When a new technology threatens to disrupt an established industry, the first instinct of the authorities is to suffocate it with regulations. In time they learn to adapt and try to bring it into the existing system. But now it seems that at least one American regulator is calling to rush past the first stage with regard to blockchain.
CFTC Commissioner Christopher Giancarlo gave a speech on Tuesday to the Depository Trust & Clearing Corporation 2016 Blockchain Symposium where he urged regulators to adopt the Hippocratic Oath on the technology: “first, do no harm.” Giancarlo also proclaimed that blockchain and smart contracts would be able to revolutionize various aspects of the financial industry in impressive ways.
Highlights from Giancarlo’s Special Address:
– The potential applications of this technology are being widely imagined and explored in ways that will benefit market participants, consumers and governments alike. Distributed ledger technology (DLT) could allow for the confirmation and ownership transfer of virtually anything from hockey tickets and magazine subscriptions to auto repair warranties and airline loyalty rewards or apartment leases. Another potential use of DLT is better and more verifiable voting systems, whether for proxies by corporate shareholders, customer satisfaction surveys or voting for political candidates.
– DLT may be able to provide regulators with visibility into the trading portfolios of swaps counterparties that they lacked during the financial crisis and that Dodd-Frank mandated. It may make possible new “smart” securities and derivatives that can value themselves in real time, report themselves to data repositories, automatically calculate and perform margin payments and even terminate themselves in the event of counterparty default.
– On this point, a dramatic example of the potential benefits to regulators of blockchain technology is in the collapse of Lehman Brothers. If an accurate DLT record of all of Lehman’s transactions had been available in 2008, then Lehman’s prudential regulators could have used data mining tools, smart contracts and other analytical applications to recognize anomalies in trade activity, divergence in counterparty exposure (specifically those willing to trade with Lehman), widening credit spreads and disruptions in short term funding activity. Regulators could have reacted sooner to Lehman’s deteriorating creditworthiness.
– And even if prompter and better-informed regulatory intervention would not have been enough to prevent a run on Lehman, the records held by trading counterparties (and available to regulators) would have accurately shown Lehman’s open positions. Imagine if, instead of requiring countless legal actions spanning eight years, we could have known all of Lehman’s exposures within minutes of a bankruptcy filing. Accelerated settlement of open positions and accounts would have likely taken weeks, not years.
– Further, DLT may help market participants manage the enormous operational, transactional and capital complexity brought about by the legion of disparate mandates, regulations and capital requirements promulgated globally in the wake of the 2008 financial crisis. In fact, one study estimates that DLT could eventually allow financial institutions to save as much as $20 billion in infrastructure and operational costs each year.
– The United States’ global leadership in technological innovation of the Internet was built hand-in-hand with its enlightened “do no harm” regulatory framework…Today, I call on my agency, the CFTC, and other U.S. and overseas policy makers and regulatory counterparts to repeat that broad-minded approach.