Quantum Updates 31 | January 2025

US CFTC Commissioner Kristin Johnson calls for Creation of an Interagency Task Force to Oversee AI and Digital Assets at Davos Blockchain Event

On 20 January 2025, US CFTC Commissioner Kristin Johnson delivered speech at the Global Blockchain Business Council’s 8th Annual Blockchain Central Davos, held alongside the 2025 World Economic Forum. Speaking on the theme Collaboration for the Intelligent Age, she addressed the role of blockchain and artificial intelligence (AI) in shaping financial markets. She called for regulatory frameworks that balance innovation with oversight and emphasised the need for collaboration among regulators, market participants, and policymakers.

• Kristin Johnson elaborated on how blockchain and AI are transforming financial markets by enhancing automation, risk management, and accessibility while also introducing risks related to fraud, manipulation, and systemic instability.
• She discussed the importance of strengthening regulatory frameworks to ensure transparency and accountability in digital asset markets.
• In 2024, the US CFTC issued a request for information (RFI) on AI in financial markets, alongside similar initiatives by the US Department of the Treasury and other federal agencies. She noted that such efforts are crucial in assessing the risks and benefits of emerging technologies.
• Johnson called for the creation of an interagency task force to oversee AI and digital assets, ensuring a structured approach to regulation across multiple agencies.
• Kristen Johnson stated in her speech that digital asset firms be held to the same financial integrity standards as traditional institutions, particularly in areas like anti-money laundering (AML) compliance and fraud prevention.
• She proposed the establishment of an AI Task Force within the US CFTC’s Division of Enforcement to combat fraudulent schemes that exploit AI for market manipulation or investor deception.
• She warned that the US CFTC’s regulatory burden has increased without a corresponding expansion in resources and called for enhanced supervisory capacity.
• Kristen Johnson urged immediate action on formalising interagency coordination on AI and digital assets, with the goal of establishing clear regulatory guidelines by the end of the year.
• While acknowledging that legislative changes may take time, she encouraged agencies to use their existing authority to enforce stronger safeguards in digital asset markets.
• She noted that the AI Task Force, if implemented, could begin operations soon to focus on fraud detection and enforcement within AI-driven financial schemes.

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Acting Chairman Pham Announces Key CFTC Leadership Changes Amid New Administration

On 22 January 2025, the US Commodity Futures Trading Commission (US CFTC) announced leadership changes under Acting Chairman Caroline D. Pham. These interim appointments reflect the transition to a new administration, ensuring continuity in market oversight, emerging financial technologies, and international engagement.

• Harry Jung is appointed Acting Chief of Staff, advising Acting Chairman Pham and leading the US CFTC’s engagement on crypto, decentralised finance (DeFi), and digital assets. Previously, he held leadership roles at Citigroup, Morgan Stanley, and FINRA.
• Meghan Tente is named Acting General Counsel, having served at the US CFTC since 2012 in roles including Acting Director of the Division of Market Oversight. She has been recognised for excellence in management and regulatory oversight.
• Taylor Foy is appointed Acting Director of the Office of Public Affairs. Before joining the US CFTC in 2024, he spent nearly 14 years on Capitol Hill, working on communications for key Senate committees.
• Nicholas Elliot is named Acting Director of the Office of Legislative and Intergovernmental Affairs, previously serving as a Policy Advisor to then-Commissioner Pham and working on financial services legislation for Senator Bill Hagerty.
• Amanda Olear is appointed Acting Director of the Division of Market Oversight, having been with the US CFTC since 2007, focusing on registration, compliance, and market supervision.
• Richard Haynes is named Acting Director of the Division of Clearing and Risk, after serving as Deputy Director of the Risk Surveillance Branch. He has experience in systemic risk and derivatives market regulation.
• Tom Smith is appointed Acting Director of the Market Participants Division, bringing nearly three decades of US CFTC experience in capital, margin, and customer fund segregation.
• Brian Young is named Acting Director of the Division of Enforcement, having joined the US CFTC in 2024 after 20 years at the Department of Justice, where he prosecuted high-profile fraud and antitrust cases.
• Mauricio Melara is appointed Acting Director of the Office of International Affairs, specialising in cross-border regulatory issues and foreign financial markets since joining the US CFTC in 2010.

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US CFTC Commissioner Kristin Johnson Calls for Stronger Digital Asset Oversight in Keynote Address

On 24 January 2025, US CFTC Commissioner Kristin Johnson delivered a keynote address at the University of Chicago Law School titled Charting the Future of Financial Regulation. Her speech focused on financial technology, particularly digital assets and artificial intelligence (AI), and emphasised the need for clearer regulations, investor protections, and governance frameworks in digital asset markets. Her remarks followed recent Executive Orders from the new administration prioritising AI and cryptocurrency regulation.

• Commissioner Johnson highlighted how technology is reshaping financial markets, with digital trading, algorithmic models, and decentralised finance (DeFi) introducing both opportunities and risks.
• She called for a regulatory framework that applies the same safeguards to digital asset markets as those governing traditional finance.
• The rapid expansion of digital assets has drawn institutional and retail investment, but a lack of oversight has led to fraud, financial instability, and market manipulation.
• The collapse of major crypto firms in 2022 shows weaknesses in the sector, exposing poor financial management and weak investor protections.
• In response, regulators, including the US CFTC and US SEC, intensified enforcement efforts throughout 2023 and 2024, leading to increased scrutiny and public consultations on crypto market regulation.
• She urged digital asset firms to segregate customer funds from company assets to prevent mismanagement and reduce investor risk.
• Stronger corporate governance standards were recommended, with calls for internal controls, independent oversight, and risk management committees similar to those in traditional finance.
• She emphasised the need for stricter anti-money laundering (AML) and know-your-customer (KYC) compliance to combat fraud and illicit financial activity.
• Interagency coordination between the US CFTC, US SEC, and other regulators was deemed essential for establishing consistent rules and enforcement strategies.
• She warned that regulatory uncertainty could slow the structured development of digital asset markets without a cohesive approach.
• With the formation of the Presidential Working Group on Digital Asset Markets and the appointment of a Special Advisor for AI and Crypto, Johnson expects new regulations to take shape in the coming months.
• While acknowledging that comprehensive regulation will take time, she advocated for immediate steps to enforce baseline protections, particularly in fund segregation and governance structures.

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US Securities and Exchange Commission Published Study on Payment for Order Flow in Crypto Markets

On 24 January 2025, the US Securities and Exchange Commission (US SEC) released a working paper titled “How Does Payment for Order Flow Influence Markets? Evidence from Robinhood Crypto Token Introductions.” Conducted in collaboration with researchers from Miami University and Wayne State University, the study examines how Payment for Order Flow (PFOF) affects cryptocurrency markets, focusing on Robinhood Crypto’s staggered token introductions and their impact on market quality, trading costs, and regulatory concerns.

• The study found that PFOF practices in crypto markets lack transparency compared to equities and options, with higher fees, ranging from 4.5 to 45 times more than traditional markets.
• Token introductions on Robinhood Crypto led to reduced trading volumes (except for Bitcoin and Ethereum), wider bid-ask spreads, increased volatility, and a shift in order imbalances towards net sales.
• The estimated daily cost increase for market participants due to these effects was $4.8 million.
• The study elaborated on regulatory disparities, noting that while the UK, Canada, and the EU have banned or restricted PFOF due to conflicts of interest, the practice remains legal and widely used in the US.
• Robinhood Crypto’s PFOF model generated $420 million in crypto-related fees in 2021, with an average of 1.2 million daily revenue-generating trades.
• Between January 2018 and October 2022, Robinhood introduced 19 cryptocurrencies, beginning with Bitcoin and Ethereum, with observed declines in market efficiency following new token listings.
• The study proposed greater transparency in PFOF practices for crypto markets, suggesting disclosure requirements similar to Regulation NMS Rule 606 for equities and options.
• Enhanced oversight was recommended to address conflicts of interest and ensure fair execution, particularly for retail investors.
• The research, conducted by the US SEC’s Division of Economic and Risk Analysis (DERA), used Robinhood Crypto as a primary case study and referenced international regulatory approaches to highlight the need for stronger safeguards in US crypto markets.

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US CFTC to Hold Public Roundtables on Innovation and Market Structure

On 27 January 2025, the United States Commodity Futures Trading Commission (US CFTC) announced a series of public roundtables focusing on innovation and market structure. Acting Chairman Caroline D. Pham launched the initiative to promote transparency and engagement in policy discussions affecting derivatives markets. The roundtables will address key topics, including affiliated entities and conflicts of interest, prediction markets, and digital assets.

• The roundtables aim to facilitate discussions among industry leaders, market participants, experts, and public interest groups, contributing to a comprehensive administrative record with studies, data, expert reports, and public input.
• Acting Chairman Pham stated that a forward-looking regulatory approach is essential to maintaining market resilience, fostering economic growth, and enhancing American competitiveness.
• The US CFTC, as a key derivatives market regulator, is adapting its frameworks to keep pace with financial market evolution, including the rise of digital assets and complex financial structures.
• Acting Chairman Pham has consistently advocated for greater transparency and public engagement in derivatives market regulation, making these roundtables a central part of her policy vision.
• The initiative will provide a structured platform for expert discussions, ensuring that emerging market trends are addressed with balanced regulatory responses.
• The US CFTC has committed to hosting these roundtables over the next several months, with specific schedules to be announced in due course.

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UK FCA Issues First Fine for MiFIR Transaction Reporting Failures Against Infinox Capital Limited

On 29 January 2025, the United Kingdom Financial Conduct Authority (UK FCA) fined Infinox Capital Limited £99,200 for failing to submit 46,053 transaction reports under the European Union Markets in Financial Instruments Regulation (MiFIR). This marks the UK FCA’s first enforcement action for a breach of EU MiFIR’s transaction reporting requirements. The fine follows an investigation into Infinox’s reporting systems, which the UK FCA found lacked necessary compliance controls.

• The Final Notice 2025: Infinox states that between 1 October 2022 and 31 March 2023, Infinox failed to submit transaction reports for single-stock contracts for difference (CFDs) executed through its corporate brokerage account, a major part of its business.
• The UK FCA detected discrepancies in Infinox’s transaction data in May 2023 and contacted the firm, which initially disclosed 6,000 missing reports. By 6 July 2023, the number had increased to 46,053.
• Infinox did not voluntarily report the failure when it was first identified in March 2023. The firm submitted the missing reports on 15 December 2023.
• Under Article 26(1) of EU MiFIR, investment firms must submit complete and accurate transaction reports by the close of the next working day to allow regulators to monitor trading activity and detect market abuse.
• EU MiFIR replaced earlier reporting frameworks under UK MiFID II and became part of UK law following Brexit. The UK FCA relies on transaction reports to ensure market fairness and transparency.
• Infinox offers CFD trading, which the UK FCA considers high-risk due to its speculative nature. The firm began offering single-stock CFDs in October 2022 but failed to implement adequate reporting systems, resulting in 60% of transactions in this business line going unreported.
• The UK FCA imposed the fine under Section 206 of the UK Financial Services and Markets Act 2000. The original penalty of £141,800 was reduced by 30% after Infinox agreed to an early resolution.
• While the UK FCA confirmed that Infinox did not gain financially from the breach, it noted that failing to report transactions in a product susceptible to market abuse had regulatory implications.
• Infinox must pay the fine by 9 February 2025, or the UK FCA may take further enforcement action.

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US SEC and US CFTC Extend Compliance Date for Form PF Amendments

On 29 January 2025, the United States Securities and Exchange Commission (US SEC) and the United States Commodity Futures Trading Commission (US CFTC) announced an extension of the compliance date for amendments to Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers. Originally set for 12 March 2025, the new compliance deadline is now 12 June 2025, following industry concerns about the administrative and technological challenges associated with the initial timeline.

• United States Form PF is a confidential reporting form required for certain US SEC-registered investment advisers, including those also registered with the US CFTC as commodity pool operators (CPOs) or commodity trading advisers (CTAs).
• The amendments, adopted on 8 February 2024, aim to enhance oversight of hedge funds and private funds by improving regulatory monitoring and systemic risk assessment.
• The extension provides affected entities additional time to implement necessary reporting system changes and comply with the new requirements.
• Form PF was introduced under the United States Dodd-Frank Wall Street Reform and United States Consumer Protection Act of 2010 to strengthen regulatory oversight by requiring private fund advisers to disclose financial stability and investor protection data.
• Industry groups, including the Managed Funds Association, Alternative Investment Management Association, Investment Adviser Association, and SIFMA Asset Management Group, requested an extension due to operational challenges.
• Concerns were raised about overlapping regulatory obligations if advisers had to file reports under both the current and amended versions of Form PF within the same reporting cycle.
• The regulators opted for a three-month extension to 12 June 2025.
• Private fund advisers must now adhere to the revised United States Form PF reporting requirements by 12 June 2025.

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