J. Christopher Giancarlo, a commissioner at the Commodity Futures Trading Commission(CFTC), told a Depository Trust & Clearing Corp. symposium that blockchain should be allowed to develop with minimal government regulation. Giancarlo noted in his published remarks that the Telecommunications Act of 1996 offers a good model since it allowed the Internet to evolve under the private sector’s leadership. There was also a “Framework For Global Electronic Commerce” that said regulators should avoid undue regulations.
As the Internet was entering a phase of rapid growth two decades ago, the Clinton Administration and a Republican Congress established a set of foundational principles: the Internet was to progress through voluntary contractual relations, free markets, and human social interaction.
Regulators were not to harm the Internet’s evolution. Thanks to this “do no harm” approach, the Internet created millions of jobs and transformed the economy and improved standards of living worldwide.
In 1996, Congress recognized that the Internet had flourished to the benefit of all Americans with little government regulation. Congress thus sought to ensure that Internet-access services remained unfettered by regulation. The Federal Communications Commission (FCC) said Internet services should exist in a minimal regulatory environment that promotes investment and innovation. The FCC issued directives that Internet service providers be governed by a relatively relaxed framework.
The FCC also supported World Trade Organization agreements that privatized state-owned telecom companies and adopted regulatory practices to create competition and reduce trade barriers for information-technology goods and services. The U.S. also worked with the Organization for Economic Cooperation and Development to support a light-touch Internet regulation regime.
Promise of Blockchain
At the present time, a new technology is at hand that could provide a similarly profound tool to share networks of information, Giancarlo said. However, its development is at risk of being stymied by disparate and uncertain regulation.
“It is time again to remind regulators to do no harm,” he said.
Regulation of blockchain, or distributed ledger technology (DLT), should be coordinated on a multilateral level based on the “do no harm” principle, Giancarlo said. Just as many financial service firms are working together in DLT consortiums, regulators should do the same.
Without such an approach, technology and financial service firms will be left trying to navigate a complex regulatory environment, with multiple agencies having their own rules. He said the industry is already starting to express such concerns.
The issues expressed include privacy, security, dispute resolution, anti-money laundering, and know-your-customer requirements.
A single distributed ledger could hold multiple assets subject to different or simultaneous regulatory agencies’ rules. Such complexity, dichotomy, and uncertainty will stifle blockchain innovation.
What Regulators Should Do
While global regulatory coordination and the adoption of a principles-based approach are critical, each regulatory agency can take steps to ensure that its rules do not undermine DLT development.
For the CFTC, one recordkeeping rule requires all books and records to be kept in their original form or native file format. The records have to be produced in a form specified by any commission representative. The rule also requires certain records to be stored either in electronic storage media or micrographic media and other related conditions.
The CFTC should reconsider this rule and make it technologically neutral to accommodate DLT and other innovations that promote accuracy, security and efficiency in record keeping.
Giancarlo said DLT could revolutionize the financial world. He noted the Bank of England has called DLT the “first attempt at an Internet of finance.” DLT can potentially link legal recordkeeping networks the way the Internet links data and information networks.
DLT will improve settlement speed and efficiency, cut transaction costs and build market access. In doing so, it will affect financial markets in securities settlement, payments, title recording, banking, trade reporting and more. Billions of dollars are being invested in innovations.
Could DLT Have Halted Lehman Collapse?
A dramatic example of the potential blockchain benefits to regulators is in the collapse of Lehman Brothers, he said. Had an accurate DLT record of Lehman’s transactions been available in 2008, regulators could have used smart contracts, data mining tools and other analytical applications to recognize trade activity anomalies, divergence in counterparty exposure, widening credit spreads and disruptions in short-term funding activity. “Regulators could have reacted sooner to Lehman’s deteriorating creditworthiness,” he said.
Regulation Lags Innovation
But DLT’s development is moving faster than regulatory frameworks, Giancarlo said. Because rules affecting DLT are likely years away, the industry currently has little clarity on regulation.
The problem is that when regulation does arrive, it will be from a dozen different directions bringing different restrictions that could stifle development.
“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,” he said.
Government regulators have a choice regarding DLT. Regulators can choose to burden the industry with numerous legal frameworks or establish uniform principles that serve to encourage DLT innovation. “I favor the latter approach,” Giancarlo said.
Giancarlo called the approach the government used for the Internet “enlightened regulatory underpinning” that delivered profound changes in society.
CFTC’s Regulatory Initiative
The CFTC officially recognized bitcoin as a commodity in September of 2015 when it took an enforcement action against a bitcoin operator for being unlicensed, CCN reported. That action marked the most significant bitcoin regulatory move in the U.S., along with the New York State BitLicense, also enacted in 2015.
The CFTC’s technology advisory committee, created in 1999, advises the CFTC on the impact of technology innovations for the securities market and financial services, along with the regulatory and legislative response to the growing use of technology in the markets. Committee members include representatives of financial intermediaries, traders, futures exchanges, self-regulatory organizations and market participants.
The commission in January appointed Paul L. Chou, CEO and founder of LedgerX, as a bitcoin trading expert to its technical advisory committee.