The commissioner and acting chairman of the U.S. Commodity Futures Trading Commission (CFTC), J. Christopher Giancarlo, called on the agency to support distributed ledger technology (DLT) and fintech innovation in his keynote address before the SEFCON VI conference sponsored by the Wholesale Markets Brokers’ Association. Giancarlo said he supports the core reforms of Title VII of Dodd-Frank, the swap data reporting and central counterparty clearing and registration of swaps dealers.
Giancarlo said his remarks reflect his personal views and are not necessarily those of the CFTC, his fellow commissioners or the CFTC staff.
He said the CFTC’s regulatory framework must catch up to 21st Century digital markets, which is one of the biggest threats to economic stability and functioning world markets.
Elements Of Market Reform
Making market reform work in the U.S. includes five key elements: providing customer choice in trade execution, fixing swaps data reporting, achieving cross-border harmonization, encouraging fintech innovation, and cultivating a forward thinking regulatory culture.
Giancarlo last year spoke about DLT and fintech innovation since he believes in its benefits for the financial marketplace and for financial regulators. DLT enables market participants to manage large operational, capital and transactional complexities brought by Dodd-Frank, he noted. But it can provide regulators with market visibility needed to meet its mission to oversee healthy financial markets.
For DLT and fintech to flourish, regulators must take a “do no harm” approach, he said.
The CFTC and other U.S. financial regulators are lagging other jurisdictions in promoting fintech. The U.K. Financial Conduct Authority (FCA) already has created an innovation hub allowing fintech firms to develop innovative financial products and test new ideas through its Regulatory Sandbox.
U.K. Model Offers An Example
The FCA’s innovation hub has been well received by regulators from Japan, Singapore and Australia to prevent stifling innovation and DLT’s possible benefits. A global consensus around a “first, do no harm” approach is the right way to prevent impeding DLT innovation through protracted rule uncertainty or uncoordinated action.
Giancarlo noted that last May he presented five steps the CFTC and other regulators should follow to promote DLT and fintech:
1) Put the best foot forward. Regulators should designate technology savvy teams to collaborate with fintech companies to address issues pertaining to the way regulatory frameworks apply to digital products and services derived from DLT and other technologies.
2) Give “breathing room.” Regulators should support a regulatory environment that drives innovation similar to the FCA sandbox, where fintech firms work with regulators and have “space to breath” to test solutions without fear of regulatory fines.
3) Get involved. Regulators should participate in fintech proof of concepts to promote regulatory understanding of technological innovation and identify how such innovation can help regulators do their jobs better.
4) Listen and learn. Regulators should work with fintech innovators to know how regulations should be adapted to permit 21st Century technologies.
5) Global collaboration. Regulators should offer a dedicated team to assist fintech firms navigate the various levels of regulation in both domestic and global jurisdictions.
A ‘Forward Thinking Culture’
To cultivate a forward thinking culture, Giancarlo said the agency must be “ahead of the curve of the enormous changes taking place in global digital trading markets.” The transformation includes:
- Algorithmic trading comprises up to 70% of regulated futures markets.
- “Big data” capability enables more sophisticated data analysis.
- Artificial intelligence guides dynamic trade execution.
- “Smart” contracts value themselves and calculate payments in real time.
- DLT technology challenges orthodoxies foundational to the new financial market infrastructure. The FTC has not kept pace in market regulation, he said, noting it remains an analog regulator in an increasingly digital marketplace.
The comment period for the supplemental notice of proposed rulemaking for Reg. AT ends on Jan. 24. Giancarlo said he is going to allow more time for public comments on the proposal. CFTC must foster well-functioning markets for swaps and other derivatives, he added.
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