Speaking at last month’s 4th Annual DC Blockchain Summit, US Commodity Futures Trading Commission Chairman J. Christopher Giancarlo lays out his position on how he and his colleagues can rise to the challenge of applying effective regulations to “exponential” technologies – such as blockchain.
The CFTC has stalled the approval of Bakkt, the upcoming cryptocurrency trading platform from Intercontinental Exchange that promises to feature physically-settled Bitcoin futures, amid concerns about security and the custody of customers’ assets. The Commissioner has taken a pro-crypto stance. The issue, however, is that, according to Giancarlo, we are in a new period of innovation with a number of different characteristics from all previous phases. As such, these differences requires “a new, differentiated regulatory response.”
The first is that we live in a period of exponential technological change. That is, the sheer speed of innovation has increased exponentially, both in terms of production of new models and products and their subsequent public adoption. The former dynamic is driven by increases in the power of computing coupled with decreases in computing costs, and the latter is a function of how the internet and mobile allow for rapid public adoption and scalability. These dynamics put pressure on regulators to keep pace with rapidly changing markets, especially given the potential for new technologies to impact markets in short order.
The second characteristic is the disintermediation of traditional actors or business models, which can challenge regulators and existing regulatory frameworks. Consider, for example, how the digitization of everything, including music, travel, trading, and even farming have furthered the decentralization of traditional intermediaries. Such decentralization of key economic actors is an enormous challenge to most regulatory approaches and frameworks, which tend to focus on key intermediaries through registration of major market participants and designation of self-regulatory organizations comprised of such participants.
Consider cryptocurrencies, for example, which seek to offer alternative means and rails to execute payment transactions, power self-executing software, or drive capital raising activity. In many instances crypto-related activity may occur outside of traditional intermediaries – indeed frequently by intentional design in order to offer an alternative model – and include new economic actors not covered by existing regulatory frameworks or covering them in an ill-fitted manner.
The third characteristic is that the pace and nature of technology-driven innovation requires heightened technological literacy across leaders in business and government. How many today truly understand the technologies that power underlying business models? And from a government perspective, how can regulators be expected to mitigate risks and formulate sound policies that foster market-enhancing innovation without requisite technology literacy?”
Known in the community as “Crypto Dad” for his support of blockchain-based solutions and fintech innovations, Giancarlo says cryptocurrencies can make a real impact and would have played a significant role during the 2008 global financial crisis.
“I am delighted to be on the same program as ‘Crypto Mom,’ Hester Peirce, my ‘crypto spouse’! With the crazy schedules that Hester and I keep, we are like virtual ships passing in the digital night. I am sure it is a comfort to all of our ‘crypto-kids’ to see us together at this great event.”
“In the past few years, I have had numerous opportunities to discuss one prominent application of blockchain technology – cryptocurrencies – especially given the CFTC’s oversight of crypto-related futures and derivatives markets.
Today I want to take stock of the current state of blockchain technology and renew a focus on how it can impact – and improve – our markets. To begin, I want to take you back for a moment to September 2008. That was a perilous time in global financial markets. An enormous US housing bubble had burst triggering a cascading global credit crisis. Concern was rife about imminent investment and commercial bank failure.
I was on Wall Street, serving as a senior executive of one of the world’s major trading platforms for credit default swaps (CDS), then the epicenter of systemic risk. Panic was in the air and tension was on our broking floor trying to maintain orderly markets. I remember a call from a U.S. bank regulator asking about CDS trading exposure of several major banks, including Lehman Brothers. In fact, trading conditions were deteriorating by the hour. It was clear that the regulator had little means, short of telephone calls, to read all the danger signals that the CDS markets were broadcasting.
But imagine what a difference it would have made a decade ago on the eve of the financial crisis if regulators had access to the real-time trading ledgers of large Wall Street banks, rather than trying to assemble piecemeal data to recreate complex, individual trading portfolios.”
“Bitcoin has refocused attention on topics of back-office infrastructure, interoperable databases, and shared ledgers – and this is a good thing. It means that efforts to upgrade data infrastructure with blockchain or DLT-inspired systems is getting the attention required to drive broader adoption. And these systems could enhance efficiencies and transparency not just in our financial markets, but also across the real-economy.”
In December of 2018, the CFTC released a 32-page primer on blockchain, touting its many use cases while also enumerating risks and challenges of smart contracts.
You can check out the Commissioner’s full speech here.