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Jeb Hensarling: Welcome, everybody, and welcome to those online. My name is Jeb Hensarling. I’m an economics fellow here at the Cato Institute. Welcome to the third panel of the day, America’s 250-year financial experiment. This panel is What Comes Next? I don’t know, which is why we have an excellent group of panelists here to answer that question for us. So allow me to introduce them, please.

First, Brian Quintenz, whose name, as a Texan, I keep wanting to pronounce with a Spanish accent, which I can’t. He serves on the board at Kalshi. He previously was a commissioner of the CFTC and has served, I believe, as head of the crypto regulatory portion of the investment firm Andreessen Horowitz. Is that correct?

Brian Quintenz: Crypto policy.

Jeb Hensarling: Crypto policy. Okay. Yeah. Next, Jeff Dinwoodie, who is an attorney at Cravath, Swaine & Moore. He previously served as chief counsel to the Securities and Exchange Commission chair and as head of the Office of Financial Institutions at Treasury. Then finally, we have Geoff Anderson, who is head of policy for Klarna and spent 25 years at the State Department. And given that the firm is a Swedish firm, I sense somewhere you did some time in Sweden. I’m just going out on a limb and guessing that.

Geoff Anderson: I did.

Jeb Hensarling: So, gentlemen, thank you very much for agreeing to be here, and I look forward to having you answer the question.

You know, 250 years, a birthday is always a good time to kind of reflect upon your life. It’s a good time for America to continue to reflect upon our collective life. As I look back, it’s necessary in order to figure out, okay, how did we get to where we are? Well, where are we today in the world of finance? Right now, 46 percent of all global trade is conducted in dollars. 44 percent of the global equity market is in the US. 38 percent of the global fixed income by market cap is in the US. We continue to be the world’s reserve currency. We have a panoply of financing options for investors and entrepreneurs, be it our public markets, private equity, private credit, venture capital, and the list goes on. We also, for an administration that is currently fixated on trade, have financial services as the only service sector of our economy where we run a trade surplus. 89 percent of global currency exchange is denominated in dollars. And we have a $130 trillion US capital market system, the envy of the world. Gentlemen, I sense it didn’t happen by accident. So let’s look backwards before we look forward. How did we get here, and what are the lessons we should learn going forward? Brian, you’re up.

Brian Quintenz: Okay. Well, first of all, thank you to Cato for hosting today’s event focused on what I believe is a critical national strategic asset of the United States, which is America’s financial markets. Mr. Chairman, thank you for hosting and moderating. My experience is with the derivatives markets. Is my mic not working? All right, thank you. This thing’s not been working. Can you hear me? Okay, there we go. Great.

My experience is with the derivatives markets, and I believe that they are just as much a national strategic asset as America’s capital markets are. But they’re also things with which I think most people are unfamiliar. And so, how did we get to have such robust, liquid, useful risk management markets in this country? And that’s really what derivatives markets are. They’re for risk management purposes and price discovery purposes. They’re not for capital formation. They’re not necessarily for wealth creation. Those aren’t their core purposes. And they evolved organically. They evolved because of risk management needs. First, mostly from the agricultural community in the Midwest, centered in Chicago. The derivatives markets moved into financial risk with things like Treasury futures, interest rate futures, and then further into stock indices, futures contracts and derivatives. And now we have derivatives products across a wide variety of rates, indices, and even events, which is kind of where Kalshi comes into play, and we can talk about that in a little bit.

But one of the things that I think has been critical in the regulatory aspect of promoting derivatives markets is two things. The first is that the law that governs the derivatives markets, the Commodity Exchange Act, is a principles-based framework, so it doesn’t call for specific one-size-fits-all rules that can be applied to everyone. It allows registrants and exchanges and participants to tailor rules to their own markets as they see fit to accomplish certain outcomes, and I think that’s been critical in the innovation that we’ve seen in derivatives markets and their responsiveness to the needs of risk management. And secondly, a framework called self-certification that takes the onus of approving new things off of a regulator’s plate. And if you think about just a person, or a regulator in general, there’s really no incentive to approve new things, right? They only get the blame if something goes wrong. They get none of the benefit if things go right. So the incentives are misaligned. Hopefully, they always act within the law, but the incentives are misaligned. So what the Commodity Exchange Act did was it said, “Exchanges and registrants, you can do what you think meets the letter of the law, and we’ll put the commission, the CFTC that oversees the Commodity Exchange Act, in the position of disapproving that.” And that reversal, I think, has also created a massive amount of innovation in the risk management markets that have become the envy of the world.

Jeb Hensarling: Well, I guess we have Jeff one and Jeff two, so Jeff one, we’ll go to you next. How did we get here?

Jeff Dinwoodie: No, and I echo the comments. Thanks to Cato for having us, and thank you, Mr. Chairman, for moderating. It’s great to be here. I’ll take a step back, and I know we’ll talk about regulation and the law in a moment. But taking a step back, as I see it, the big picture is that in this country we’ve had, since its founding, a recognition of dynamism, of entrepreneurialism. And I think, broadly speaking, and we’ll talk about it when we look into the future, there’s been a recognition that that sets up our economy, sets up national security. It’s really the foundation for our country. And I think, looking back, there’s been a recognition of that on the economy and on financial services as effectively a jewel of our country. Other countries are very focused on whatever they think their jewel is, whether it be an agricultural product or what have you, and they protect it. I think over the years there’s been a focus on protecting, and on thinking through how to have a thoughtful business environment where entrepreneurs can take risks. We need regulation, thoughtful regulation. And I think it’s been the pairing of those—the culture of risk-taking, of innovation, paired with a recognition and the calibration of the law and regulation, property rights, rule of law—that has set us up for success in this country. And again, we’ll talk about it as we look into the future, the risks around that national jewel of our financial markets.

Jeb Hensarling: Jeff.

Geoff Anderson: Well, thank you, Cato, and thank you, Mr. Chairman, today. I think it’s very much our own story about why we’re here in the United States. Klarna’s been around 21 years or so. It’s a global digital bank and flexible payments provider. Started in Sweden. Something like 85 percent of Swedes use Klarna, and similar stories in the UK and so on. So about 10, 15 years ago, we were looking to expand, and the United States was that ideal market. Much of what you said, those deep capital markets, that spirit of entrepreneurship, which, from my own life in the State Department traveling around the world, is our golden jewel in the United States. And really a regulatory system also that promotes innovation. So we’ve been here in the US, and it’s now our fastest-growing market.

Jeb Hensarling: So again, to continue to look a little bit more backwards before we look forwards, and indeed it’s hard to have capitalism without capital, and nobody has produced a greater infrastructure for capital formation than the US. But when we talk about innovation, and there have been many innovations, seemingly it’s still running up against, on many occasions, the barrier of government regulations. I mean, for example, you had to wait until, I think, the early ’90s before we legalized interstate banking. Interest on demand deposits—we used to have Regulation Q, and so citizens could not receive interest on their demand deposits. I think that dates back maybe to the late ’70s; I don’t quite recall. You couldn’t have a bank holding company that could combine investment banking with retail banking with insurance until Gramm-Leach-Bliley. Crowdfunding only arose with JOBS Act 1.0. So why is it, through our history, that there still seems to be this friction against financial innovation that is ultimately adopted in the market and benefits both the investor and the capital raiser? Jeff, we’ll go to you first.

Geoff Anderson: Oh my goodness. That’s a good question. I mean, I think there’s sometimes this reaction—and I’m kind of going from my world—for new products to be put into old frameworks. And I think there are a lot of reasons for that. I think one is just getting people around the table: getting consumer interests around the table, the innovators around the table, the regulators around the table, to have this discussion on what is the product, what is the proper framework for this product, and how do we go forward? I mean, in our world, it’s the Truth in Lending Act, which has been around for about 50 years and has really governed open-ended credit for the last 50 years and provided some really important protections for consumers. That framework doesn’t fit closed-ended credit. So there have been a lot of attempts to put buy now, pay later and installment lending in that type of framework, instead of sitting down at the table and going through this process of tailor-made regulation.

Jeb Hensarling: So as a follow-up, since your company was founded in Sweden, how is that system different from the US? Is there some takeaway?

Geoff Anderson: I think in the UK and in Europe over the past several years, on this topic of buy now, pay later, these closed-ended, no-interest, low-interest loans, they’ve sat down at the table and started this process of saying, “We’ve got to have something separate, because what we have right now doesn’t work.” The UK, for example, went through a years-long process to do this and just enacted buy now, pay later–specific regulations back in July. They took in the interests of industry, they took in the interests of consumer groups and consumers, and came up with a framework that is unique to the conditions of buy now, pay later.

Jeb Hensarling: So your company has been a disruptor. Your company has certainly been a disruptor. I assume, Jeff, that your law firm represents either fintech companies or other companies that are disruptive in the market. So as I look at, for example—let’s start with you, Brian, and Kalshi. You’re not, in many respects, trying to produce a new product; you’re really trying to produce a new market that hasn’t previously existed. Is that a fair assessment?

Brian Quintenz: I mean, I think, to some degree. I mean, prediction markets and event contracts have existed in a pseudo-regulated way for a couple of decades, but certainly not in as robust a way as they exist now, because of, I think, more recent legal clarity.

Jeb Hensarling: So I guess the question is, as you have these evolving innovations that regulators have not seen before, there seems to be a predisposition to fit you into the earlier infrastructure and essentially to fine you into submission. F‑I-N‑E, not F‑I-N‑D. So surely there is some better system, because, again, when I look at our capital markets, it has depended upon new financial innovation. So I don’t know what your various general counsels and your communications departments will let you say, but any insights in your own company and product evolution, and what would be important for US policymakers and regulators to know as we start looking at the next 250. You’re living it. This isn’t the past. Your companies are living it right today. So whatever you feel at liberty to say—I’m sure nobody will be taking notes—

Brian Quintenz: Well, no.

Jeb Hensarling: So feel free to say anything you want.

Brian Quintenz: Yeah. I could answer that question for 60 minutes.

Jeb Hensarling: We don’t have 60.

Brian Quintenz: Not the news program, just in terms of the timeframe. I’ll try to be brief. I think the first thing is that the founders of Kalshi sensed a tremendous opportunity for risk management by offering direct, more simple, transparent, market-based products for event risk. That could be events and risks that anyone faces, or a lot of people face. And one of the founding stories and anecdotes around that was that one of the founders was at Goldman and was asked by clients, “How do we hedge the risk of Brexit?” And they had to come up with very complicated derivative products in order to allow companies to hedge that risk. The second question was, “How do we hedge the risk of the 2016 election and Donald Trump becoming the president?” Which a lot of people had no sense as to how to value or how to risk-assess. And Tarek Mansour, the co-founder of Kalshi, said, “Why do we have to go through this complicated process to develop very opaque products to hedge a risk of a direct event and its outcome, when we could actually just list that event itself on a marketplace, have transparent trading and pricing, and a simple risk management tool?” And fortunately, the Commodity Exchange Act allows for that.

The Commodity Exchange Act is very broad in terms of how it views a commodity upon which a derivative can be based. It includes events. It overtly includes events. A lot of people think of—and we can have the conversation around speculating versus trading versus gambling and how people think about that—but a lot of people think about gambling as risking money on the outcome of an event. That is directly included in the Commodity Exchange Act as a legitimate derivative product. So that’s one thing that I think, first of all, challenges that preconceived notion. I think it also challenges regulators’ preconceived notions as to what some of these products are or why they should exist. And the Commodity Exchange Act says that any event that has any financial, commercial, or economic consequence meets the underlying purpose of the CEA, because it would allow someone somewhere to hedge risk or gain price information around that risk. And the breadth of the statute is why I believe we have now very robust, liquid, transparent, and simple and effective risk management products for events that are in the marketplace.

Jeb Hensarling: Jeff Dinwoodie.

Jeff Dinwoodie: So, if it’s okay, I’ll address it directly. Just to drop back to your—it was the perfect place to start, looking back into the past. That informs the future and sets the context. One thing I will say, and you were describing some of the changes that occurred in the ’80s and 1990s: I think it’s just a critical thing when we think about policy. It’s very easy to constantly get caught up in what’s the hot new thing, what’s in the headlines. But I think it’s essential for regulators in particular to regularly look back and say, “In addition to what we know we need to get done for new emerging products, let’s look back at what is applying now, what are the legacy rules, and be thoughtful as to whether those risks still exist. Do those need to be modified?” So it’s the less sexy portion of regulation, but it’s just essential. And I will say SEC Chairman Atkins has been laser-focused on that, with things like revisiting the decades-old transfer agent rule and taking a fresh look at market structure. Regulation is hard work. It’s looking forward and it’s looking back and making changes.

And I think, just on your question as to how we look forward, as we have new products—like anything in life, when you’re faced with uncertain times, with change, with confusion, you always go back to first principles, and I think that’s what regulators should do as a general matter. Think about what the principles are here. What are the risks that we are thinking about, whether there are information asymmetries, whether we think there are competitive issues, whatever the risks are. Regulation is hard work, and it is not blindly following old paradigms. It’s stepping back and thinking about what the current risks are, and then how the regulation addresses those, and being laser-focused on that, and not in the world of “because this is how it used to apply.” So, unfortunately, regulation and policymaking is just hard work.

Jeb Hensarling: So, Jeff, are you buy now, pay later? Are you a credit card? Are you somewhere in between? Where do you sit today?

Geoff Anderson: That’s a good question. I mean, our philosophy—there are two things here. People should be able to spend their money how they want, where they want, and when they want. And the other thing here, too, is that we’ve been living in a system for the last—I think we all grew up in this—where credit cards were kind of the only game in town. And when you’re looking today at credit cards, I think the average credit card balance is something like $6,500, and people are paying 25, 28 percent interest, on average. At Klarna, we look at it differently. There have to be different models out there for this. People need credit, and what are ways to provide affordable credit that help people manage their finances? And that’s where I think buy now, pay later comes into play, in helping people manage their finances and avoid that sort of spiral of debt. On the regulatory side, again, the regulations that exist are for open-ended credit cards, and they’re not tailored for this relatively new—although it’s been around about 20 years now—financial product.

Jeb Hensarling: So we know that there are a lot of headlines. I guess it was a couple of weeks ago, CLARITY, with all caps, failed on a Senate cloture vote. And as was already mentioned, a few days ago Chairman Atkins announced, for lack of a better term, kind of a regulatory sandbox for tokenized assets, which I believe creates a five-year moratorium on certain enforcement. But I’d like to talk about the topic of so-called regulatory sandboxes. I know that Miki Bowman at the Fed has been a huge proponent in banking, and Hester Peirce at the SEC. Already, we have jurisdictions, though, for example, I think the UK has their digital securities sandbox, which is well established. Abu Dhabi has their regulatory lab. We seem to be a little bit behind the curve. So, a couple of questions. Number one, what type of regulatory sandbox should we have beyond what Chairman Atkins just announced? And what would a successful one look like? Brian?

Brian Quintenz: Yeah, why don’t I start with that?

Jeb Hensarling: You’ve got a little experience there.

Brian Quintenz: Well, yeah. And when I was at the CFTC, there was a debate, an internal debate, about whether or not the CFTC itself should do something like that. And we tried to, in some capacity, but I think the takeaway was that it wasn’t a simple decision. It certainly had some positives, because it would allow people and businesses that are doing new things that could touch the law or could touch regulation, but in a different way that created different risks or solved certain risks, to have more freedom with how they operated, which would then educate the regulators around exactly what Jeff said: the application of old rules to new technology or new systems. The downside, which I don’t think gets as much consideration, is that when you have a sandbox, you have a limited number of participants. There’s always a question as to whether or not you are therefore disadvantaging people that can’t participate in the sandbox, that there’s an implication that people in the sandbox are getting a stamp of approval and therefore get a competitive advantage. And there’s also the question of can you ever get out of the sandbox? Because you don’t want to be just trapped in the sandbox forever. And what does that actually mean? What if the rules don’t change over a certain period of time?

So I think, number one, any sandbox has to be very thoughtfully designed around those kinds of ideas, knowing that it has to be limited in participation, and knowing that it can’t necessarily do a stamp of approval or competitive disadvantage. But secondly, there needs to be a result from the regulator as a result of this. It can’t just be an educational system. It can’t just be doing it for the headlines or doing it to talk about at conferences. It really needs to affect regulation in a positive way, so that other people that can’t participate in the sandbox can do the same things, and so that it informs new rules going forward.

Jeb Hensarling: First, Jeff.

Jeff Dinwoodie: So, in regards to, as you mentioned, the recently launched innovation exemption—my interpretation as to the context around that, and I think this is consistent with some of the statements that the commissioner’s made, and I’ll add some of my own gloss—is that I think they found themselves in a bit of a holding pattern as they looked at whether legislation was going to pass. The prior administration dug a deep hole in terms of where we collectively stood. I think they were looking and saying, “Okay, we’ll do this innovation exemption.” Everyone in this room, everyone watching knows rulemaking is the best way to create policy at a regulator, as opposed to an exemption. I think that they effectively said, “This is a bridge. We’re in a hole here, and we need a bridge to avoid a situation where other jurisdictions, as we’ve talked about, start running away with things, or there is activity occurring which people are working around and in the gaps.” So, to put something clear in place to allow this marketplace, this new area of innovation, to start building, and do so in a thoughtful, responsible manner. And so, getting back to some of the points Brian made around sandboxes, I personally think that sandboxes, or an exemption, can be useful, but they need to be done in tailored and, I think, special circumstances, and I think this is one that the SEC used.

Jeb Hensarling: Jeff, any comment?

Geoff Anderson: Just, you know, getting back to what Brian said at the beginning, that they’re not just a forum for a talk shop where nothing actually comes out of it. I mean, I think as our technologies are advancing and as people’s habits are changing, we really need to see those put into practice.

Jeb Hensarling: So in mentioning the CLARITY Act, which, in all probability, since it failed on the Senate cloture vote, is probably dead for this Congress—I know from experience not much happens in lame-duck sessions, or not much good happens in lame-duck sessions. So how much clarity, lowercase, can you get with the failure of CLARITY, uppercase? I’m not really speaking about tokenized assets and that infrastructure. What I’m really speaking of is whatever is done at the SEC and the CFTC, that potentially could have about a two-year half-life until the next administration. I mean, for example, the CFPB under Kathy Kraninger, they had their particular regulatory sandbox. As soon as the Biden administration came in, it was rolled back. As soon as Trump 2.0 came in, it came back. So how can you really have a robust fintech industry and financial innovation when you have kind of windshield-wiper regulation? How solid of a foundation is there for the rule of law, as opposed to the discretion of regulators? I guess another way of putting it is, how depressed are you that there’s no clarity in CLARITY, Brian?

Brian Quintenz: Well, I’m an optimist, but I’m very depressed about that.

Jeb Hensarling: He’s a depressed optimist.

Brian Quintenz: Yeah. I think it would have been absolutely transformational for the United States. It would have unleashed a massive amount of robust innovation that solved a lot of processes that created risk for consumers and added a lot of value to things to which they could contribute, using this phenomenal new technology. And it gave very clear guidance and put very strong guardrails on how those products could be developed and by what methods, with what kinds of systems that prevent an individual from controlling them and doing something nefarious with them, that would add that value. So I think that’s a revolutionary concept when it comes to different economies and sectors of the economy and different value propositions and regulations. I cannot understate how much of a disadvantage the United States might be at now that CLARITY has failed for the time being.

That being said, there is work that the agencies can do, and I’d give two competing examples here. From the windshield-wiper example you were talking about, Jeb: when I was at the CFTC, a lot of our work went into recalibrating and right-sizing the rules that came out of Dodd-Frank. When I came in, I felt like a lot of those rules were written poorly. They were written quickly. They were targeted at activities as opposed to risk, and we had to go in and rewrite a lot of those rules, and some of them were very large rule sets, very complicated, around cross-border derivatives transactions and capital sufficiency and things like that. Because we did those very, very thoughtfully and thoroughly, in a way that suited risk and suited the markets, they have not been revisited since in the last administration, and no one’s even talking about revisiting them now. That’s a positive example.

I think the negative example is if you do something in an environment like this that might be more controversial, where there could be lawsuits, where there could possibly be injunctions, in a way that may not let the market flourish as much as it can, either under CLARITY or with more durable rules. The only way I think those kinds of activities and propositions by the regulator can survive is if they unleash enough innovation in a safe way that it is very hard for a court to say, “I’m going to eliminate all that, because I’m not sure it actually met the letter of the law.”

Jeb Hensarling: Either Jeff?

Jeff Dinwoodie: I’ll make two really quick points. Number one, I agree it’s a shame what happened with CLARITY. To keep things simple: there are now people across the country—forget about us in Washington, DC—people across the country who are now engaging in activities in a big market, and there’s not a regulatory paradigm over it. And they’re at risk of being defrauded, et cetera, which the CLARITY Act would have imposed a framework on. It might not have been perfect, but I think, with the philosophy of don’t let the perfect be the enemy of the good, that’s a significant loss. And I think similarly, most people in the country would say this is a big enough issue, and we all know the regulators will now do the best that they can. They’re highly talented, skilled. But this is clearly an area where I think everyone would agree that our elected representatives should act, as opposed to having the unelected regulators act. And one of the results could be that talent and capital are going to go offshore to places like Singapore, the UK, Switzerland, that already have this type of framework in place.

Geoff Anderson: Yeah, I, you know—

Jeb Hensarling: Maybe even Sweden.

Geoff Anderson: Yeah, maybe even Sweden. Yeah. I mean, I won’t talk about the capital-letter CLARITY, but the small-letter clarity that you said about this regulatory whiplash that’s happening. It creates the biggest risk for a business, which is uncertainty. And in our business, we’re pushing for federal frameworks and so on, but in the meantime, states are doing their own thing and creating de facto potentially national standards for buy now, pay later, for example. And that lack of small-letter clarity is really difficult.

Jeb Hensarling: Well, I think slowly but surely we’re putting our finger on the public policy foundations necessary going forward. So certainly what I’m hearing is the rule of law, clarity of law, incenting innovation, how important that is. Let me talk about the cost of regulation. You brought up Dodd-Frank. I remember vividly when Dodd-Frank was passed, a Texas congressman warned that if Dodd-Frank passed, the big banks would become bigger and the small banks would become fewer. I remember that vividly, because I was the congressman who said it. And it turns out that that proved to be prescient, because now the largest banks, I think, have roughly 30 percent more of the financial assets. We’ve gone from launching roughly 150 new banks a year to about five a year post–Dodd-Frank. And I think I have these numbers roughly right. For a small bank, say capitalized at $100 million or less, about 8.9 percent of non-interest income is devoted to compliance. For, say, a super-regional bank, it’s about 2.9. Okay? So speak to, as we look to the financial future, and many of you have obviously been with the regulators in the past, how should we be thinking about the cost of implementing all of these regs and what impact it will have? How do you do that kind of cost-benefit analysis, or how should it be done? We’ll follow the usual order.

Brian Quintenz: Yeah. It’s a really interesting question. And, unfortunately, maybe there is one, but I don’t feel as though, if there is one, it’s well known, or that there is a good feedback mechanism or a good lever to pull to force old regulations to be reviewed, to force a cost-benefit analysis of what has been done, as opposed to what might be being proposed, to be revisited. And I think there are some interesting things that could be discussed there, either through Congress and legislation, or by the agencies themselves, where maybe a couple of years after a rule has come into existence, you survey businesses and see what the actual cost of compliance is. You evaluate how well you’re using the data that is being created as a regulator, or how much that’s actually contributing to the regulatory safety in the environment, so that you can provide the regulator feedback and provide the incentive to actually change things. One of the unfortunate aspects of regulation is that there is never really, at least that I have seen, a backward-looking review process on the cost of compliance, as opposed to only thinking, “Well, if we only had this one more tool, it might save us some headaches in the future,” which is very speculative, but does impose even more real-world costs on businesses. It would be interesting to think about creating some kind of forced or automatic or maybe even voluntary feedback mechanism around a survey of cost that would trigger a review of certain rules in certain situations.

Jeff Dinwoodie: Look, I completely agree with that. My take is that cost-benefit is essential. When you read some of them—and I think the regulators have gotten a little better about this—some of them are just laughable in terms of the estimates that are given, which are completely unrealistic and just show a lack of understanding as to what compliance entails and the resources. I actually think this goes to a core principle. When you were teeing up the last set of questions about the inconsistency in regulation, I think we’re in this bad pattern in our country right now. I think most people should agree that around the economy, financial regulation shouldn’t swing from left to right with different administrations. And I think, as a result of that swinging that we’re experiencing, a lot of projects at the agencies are being dropped—

Brian Quintenz: Or started again.

Jeff Dinwoodie: —and things like that. It’s creating inefficiencies. I think things like that cut into the resources to do, along the lines of what Brian said, where you’re regularly looking backwards in addition to looking forward at the cutting-edge, ripped-from-the-headlines issues. You’re regularly doing retrospective reviews. All of this comes down to resources within the agencies, and I think a lot of resources and bandwidth are continually being lost that way, with the windshield-wiper back and forth, as you were saying.

Brian Quintenz: Speaking of a sandbox, here would be a really interesting sandbox. To your point about the estimates of cost-benefit in rule proposals or final rules and how ridiculous they are: sometimes agencies will say, “Well, this is going to take one person about 50 hours to comply.” Three years later, there are hundreds of people working for four months on an outcome. Why don’t we do a sandbox where we take one person and put them in a room for 40 hours and see how much of the rule they can actually get done by themselves? And if they can’t do it, what would that mean to the regulatory satisfaction of the marketplace? And does that mean that that’s all that a company should have to do? Because that’s what the cost was estimated to be.

Jeff Dinwoodie: I completely agree. I’ve thought before, somewhat tongue in cheek, to say to a regulator, when they’re coming in doing an examination, “This is what your estimate was, so is this the type of compliance program you expect, then?”

Brian Quintenz: Yeah. Because that’s what your justification on the estimate was.

Jeb Hensarling: Jeff, anything?

Geoff Anderson: Yeah, no. I think, for us in our world, it comes from philosophy, and it’s that regulation should be outcomes-based. What problem is it trying to address? What is it trying to fix? And then also proportionate. I can give you a specific example. A lot of regulation in buy now, pay later focuses on ability to repay. And some of the proposals have the same structures in place to assess ability to repay for a $100 loan as they do for a $20,000 loan. And never mind that 99 percent of our loans are repaid. Nobody pays attention to that. It’s those types of disproportionate regulations.

Jeb Hensarling: So I’m going to have one more question for the panel, and then it’s going to be your turn in the auditorium and online as well. And online you can submit questions via Cato’s webpage, Facebook, and YouTube, or on X using the hashtag #CatoEcon. So, gentlemen, we spent a little time looking at the foundations of our success in the past, talking about some real-world examples as fintech and financial innovation unfold today. Starting to talk a bit about the principles that are necessary for what the financial infrastructure looks like in the future. So what does it look like, and what would you have regulators and legislators think about as we look at potentially our markets moving to tokenized financial assets, AI, utopian, dystopian? What does the future look like? How should policymakers think about it? We’ll reverse order this time.

Geoff Anderson: Oh, goodness. Oh, thanks. So the pressure’s on.

Jeb Hensarling: The pressure’s on you, Jeff, too.

Geoff Anderson: Yeah. No, I mean, I keep going into my own world, but something like 10 out of 10 Americans have some sort of financial technology app on their phone. And what are they using it for? They’re using it to buy things. They’re using it for banking. They’re using it as a financial management tool. More and more those are coming together, and we have to have the structures in place to allow for that to happen, to give the consumer the tools that they need. And there’s a lot of promise out there for ways that can lower the cost for businesses and for consumers, and we’re really excited about that. Just so regulation keeps pace with that.

Jeb Hensarling: Jeff?

Jeff Dinwoodie: So, look, I think it all comes down to—when it comes to regulation keeping up—the old cliché, personnel is policy. And I think a real focus is that we’ve got to continue to have talented people coming into the government to fill these seats and agencies at all different levels. I think there’s an issue in this country where we’re not getting all of the talent across the country because we have so many people in Washington, DC. So there needs to be, I think, a concerted effort across the government to harvest our entire pool of talent across the country, and be thoughtful as to recruiting or having people who live in other parts of the country. Because I think at base, the future’s uncertain. We can always go back to first principles, but we have to have thoughtful, experienced people who bring a diversity of views, who’ve served in the business world, and have them helping to make and shape these decisions. And I think that’s a core element that will ensure continued success going forward.

Jeb Hensarling: Brian?

Brian Quintenz: I have two combined thoughts. One is that risk-taking is what I think has made the United States the envy of the world. Individuals becoming entrepreneurs with good ideas, even if they fail, they have tried, and a lot of times they’ll fail and try again and succeed. And in my mind, there is a misplaced focus on risk as only being downside. Risk also creates opportunity. Risk management, which kind of comes back to the derivatives markets—but I think risk management in general needs to be much more embraced by individuals, as well as individual accountability for their own actions. I think marketplaces have good and responsible regulatory obligations to run open and transparent venues, but we can’t look at markets as only providing downside risk. The only way to eliminate downside risk in markets is to eliminate markets, and if that’s what people are proposing, I would say that they’re in the wrong country. So if we want to have markets, we want to have opportunity. In my mind, the key is to run open and transparent marketplaces and embrace individual accountability, individual responsibility, and ensure that the American dream is promoting that mindset.

Jeb Hensarling: Are you running for something? I’ll vote for you. Well said. Well said. Okay, now it’s time for Q&A. We will go to our audience first. We have some lights on here. It’s hard for me to see. I think we have some people running around with microphones. I’m not seeing any hands at the moment. Oh, the lady over here.

Audience Member: Thank you. I really enjoyed your discussion about innovation in financial markets. I wonder if any of you would like to comment on what major concern is bubbling up, not in connection with your particular areas, that’s going on in financial markets. A couple that I see in reading are private credit, and the fact that private credit is now acquiring life insurance companies. That’s one. Another would be the prevalence of passive markets, i.e., through indexing, which is getting to the point where it might be out of control. Just suggestions, if any of you have any thoughts on what’s concerning you outside your area of expertise.

Jeff Dinwoodie: So, look, when I was at the SEC, I was the agency’s deputy representative to the FSOC, which is the Financial Stability Oversight Council. And look, the two examples you just mentioned, I think it’s certainly the case that the regulators and the policymakers should be laser-focused on understanding those and keeping up with them, and I think that’s part of the mission. Those two examples don’t give me, at the moment, a lot of consternation. A bigger one that I see that gives me consternation—I say it all the time—I think the biggest risk is actions of the government. I think it’s things like government debt, poor regulation, some of these drastic policy changes. And so I think the big picture is that the biggest risk I’m seeing right now is a government that’s not working properly or that is getting outside of its lane in certain areas.

Brian Quintenz: I would just echo that. The first thought I had was the amount of sovereign debt that exists in the world relative to the GDP of individual countries or global GDP. If the market loses confidence in any country’s or all countries’ ability to repay that debt, we are in a tough spot. I’m hopeful that risk management products through the derivatives markets provide some opportunity for hedging that risk, but the risk exists. It can’t just go away. It has to be transferred somewhere. And it feels as though—Jeb is probably as qualified to talk about this as anybody—we are on a one-way incline in terms of debt to GDP, not only here in the United States, but everywhere around the world.

Jeb Hensarling: I think I saw a question over here, perhaps. Up there, maybe.

Audience Member: So, maybe on a similar line of thought, I’m very curious about your perspectives on what risk is getting too much attention, and also, on the flip side, what isn’t getting enough attention?

Jeb Hensarling: Who wants to take that first?

Brian Quintenz: I guess the first reaction I have is, it’s hard to say some risk is getting too much attention, because I think risks are always good to discuss and to debate. I think there has been an overreaction, in my mind, to AI and the AI risk. AI is a tool. There’s a great saying, “Steel is steel.” You can use it for a lot of different things, but it is itself. And AI is a tool, and you can use it for a lot of different things. And I think it comes back to individual accountability and responsibility, and if you choose to use it for something bad, you’re going to be held accountable for how you use it, because you, the person, are choosing to use it that way. And the thing that I think is actually more dangerous, in my mind at least—and this may not prove out to be true, and it’s kind of a high-stakes conversation—is trying to incorporate value judgments into AI to dictate outcomes that a certain segment of society wants and the other does not. I think that’s almost as dangerous, if not more dangerous, and I would rather have open, transparent systems that people can use and then be held accountable if they use them poorly.

Jeb Hensarling: Any other comments? If not, I’ll go to a question. We’ll break it up here. We have a question online. A speaker in a previous panel stated their belief that the big banks should be broken up, and prior CFPB leadership discussed, quote-unquote, “too big to manage” in their guidance. Do you see a future where the largest financial services organizations are broken up? The question doesn’t say should they be; the question is, might they be? Jeff, you’re shaking your head no.

Geoff Anderson: No. I don’t think they’ll be broken up. I think it ultimately comes down to: are they able to best address and be flexible enough to continue to innovate and continue to provide customers with what they need? And there needs to be a marketplace where there are new entrants who are able to provide those services and new products and innovate. And I’m not convinced that the best innovation always happens at the biggest players. So whatever ecosystem allows the others to come in is what I’m hopeful for.

Jeb Hensarling: Anybody want to add, or should we go to another question? Okay. We’ll go back to—yes, I think the gentleman over here has his hand up.

Audience Member: Thank you. I have a quick question on the regulation around Kalshi, Polymarket, and some of those. I’m a big supporter of them and what they do: price discovery, information, all that. But there have been some egregious examples of people placing bets on some of these binary events. What should be regulated there? How should it be regulated? And similarly, there’s a proliferation of single-stock ETFs, double-leveraged. They don’t do a lot for risk management per se. I guess there’s speculation, which you could argue is a part of a complete market, too. What are your thoughts on where the boundaries are? Because that’s what regulation’s usually about: less an absolute, but a more relative place of where do we put the guardrails.

Brian Quintenz: Yeah. So I think the first thing is there is a difference between what I would say are highly regulated derivatives venues, which these are. These are derivatives exchanges. A prediction market is a colloquial term, but they are fully regulated designated contract markets by the Commodity Futures Trading Commission, right? So they have to abide by the full slate of all of the rules of every other contract market, like the Chicago Mercantile Exchange or the Intercontinental Exchange. Well, there are some marketplaces and businesses that claim to operate offshore, that may or may not be accessing US customers, which would be illegal, and not abiding by any country’s rules, which I think is dangerous. So how that gets resolved, I think, is an open question.

But to your more direct question, around referencing individual participants, possible insider information, insider trading: the first thing is it’s important to understand what insider trading is. It’s using information to benefit yourself when you have a duty of care around that information to someone else, to your employer, to a business, to the government, or something else. It’s not necessarily having information that no one else does, because that’s representative of fundamental research and makes markets more efficient, as it has for decades and centuries. There are people in the event contract marketplace that have special information about how contracts, how events may resolve, that might have influence over an event resolving. To the best that we can, Kalshi is screening people according to that threat and preemptively precluding them from trading, which is more than any other exchange in the world does. In fact, it is illegal for a CEO to trade during a blackout period around their stock earnings. As far as I know, the New York Stock Exchange does not block CEOs from actually trading. They just rely on the fact that they probably shouldn’t do it, and if they do it, they’re going to get caught.

I think there always has to be room for after-the-fact enforcement. We can’t operate in what I like to call a Minority Report society, where we try to prevent everyone from doing anything bad. But to the extent that we know and that we have lists, and we compare these against, for instance, FEC filings, to understand who’s working for campaigns, so that they can’t place any kind of trades on election markets in which they’d be involved. We screen out the president, cabinet members, judges, members of Congress, financial regulators from trading in markets. So I think there’s a lot happening there, but it doesn’t mean that a good person might not make a mistake, or a bad person’s not going to continue to try to do something bad. The point I see there is that they’re being caught, they’re being held accountable, and they’re being referred to the regulator, if not the DOJ.

Jeb Hensarling: Any other questions here? I’ll tell you what, I want to go back—we’re running out of time here, so I do want to pose one last question to our panelists. You’ve touched upon parts of it, but I want to know, looking at the next 250 years, to the extent we’ll find out how much clarity there is in your crystal ball: what are your fears, what are your hopes, and what are your predictions? Do not end on your fears. You must end on your hopes. Some of your fears may have already been spoken about. So we’ll go to the far—Jeff two first.

Geoff Anderson: I’ll start with a fear. The fear is the continued—at the political level, this lack of ability to get around the table and work with industry, with consumers, with different political parties, or whoever the case may be, to come up with durable solutions that protect consumers but are also really promoting innovation. My hopes—and again, looking at financial services—I really do think that the consumer’s going to continue to demand more integrated products: being able to do banking, easily send their money, and so on and so forth. Shopping, financial management, and all this in one platform. We’re trying to get ahead of that, but we really need to have the regulation do that as well. And I think it’s going to get there, because that’s what the consumer’s already demanding.

Jeb Hensarling: Jeff?

Jeff Dinwoodie: As I look into the future, and to try to be an optimist: the advantages that this country has, I don’t see going away. The geographic advantages, the cultural advantages, the rule of law, I don’t see those going away. I think the risk, and what’s the old saying? Most ships sink because they have a leak inside. So it’s something inside the country, some of the political pendulum swings. But I think when you reflect on history and everything this country has been through for 250 years, and that’s the importance of studying history, it gives you that perspective: we’ve gotten through a lot worse. So I’m very optimistic. And again, optimistic looking forward in part because look at all the other problems every other country has, and I think they pale in comparison to what we’re dealing with. And so again, very hopeful and optimistic for the next 250.

Jeb Hensarling: Brian?

Brian Quintenz: Yeah, I think my fear goes back to what we were talking about, about over-managing, and trying to reduce or eliminate risk in markets, which therefore reduces opportunity and risk-taking. I see that in a lot of different areas. I see that in an interest in reappropriating assets and property. I see that in targeting successful entrepreneurs for their success and the businesses they run. And I think if we as a society or a country do that too much, we will disincentivize future citizens and young people from doing it more, and I think that’s a path to decline. And the path to decline is very hard to reverse, so that’s the fear.

I think the optimist in me recognizes that people live in this country and come to this country for its opportunity and face a lot of hurdles in trying to do new things and create new things. And some of those dialogues or systems that might try to evolve to prevent that from happening might just be one more hurdle over which they climb, and I think that they hopefully will. And the robust, fascinating new landscape of things like a space economy, for instance—we are scratching the surface of what that actually means from a technology, from a communications, from a scientific landscape. It’s kind of way outside of the realm of what we’re talking about, but if we have good risk management markets to manage risk, good capital markets to develop capital formation to incentivize that economic development, I think we can be a leader in something that’s going to be an incredible, incredible thing.

Mr. Chairman, can we get your thoughts on that question?

Geoff Anderson: What are you seeing going into the—give us yours.

Jeb Hensarling: You’re turning the moderator into the panelist.

Jeff Dinwoodie: Yeah.

Jeb Hensarling: My fear is that we do not teach our children what is the source of America’s prosperity, how wealth is actually created, and why it is so ennobling. That is my fear. My hope is that we can indeed teach them, and that they understand that if we remain true to our foundational principles—as I often say, our founders were flawed, the founding principles were not—and if we remain true to the foundational principles, including capitalism and freedom, there’s really no limit on what we can achieve as a republic. And my prediction is that we will, and when we do, we won’t be here for it. But there’s going to be a sign up there: “The American Financial Experiment at 500.” That’s my prediction.

Okay, well, I was going to have you applaud for our panelists, but I think you just did. Jeff, Jeff, Brian, thank you very much. Some housekeeping. We’re about to take a 15-minute break. Please come back for the closing session with our director, Norbert Michel. It will be well worth your time and effort. Thank you very much.