In the blockchain world, the US CFTC wants to be a node

Babbitt Information

While participating in a blockchain summit in Washington, J. Christopher Giancarlo, chairman of CFTC (U.S. Commodity Futures Trading Commission), delivered a speech entitled Three Elements of Digital: Technology, Regulation and Market.

The following is the full text of the speech:

In his speech, Giancarlo mentioned the possible application of blockchain technology, and believed that if regulators had mastered blockchain technology before the outbreak of the economic crisis in 2008, the final result might be very different. In addition, he also pointed out the basic principles that CFTC should abide by as a regulatory agency when dealing with the development of emerging technologies. One of the most interesting points is that the CFTC hopes to master data processing and analysis capabilities, reduce dependence on autonomous organizations and major intermediaries, and become a potential node with access to information in decentralized economic blockchains and networks.

Using Bitcoin futures as an example, Giancarlo also illustrated the importance of free markets. He said that the decline in the price of Bitcoin is a good thing. On the one hand, it stops the speculative bubble, and on the other hand, it promotes the development and popularization of technology.

The following is the full text of the speech:

Its a pleasure to be here today.

It was a great pleasure to be part of this event organized by the Council for Digital Commerce (CDC), an organization that brings a lot of information to the public discussion on digital assets and blockchain technology. I would like to thank Perianne Boring, who was one of the founders of this emerging field of innovation.

Its a pleasure to speak after Craig Phillips, who led the US Treasury Departments groundbreaking report last year, Nonbank financial, FinTech and Innovation (Nonbank financial, FinTech and Innovation), which mentioned a lot of reform regulation key recommendations for the environment to drive innovation.

I was also delighted to be at the event with Crypto Mom ​​(who is very crypto-friendly) Hester Peirce, who is my crypto spouse (she is my other half in the crypto world, meaning that both parties are sympathetic to each other). Cryptocurrency friendly)! With both Hester and I having crazy schedules, were like virtual ships passing through digital night. Im sure our crypto-kids (meaning the cryptocurrency community) are excited to see us together at this awesome event.

I am very grateful to organizations like the CDC, who have been working with us. They are a trusted source of information and their responses have been thoughtful whenever we have asked them for information on cryptocurrency markets and mechanics.

Indeed, what makes this era of fintech innovation so fascinating is the realization that the development of new technologies and business models is inextricably linked to older regulatory frameworks, and that new policy developments must keep pace. I think thats why were here -- in Washington, D.C. -- to have this discussion and have a lot of great people in the professional world come here.

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My inventory of the blockchain

Over the past few years, I have had a number of occasions to discuss an important application of blockchain technology — cryptocurrencies — especially in light of the CFTC’s role in regulating the cryptocurrency futures and derivatives markets.

Today, I want to take stock of the current state of blockchain technology, with a renewed focus on how it can impact and improve our marketplace. First, I want to take you all back to September 2008. It was a dangerous time for global financial markets. The bursting of the huge housing bubble in the United States triggered a global credit crisis. There is widespread concern that investment and commercial banks are headed for failure.

I was on Wall Street at the time, serving as an executive at one of the worlds largest trading desks for credit default swaps (CDS), which at the time was a center of systemic risk. Panic was in the air as we tried to maintain order in the markets, but tension reigned in the office. I remember a call from US banking regulators asking about the CDS trading exposure of several large banks, including Lehman Brothers. In fact, trading conditions are deteriorating by the day. Clearly, regulators have little recourse to decipher all the red flags the CDS market is sending out, other than making phone calls.

But imagine how different things would have been 10 years ago on the eve of the financial crisis if regulators had had access to the real-time trading ledgers of the biggest Wall Street banks, rather than collecting bits and pieces of data to reconstruct complex, independent trading portfolios.

Imagine if prudent regulators had access to the golden record of real-time ledgers of all compliant trading participants, instead of poking around for market information like the brokerage firm I was working for at the time?

Imagine if regulators could see a real-time distributed ledger in 2008, perhaps using modern cognitive computing power to identify anomalies in trading activity across markets, differentiate counterparty exposures, and analyze bank failure risk , what happens? Imagine if the ledgers told us that Lehmans $400 billion CDS accounted for less than $8 billion of the firms post-bankruptcy net market exposure?

In short, if blockchain technology was the information basis for Wall Streets derivatives exposure a decade ago, things would be very different. At the very least, it would certainly allow for more timely, informed, and precise regulatory interventions rather than the chaotic responses that would ensue.

Now, lets go back to today. Bitcoin has brought attention back to topics like back-office infrastructure, interoperable databases, and shared ledgers — and thats a good thing. This means that efforts to upgrade data infrastructure with blockchain or systems inspired by distributed ledger technology (DLT) get the attention needed to help achieve wider adoption. These systems can increase efficiency and transparency, not just in our financial markets, but across the real economy.

As far as financial markets are concerned, DLT is likely to have a wide-ranging and lasting impact in payments, banking, securities settlement, title filing, cybersecurity, and transaction reporting and analysis.

In addition, as recently stated by Lab CFTC in the smart contract introductory guide, DLT is likely to be combined with smart contracts to perform real-time value evaluation, report its own situation to the database, automatically calculate and execute margin payments, and even trade with counterparties. Terminate the contract upon default.

Outside of the financial services industry, DLT can be found in many fields, from international trade to philanthropy and social services. International agricultural commodities trader Louis Dreyfus and a group of financing banks completed the first DLT-based agricultural transaction last year, selling 60,000 tons of U.S. soybeans to China. Other DLT use cases include: legal records management, inventory control and logistics, charitable donation tracking and confirmation, voting security, refugee identification and migration, and more.

But it is undeniable that DLT has huge commercial prospects. Thats why many of you in this room today are doing our best to advance this technology and drive wider adoption. In my view, this could provide important assistance to financial market regulators in their mission of regulating healthy markets and reducing financial risks. This is one of the reasons why I am excited about the prospect of DLT.

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CFTC: Regulatory Response to Exponential Technologies

Let us now turn to the broader discussion of regulation in the face of exponential technologies. An introductory question that often comes up when we talk about financial technology is, throughout history, is innovation different this time, or why? After all, one could well argue that the ATMs of the 1960s were a fintech innovation, as were the electronic trading venues built in the 1980s and 1990s.

However, based on our observations and our work at the CFTC, I believe that some features of this current period of innovation are actually different and require new, differentiated regulation to respond. Allow me to discuss each one.

First of all, we live in an era of rapid technological development. That said, the sheer speed of innovation has grown exponentially, both in the production of new models and products, and their subsequent mainstream adoption. The former is driven by increased computing power and reduced computing costs, and the latter is dictated by rapid mainstream adoption and scalability allowed by the Internet and mobile devices. These dynamics put pressure on regulators to keep pace with rapidly changing markets, especially given the potential for new technologies to impact markets in the short term.

The second feature is the disintermediation of traditional players or business models, which can pose challenges to regulators and existing regulatory frameworks. Just imagine how the digitization of everything, including music, travel, trade, and even agriculture, facilitates the decentralization of traditional intermediaries. This decentralization of major economic players is a huge challenge for most regulatory approaches and frameworks. Traditional management models tend to record major market players, designate autonomous organizations composed of these players, and only need to focus on These key intermediaries will do.

As an example, cryptocurrencies are another option for executing payment transactions, powering automated execution software, or facilitating financing activities. In many cases, cryptocurrency-related activities may take place outside of traditional intermediaries - indeed this is often by design, so as to provide a choice - and include existing regulatory frameworks that do not cover or do so in an inappropriate manner Covering new economic actors.

The third characteristic is that the speed and nature of technology-driven innovation requires business and government leaders to improve technology literacy. How many people today truly understand the technologies that drive the underlying business models? From a government perspective, how can regulators mitigate risk, develop sound policy, and foster innovation in the market without the requisite technical literacy?

Based on the above characteristics, how can regulators respond to and keep up with the rapidly changing market?

During my tenure as CFTC Chairman, we took aggressive steps to evolve into a 21st century regulator and develop a modern approach to regulation. Our criteria for responding to change are simple and based on four key elements:

1. Embrace an exponential growth mindset.

2. Create an internal fintech stakeholder.

3. Become a data-savvy regulator.

4. Embrace market-based solutions.

Lets take a closer look at these four elements:

First, its important to embrace an exponential mindset, based on anticipation, or more colloquially, skating the puck. Specifically, this means expecting: the rapid pace of change, the market adoption of innovations, the resulting new demands on regulators, and the need for regulator capacity and capacity building. This mentality must inform our entry into the market and become an entry point for observation.

The second factor is actually a natural consequence of the first: namely, the creation of a permanent stakeholder within the regulator to understand and respond to the opportunities, challenges and risks presented by innovation. Without this stakeholder, there is no one responsible for thinking about the direction of emerging technologies, considering the impact on existing rules and regulations, exploring ways to internalize these new technologies, and working to mitigate emerging risks

This stakeholder should be concerned with both external and internal dynamics. Externally, stakeholders engage with innovators – whether start-ups or existing market players – and help them save time and resources by providing feedback on new concepts or identifying regulatory issues. As a liaison to innovators, this stakeholder also benefits from technological change and market evolution.

Internally, this stakeholder can conduct popular science and update technical progress to insiders. He can help manage tensions between innovation and the existing regulatory framework, drive and inform internal technology and strategy, and act as a liaison with other domestic and international regulators and political bodies.

If this stakeholder sounds familiar and is a good idea, Im happy to tell you that its Lab CFTC.

Founded in 2017, Lab CFTC has worked with more than 250 entities in different cities and regions around the world, including New York, Chicago, Silicon Valley, Austin, Singapore, London, Boston, and Washington, DC. Lab CFTC will popularize emerging technologies in a timely manner, including virtual currency and smart contracts; Lab CFTC has created innovative competitions, updated information for the committee, participated in numerous external activities, implemented bilateral financial technology cooperation with international regulators, and worked with members of Congress and Played an important role in the engagement process with other domestic regulators.

Lab CFTCs work highlights an important issue facing U.S. regulators. We are limited in our ability to test, demonstrate and proof-of-concept these complex emerging technologies and systems. Specifically, many external entities targeting fintech and innovation have direct access to research and testing environments, but the CFTC lacks the authority to work with them. Without such authority, the CFTC would have to forego greater opportunities to participate in research that could benefit the derivatives markets the agency regulates, as well as the CFTCs own activities.

We look forward to the next phase of Lab CFTCs growth as we increase the agency budget to support modernization and capacity building. I am very happy that at this stage, every federal financial regulatory agency in the United States has or is creating an innovative project or office similar to Lab CFTC, because we are all developing a blueprint for modern regulation.

In many ways, this capability is necessary to address systemic disintermediation. It enables regulators to conduct independent analysis of market data across disparate data sources, reducing reliance on autonomous organizations and key intermediaries, and becoming a potential node with access to information in decentralized economic blockchains and networks.

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Embrace market-based solutions

The fourth element of being a 21st century regulator deserves discussion and consideration, as it is more of a fundamental principle than an activity of the CFTC. Its element is the acceptance of market-based solutions – this should be a responsibility and accepted, but some reminders may still be needed today.

The market constitutes the DNA of CFTC regulation and the basis for our regulation. In the United States, market-based capital and risk transfer have led to unparalleled industrial and technological innovation. Indeed, markets are good at assessing innovation and managing corporate risk, are more flexible than bank financing, and are better at dealing with intangible collateral.

Through the interaction of hundreds, if not thousands, of economic actors, markets further drive price and value discovery, enable the efficient allocation of resources, and allow risk transfer, thereby driving stability and certainty in real-world economic activity. Many of you here today are aware of or are learning about the development (albeit sometimes uneven) of the modern cryptocurrency market and its multifaceted dynamics.

While the market is not always perfect, it has been shown time and time again to be humanitys most effective means of driving economic productivity and prosperity. For todays younger generation, you can think of the marketplace as the ultimate tool for outsourcing and decentralized decision-making, a natural tool to develop and deploy for those looking for a bright and self-fulfilling future.

Indeed, this is the core value proposition of free market capitalism - as long as there are open and competitive markets in the world, free from political interference, coupled with free enterprise, individual choice, voluntary exchange, and legal protections for individuals and property, there will be Broad and sustained prosperity.

This value proposition is the wellspring of human expression, desire and creativity. Freedom of choice is a social good in itself, morally and economically vital. Life, liberty, and the pursuit of happiness are about personal freedom—not just moral or political freedom—but also economic freedom, freedom to work for yourself, and freedom to do business as you please.

However, there is often a tendency to exert paternalistic intervention in the market in order to steer the market in a desired direction, or to eliminate all risk - which may ultimately be futile. This temptation is understandable but must be limited, as the situation is more likely to have unintended and unwelcome outcomes.

This is not to say that prudent surveillance, targeted enforcement and appropriate precautions are inappropriate, but our individual concerns or judgment should not override the efficiency of the market and we should allow others to make their own decisions or pursue own goals.

The CFTC believes that market forces are the best determinant of the value of technology-driven innovation. To this end, the following case study can help illustrate the above concepts.

At the end of 2017, two exchanges under the CFTC’s supervision — the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) — sought certification and listing of futures products based on the value of bitcoin. The CFTC makes these exchanges certify that they comply with the CFTC’s core principles before listing new contracts. This approach allows for a robust and dynamic risk transfer market to develop and test new products without time-consuming application processes. In fact, since 2000, more than 12,000 new futures products have been launched in the United States, far exceeding the markets in other countries.

The Bitcoin product is a brand-new concept and based on a unique encrypted asset, the two exchanges did have a lot of pre-discussions with CFTC staff before launching; this helps to introduce low-risk factors, including more High margin requirements and contract sizes.

Indeed, when Bitcoin futures were launched, many people found that there was a potential bubble in the price of Bitcoin, which had exceeded $19,000 at that time. Within months of launching the futures product, the price of Bitcoin fell to less than $10,000. There has been speculation that the drop in bitcoin price reflects a return to one of bitcoins fundamentals: namely, the cost of production. Economists at the San Francisco branch of the Federal Reserve pointed out in a report in 2018 that the launch of bitcoin futures products coincided with the subsequent sharp decline in bitcoin prices, perhaps because futures provided people with the first way to trade in encrypted assets. A way of speculating on prices.

The key takeaway, however, is that markets can work even when they behave in ways we dont expect. In terms of information discovery, the market is a much healthier way to discuss than to listen to the opinions or perspectives of a few.

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Solving digital economy problems

This is the CFTCs attitude towards financial technology innovation and modern market regulation, which can also be said to be the three digital elements: technology, market and policy. Our principles are to adopt an exponential growth mindset, create an internal fintech stakeholder, become a quantitative regulator, and adopt market-based solutions.

So, as an innovator, what should you do? My advice to you is: keep going! Solve the problem. Bold innovation, integrity innovation, wisdom innovation. Take sound advice. abide by the law. keep going. Be fearless.