CFTC discusses role of regulation in blockchain

The U.S. Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee discussed how blockchain applications could reshape the derivatives market during a meeting today, with particular attention being paid to industry standards and collaboration.

The hearing, originally scheduled for January but later postponed, will include representatives from traditional financial firms and blockchain startups.

Notably, CFTC commissioners expressed a willingness to avoid onerous regulatory requirements for emerging technologies, while CFTC Chairman Timothy Massad said that while there are problems in the industry that blockchain technology could solve, the agency does not want to prevent any possible benefits.

Massad noted:

"I hope I can speak for my fellow commissioners when we say that we need to make sure that we not only take the side of new technology developments, but also encourage the development of technologies that are beneficial."

Commissioners Sharon Bowen and J Christopher Giancarlo also offered positive comments in their comments, with Giancarlo expressing a keen interest in blockchain applications in financial markets.

In his opening remarks, Giancarlo said he believed the technology would have a “huge impact” on the financial sector, including applications in payments, securities settlement, banking and other industries.

“Open ledgers could also give rise to new ‘smart’ securities and derivatives that would revolutionize operational and trading efficiencies,” Giancarlo continued. “They could help reduce the enormous costs of adding new laws and regulations to the financial system’s infrastructure.”

The comments echo those expressed by Giancarlo late last year, when he said technology could lead to a reduction in financial sector jobs.

Forum members during the blockchain conference included Sandra Ro, head of digitization at CME Group, Brady Levy, head of processing at financial information company MarkIt, Robert Sams, CEO of London blockchain startup Clearmatics, and James Slazas, CEO of New York startup ConsenSys.

Strive for transparency, collaboration

In their presentations, the groups and advisory committee seemed to agree that possible applications of blockchain technology in the financial sector still need to be examined, particularly in the derivatives market.

Ro said one of the ongoing issues is how to digitize assets, in this case tokens on a blockchain and how they will be governed by law, especially if the issuing institution goes bankrupt and goes into liquidation.

“I think one of the hurdles we need to figure out is what happens in the event of a loss of litigation or bankruptcy,” she said. “What regime will cover these tokenized assets? And if they are transported from one jurisdiction to another, will these tokenized assets be legally recognized?”

The topic of cooperation between financial institutions and regulators also frequently appeared in the hearings.

For example, Levy said there is a strong appetite among financial incumbents to participate in the process, and stressed that MarkIt believes open source code will be a very important aspect of the process.

“Even some of the words used in the space like shared, peer-to-peer, distributed, all suggest a level of collaboration,” he said. “And then we do feel that open source is going to be a very important player in this space, probably more than any other initiative in the industry.”

Regulation included in the discussion

One topic that came up during the hearing was how regulators would approach oversight of blockchain networks.

According to the panelists, this process could result in regulators maintaining distributed network nodes or having special access to data from those networks.

Ro said:

“I can attest from the perspective of CME Group that we are part of a very small consortium of industry groups that includes a significant number of regulators that require at least observer status in the network, or greater authority within the network.”

Slazas echoed those comments, suggesting that regulators like the CFTC should have access to a “dashboard” that would allow them to observe what is happening on a particular network.

“I think in a few years we’re going to have some type of mechanism that gives you an opportunity to get into the space, and I think the things that can be done and are being done can be done in parallel when the blockchain is closed.”

While there was no indication of specific actions the CFTC might take, some commissioners at the hearing suggested adjustments to existing regulations.

In their closing statements, the commissioners said further discussion and fact-finding on the technology was needed.