Distributed ledger technology ‘at risk of being stymied by disparate and uncertain regulation,’ states CFTC Commissioner

On Tuesday, the Depository Trust & Clearing Corporation (DTCC) held its 2016 Blockchain Symposium, Blockchain: Beyond the Hype, at the Grand Hyatt hotel in New York City.

There were over a dozen influential speakers, including Digital Asset Holdings CEO Blythe Masters, Bloq CEO and bitcoin developer Jeff Garzik, Digital Currency Group CEO Barry Silbert, and Overstock CEO Patrick Byrne. Michael Bodson, the President and CEO of DTCC, gave two speeches, both opening and closing the one day event.

Commissioner J. Christopher Giancarlo, of the US Commodity Futures Trading Commission (CFTC), spoke during the afternoon session. The CFTC consists of five commissioners appointed by the President, with the advice and consent of the Senate, to serve staggered five-year terms. J. Christopher Giancarlo was sworn in June 16, 2014.

“A new technology is at hand that may offer a similarly profound tool to share networks of information. Yet, its development is at risk of being stymied by disparate and uncertain regulation.”
— – US CFTC Commissioner J. Christopher Giancarlo

Commissioner Giancarlo used a brief history of the internet to provide some context for Distributed Ledger Technology (DLT) evolution, progressing through human social interaction, voluntary contractual relations, and free markets. This approach led to the creation of “millions of jobs” that “transformed our economy forever and improved standards of living across the globe.”

“I believe that innovators and investors should not have to seek government’s permission, only its forbearance, to develop DLT so they can do the work necessary to address the increased operational complexity and capital consumption of modern financial market regulation.”

• Giancarlo

The commissioner covered many of the potential benefits and uses of the technology in his speech. “It will have profound implications for global financial markets by increasing settlement efficiency and speed, linking recordkeeping networks, reducing transaction costs and increasing market access,” he predicted. “It will broadly impact financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis.”

Giancarlo provided an in-depth explanation of how blockchain technology could have subdued the dangers of the Lehman brothers’ actions at the time of the financial crisis. “If an accurate DLT record of all of Lehman’s transactions had been available in 2008,” he argued, “then Lehman’s prudential regulators could have used data mining tools, smart contracts and other analytical applications to recognize anomalies in trade activity, […] Regulators could have reacted sooner to Lehman’s deteriorating creditworthiness.”

“Even if prompter and better-informed regulatory intervention would not have been enough to prevent a run on Lehman, the records held by trading counterparties (and available to regulators) would have accurately shown Lehman’s open positions. Imagine if, instead of requiring countless legal actions spanning eight years, we could have known all of Lehman’s exposures within minutes of a bankruptcy filing.”

• Giancarlo

Although the word Bitcoin was not used in his speech, Giancarlo provided a wide spectrum of uses for the technology, including many different types of assets: “Distributed ledgers could allow for the confirmation and ownership transfer of virtually anything from hockey tickets and magazine subscriptions to auto repair warranties and airline loyalty rewards or apartment leases.”

Even government functions were within his range of examples: “Another potential use of DLT is better and more verifiable voting systems, whether for proxies by corporate shareholders, customer satisfaction surveys or voting for political candidates.”

He then called for fellow regulators to not only take a light-handed approach to all future regulation of the technology, but to also coordinate their efforts with other regulators, both foreign and domestic.

“Regulation of DLT must indeed be coordinated on a multilateral level based on the principle of ‘do no harm’,” Giancarlo stated. “Just as many financial service firms are joining together in broad DLT consortiums, regulators must do the same.” Furthermore, the commissioner asserted that “the private sector must lead and regulators must avoid impeding innovation and investment and provide a predictable, consistent and straightforward legal environment.”

Giancarlo went on to describe the potential impact on jobs. “I have no doubt that the FCA’s intention to give DLT innovators ‘space’ to innovate will be good for DLT research and development,” he praised for a moment. “I also suspect that it will be good for the UK’s burgeoning FinTech industry and the jobs it creates across the Atlantic.”

Towards the end of his speech, the commissioner offered what may be the first specific advice to US regulators about a change they should take to accommodate blockchain technology. “For the CFTC, one example comes to mind – recordkeeping rule 1.31 [which] requires all books and records to be kept in their original form or native file format,” he indicated. “Such records must be produced in a form specified by any representative of the Commission.”

“Rule 1.31 also has requirements for certain records to be stored in either micrographic media or electronic storage media and other related conditions. The CFTC should revisit this rule and make it technologically neutral such that it can accommodate DLT.”
— – Giancarlo

The conclusion of his speech was a recognition of the preferable outcome from light-touch regulation towards the internet 20 years ago, and a strong appeal to do the exact same thing with regulation for blockchain tech. “when the Internet developed in the mid-1990s, none of us could have imagined its capabilities that we take for granted today,” He said. “Fortunately, policymakers had the foresight to create a regulatory environment that served as a catalyst rather than a choke point for innovation. Thanks to their forethought and restraint, Internet-based applications have revolutionized nearly every aspect of human life, created millions of jobs and increased productivity and consumer choice.”

“Regulators must show that same forethought and restraint now. Today, I call on my agency, the CFTC, and other U.S. and overseas policy makers and regulatory counterparts to repeat that broad-minded approach.”
— – Giancarlo