot and crypto derivatives markets. Founded in 2018, Cboe Digital offers cap-markets-friendly workflows and technology for market participants. The company received approval in June from the Commodity Futures Trading Commission (CFTC) to offer margin futures on bitcoin and ether, becoming the first US-regulated combined crypto-native exchange and clearinghouse platform to provide leveraged derivatives products to its customers.

In an interview with The Financial Revolutionist, Katherine Kirkpatrick Bos, Chief Legal Officer at Cboe Digital, outlines the state of crypto regulation, makes a case for institutionally backed crypto solutions, and describes non-crypto use cases for blockchain technology.

This interview has been edited for length and clarity.

The Financial Revolutionist: Presumably, you have your ear to the ground as it relates to crypto regulation…

Katherine Kirkpatrick Bos: I love being a crypto lawyer, because I think, as a lawyer, you're [generally] not an innovator: It's not your role at all. The closest thing you can be to an innovator as a lawyer is in crypto. There's a lot of interest in the legal and regulatory environment because it's viewed as existential for crypto.

We're at this very interesting transition period for institutional engagement with crypto domestically. Crypto lawyers have to be very active in monitoring the regulatory developments and using that to not only form legal strategy but also converse with our business side to factor in this environment. The most difficult aspect is that some of this is a little bit unpredictable; even the savviest lawyers can only give their two cents with a lot of caveats.

Do you anticipate the regulatory landscape becoming clearer or murkier over time?

I think people are really excited about the Ripple ruling for good reason. What’s really interesting right now is that we’ve finally hit a point where there's a lot of crypto litigation; we’re going to see some resolution to those cases in the very near term. We've already started to see that. So some people take that as “Oh, we’ll get clarity through precedent.” That's absolutely true, and precedent is more impactful and more important than settlements, of course, because precedent is effectively the rule of law.

That being said, this precedent is going to further muddy the waters. And that's actually something really important to consider: The SEC, all along, has said that their token analysis is facts-and-circumstances-based. So they've been very smart in making that explicitly clear, because if they lose in a given case, if they lose on a token, or if they win, all they need to do is distinguish that token from their next case in their arguments. So maybe it will clarify the universe to some degree with respect to an individual token, but how does that help on a broader ecosystem basis? It really doesn't.

In the case of Ripple, I think one of the most impactful takeaways of that case is it will make it harder to prove intent to violate the securities laws, because projects will say, “I didn't mean to violate the securities laws: Here was my justification.” Litigation is not the path to clarity, or at least not the litigation we're going to see in the next couple of years. And we're really not going to get the market structure along for a long time to come. We will probably get a stablecoin law, which is going to be in some ways fairly narrow with respect to the broader crypto ecosystem.

What kind of conversations do you have with regulators?

Cboe Digital is CFTC regulated, so it's a little different from Cboe Global Markets, which talks to the SEC all the time. Obviously, we're keeping our eye on the SEC environment, because that is likely going to play a role with respect to digital asset trading. And I should say, on the spot side, we are state regulated, so we're constantly talking to the states as well.

There's a lot of education, especially with the states, even states where we have a money service business, or money transmitter license. When we're doing exams, we like to have introductory meetings to present what we're about and let regulators understand our business and understand that we are a real operation.

And then we're also talking with all of the regulators about what we want to do, why it's going to benefit our clients, the broader ecosystem, why it’s going to benefit their jurisdiction, and why they should work with us. I do think that there is a shift in the regulatory mindset; even over the course of five years, there's been an acknowledgement that this is all here to stay. So there is an appetite, both domestically and overseas, for regulators to work with a Cboe Digital, especially as compared to some of the crypto native entities

What kinds of interfacing takes place between Cboe Digital and more traditional parts of Cboe when it comes to dealing with regulators?

Some of it gets complicated, because we need to make sure the appropriate boundaries are drawn, and we have policies upon policies interacting with regulators. For example, a lot of crypto companies join crypto advocacy groups like the Blockchain Association. We’ve made the decision not to join the Blockchain Association, because we feel like our voice is already heard in Washington through the Cboe Global Markets policy team, which helps guide our understanding.

I have a lot of the crypto policy knowledge and experience that they don't have, so I'm filling gaps for them, but they're filling gaps for me in terms of broader policy operations. The other interesting benefit of our crypto-TradFi marriage is we have a surveillance and regulatory structure in place.

Are there particular regulations you see in the pipeline or legal frameworks that you advocate for in particular?

I really like the use of blockchain analytics. You have a lot of companies doing great work in this space: TRM labs, Chainalysis, Elliptic. It's an excellent way of making the user experience unfettered by certain upfront compliance mechanisms, and I love the idea of using zero-knowledge proofs. That technology is so theoretically compelling from a compliance perspective. When you apply that to KYC, how can you argue with the potentially compelling utility of that technology?

The technology isn't there yet to hold up against scrutiny from the regulators, but it will get there. So I think that's actually really exciting, and that's a perfect use case for why blockchain technology more broadly can be and should be very attractive apart from crypto.

Have there been any doubts internally about the direction of something like Cboe Digital in the wake of regulatory interventions against FTX, Binance, and even Coinbase?

Cboe Global Markets is a mature entity that is in this for the long haul and is playing the long game. I have confidence in Cboe’s commitment to this asset class, and they're smart enough to become educated about the core business that Cboe Digital is engaged in now, as well as R&D on a number of other fronts relating to other things that could potentially marry well with existing Cboe businesses.

We've seen waning interest or fear or a departure from certain institutions. I understand that it's a difficult space to be in right now. But I think there's a difference between pulling back or being more conservative versus entirely shutting operations and never revisiting them. Those entities—including Cboe—with mature and seasoned legal and policy teams completely understand and were prepared for the regulatory onslaught that we're experiencing now. So I think a lot of sophisticated institutional investors are unfazed by this.

Volatility creates opportunities, and we're seeing volatility; crypto is very early, and even if a massive part of the ecosystem falls away and all you have is bitcoin and ethereum, or all you have is tokenization, that is still a massive opportunity. When you take every ultra high net worth individual and you put 1% of their net worth into diversification of an experimental asset class, crypto will take that 1%.