On February 14, 2018, the CFTC's Technology Advisory Committee (TAC) hosted a meeting focused on bleeding edge topics in the FinTech world. These included blockchain and distributed ledger technology (DLT), virtual currencies, artificial intelligence, advanced trading algorithms, and machine learning. The meeting was open to the public and available via a livestream on the CFTC website.
In the first panel, entitled "Blockchain and the Potential Application of Distributed Ledger Technology to the Derivatives Markets," participants discussed the vast yet uncertain opportunities at their hands.
First, Charley Cooper, managing director of R3, encouraged US regulators to engage with blockchain innovators. Through an impassioned plea, he told the audience that the US is falling behind on the world stage in regard to FinTech innovation.
This was followed by Dan Bucsa, the CFTC's deputy director of market oversight, who discussed how the agency might transition away from being an "analog regulator of digital markets." Acknowledging that there is no guarantee as to DLT's future, Bucsa called for a cost-benefit analysis. He showed foresight, too, urging that an examination of DLT – or any possible technological improvement – must be "forward-looking."
While cryptocurrency has leaped into the mainstream (and blockchain hype with it), regulators seem determined to maintain a steady hand, keeping watch on the horizon rather than making dramatic, short-term adjustments. Patient investigation and evaluation is being prioritized over boom-bust innovation.
Still, Bucsa foresaw great potential, explaining that reporting systems could be made more reliable and automated. Furthermore, blockchain and DLT might enable what he called "real-time oversight" of markets.
Specific to the derivatives market, Bucsa suggested that data sharing agreements and enhanced connectivity might allow for fully-informed and holistic decision-making. He also tempered expectations, reminding listeners that blockchain and DLT are not definitive solutions, and the anticipation of near-term implementations may be overzealous.
The deputy director also pointed out that blockchain interoperability is crucial (think of interchangeable parts on an assembly line). With the rapidly growing number of blockchains, there isn't one absolute standard. This could be a problem.
It's like an electrical outlet. That fixture is standardized within the United States, but varies between countries. However, with adapters, travelers can plug in their devices and use them across the globe.
Now, imagine that same complexity, but multiply it hundreds of times. That's one of the looming obstacles for regulatory blockchain implementations. In essence, Bucsa said, blockchain efficiencies could be lost as various developers and projects create their own iterations. Without an overall standard, the CFTC wouldn't have a chance of engaging with so many different approaches. Bucsa referenced the International Swaps and Derivatives Association's contract standardization as an example. Ultimately, who cares if your electrical outlet has the most aerodynamic design if I can't plug in my speakers?
Another concern he raised is that DLT implementation could crowd out the smaller players. That's not something that would be in the best interests of the CFTC or the market. Some companies might not have the resources (or desire) to develop DLT-based solutions for regulatory compliance, so the agency must be cognizant of various needs.
In all, the question is whether it makes sense to move toward a new schema while supporting the old mechanisms. That's why these conversations are taking place now. Advancement will require change, and that will be painful, but necessary with time.
While the CFTC welcomes the challenge and "growing pains," Bucsa said, it does not want to go "all-in" without knowledge of the associated risks.
Brian Knight, a senior research fellow at the Mercatus Center at George Mason University, asked whether a regulator ought to serve as a consultant to private industry, noting the risk of putting a single company at an advantage over its peers. Knight further raised concerns about the terms of data access for regulators.
Jennifer Peve, managing director of business development FinTech strategy for the Depository Trust & Clearing Corporation (DTCC), offered critical insights into some of the obstacles that blockchain-based settlements face. DTCC, Peve explained, can handle 25,000 transactions per second. Public blockchains – as we know – are a far, far cry from that number. Peve discussed how architectural components might inhibit further progression and highlighted concerns regarding latency and scalability, especially as the number of nodes increases.
DLT can assist with settlement and managing counter-party risk, contended Peve, but it is not the only solution. Like Bucsa, she also reminded the audience that the use case for blockchain-based reporting is highly dependent upon "harmonized" data standards.
Earlier today, ETHNews reported on the CFTC's creation of subcommittees dedicated to blockchain and virtual currencies.