J. Christopher Giancarlo, Commissioner of the Commodity Futures Trading Commission, called for regulators, including the CFTC, to “do no harm” in permitting the new blockchain or distributed ledger technology to develop.
DLT, introduced in connection with transactions involving Bitcoin, references a public ledger of all transactions referencing an item that is automatically updated to include the latest and all prior transactions. A DLT should not be subject to tampering or independent revision.
According to Mr. Giancarlo, the model for a “do no harm” regulatory approach is the path regulators followed during the initial days of the Internet. According to Mr. Giancarlo, back in the 1990’s,
a Republican Congress and the Clinton administration established a set of foundational principles: the Internet was to progress through human social interaction, voluntary contractual relations and free market. Governments and regulators were not to harm the Internet’s continuing evolution.
As a result of this approach, claimed Mr. Giancarlo, the Internet flourished, “created jobs, increased productivity and fostered innovation and consumer choice.” Mr. Giancarlo argued that, by following the same approach now, the DLT can most effectively be permitted to evolve in a similar fashion.
To accomplish this, US and foreign regulators should “coordinate to create a principles-based approach for DLT oversight in order to provide the flexibility, certainty, and harmonization necessary for this technology to flourish.” The CFTC itself, said Mr. Giancarlo, should examine and revise it rules – such as its recordkeeping requirements – to ensure they are technologically neutral to avoid inhibiting DLT development.
In a separate speech before SEC-Rock Center for Corporate Governance’s Silicon Valley Initiative, May Jo White, Chairperson of the Securities and Commission, indicated that her agency is currently considering whether certain blockchain applications may require registration as transfer agents or clearing agencies. She observed that the SEC recently reviewed the registration statement of Overstock, Inc., which is seeking to offer and sell digital securities that trade and settle entirely on the blockchain, bypassing intermediaries.
Relatedly, last week the office of the Comptroller of the Currency issued a paper articulating standards it will apply to support “responsible innovation” in the federal banking system. These principles included supporting “responsible innovation” and fostering “an internal culture receptive to responsible innovation.”
Legal Weeds: The CFTC has previously determined that Bitcoin and other virtual currencies are “commodities” under applicable law. (Click here for details in the article, “CFTC Says Virtual Currencies Are a “Commodity” Under Federal Law, Files Charges Against Coinflip for Operating an Unregistered Bitcoin Options Trading Platform” in the September 20, 2015 edition of Bridging the Week.) This is likely a correct interpretation as under applicable law, commodities are broadly defined as any goods, articles, services, rights and interests “in which contracts for future delivery are presently or in the future dealt in” with two exceptions: onions and motion picture box office receipts, or any “index, measure, value or data related to such receipts.” Moreover, with limited exceptions (most notably, involving securities), the CFTC has exclusive jurisdiction under applicable law with respect to all trading of commodities of the nature of options, futures and swaps, including over most market participants. It is not certain, however, that the New York State Department of Financial Service is prepared to restrict its regulation of virtual currency transactions and intermediaries through imposition of its so-called “BitLicense” and other requirements to the extent such obligations impact activities and persons under the exclusive jurisdiction of the CFTC. It is also not clear how states that adopt their own BitLicense-type provisions will address CFTC exclusive jurisdiction regarding certain aspects of digital currency businesses (click here to access the proposed model state BitLicense equivalent law, the Regulation of Virtual Currencies Act). It will be interesting to watch this space going forward to see whether a jurisdiction fight emerges. (Click here to review the relevant provision of law related to the definition of a commodity and here for the scope of the CFTC’s exclusive jurisdiction. Click here for background on the NYS Department of Financial Services’ “BitLicense” requirements in the article, “NYDFS Issues BitLicense Framework for Regulating Virtual Currency Firms” in the June 7, 2015 edition of Bridging the Week.)