In Farewell Address, CFTC Commissioner Johnson Warns Against Weakening Regulations, Urges Caution on Prediction Markets
In a farewell address marking the end of her tenure, Commodity Futures Trading Commission (CFTC) Commissioner Kristin Johnson issued a forceful defense of robust financial regulation, warning that a failure to prioritize consumer protection and market stability could lead to devastating crises. She also sounded a specific alarm about the rapid growth of prediction markets, stating that there is an “urgent need” for the commission to establish clear rules for the burgeoning sector.
A Call to “Measure Twice, Cut Once”
Johnson’s core message was a direct rebuttal to the idea that strong regulation and sustainable economic growth are mutually exclusive. Drawing parallels between the 2008 financial crisis and the more recent wave of crypto firm collapses, she argued that the failure to implement proper guardrails can have catastrophic consequences for the entire economy.
“Deciding the course for financial markets and financial markets regulation simply requires remembering why we regulate and the catastrophic consequences that may follow if we fail to regulate well,” Johnson said.
She repeatedly emphasized the need for a deliberate and careful approach, summed up by the adage, “Measure twice, cut once.” Johnson rejected the notion that consumer protection and market growth are in conflict, stating that “each is a necessary component of a healthy financial system.”
An “Urgent Need” for Guardrails on Prediction Markets
Johnson dedicated a significant portion of her address to the rise of prediction markets, an area where she believes the commission has not yet acted decisively enough. She expressed disappointment that the agency was unable to finalize a rule on political event contracts during her term, a concern that has been amplified by the recent surge in activity in these markets.
“As of today, we have too few guardrails and too little visibility into the prediction market landscape,” she warned.
Her concerns are particularly acute given that the target audience for these products is retail customers. She noted the trend of firms “marching down a path to offer leveraged, margined prediction market contacts to retail investors,” a development she sees as a significant risk without clear regulatory expectations.
Johnson also highlighted the growing trend of a “rent or buy my license” model in the derivatives space, where firms obtain a CFTC license and then quickly pivot to self-certify prediction market contracts or auction off their newly acquired license to others.
A Warning on Corporate Governance and a Call for Resources
Drawing on the lessons from the “crypto winter” of 2022, which saw the collapse of major firms like FTX and Celsius, Johnson reiterated the critical importance of strong corporate governance and risk management. She pointed to a common pattern of failures, including a lack of independent board oversight and weak or non-existent compliance programs, as the root cause of these crises.
These failures, she argued, impose “tremendous costs that fall disproportionately on customers.”
As she concluded her address, Johnson made a final, forceful plea for increased investment in the CFTC itself. She praised the agency’s “talented and dedicated” staff but warned that as markets are transformed by new technologies like artificial intelligence, it is critical that the commission receives the resources needed to keep pace.
“As we witness transformative changes in markets,” she said, “it is critical to ensure that we commit resources to upskill Commission staff to ensure a robust workforce proficient in the technology that will define the future of financial markets.”
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