On October 7, 2016, Federal Reserve Board (Fed) Governor Lael Brainard spoke at the Institute of International Finance Annual Meeting Panel in Washington, DC about the potential for distributed ledger technology, or blockchain, to transform important back office systems. Governor Brainard’s October 7, 2016 speech follows up on her April 14, 2016 speech on “The Use of Distributed Ledger Technologies in Payment, Clearing, and Settlement” where the Fed first spoke about blockchain’s benefits and the need for regulatory safeguards. Governor Brainard’s recent speech again noted blockchain’s well publicized potential to improve payment, clearing and settlement systems for trade finance, securities markets and commodities and derivatives trading. Additionally, Governor Brainard also discussed the emergence of distributed ledger protocols couples with self-executing contractual clauses, to create so-called “smart contracts.” When speaking about smart contracts, Governor Brainard said:

“Although the idea of automating certain aspects of contracts is not new, and banks do some of this today, the potential introduction of smart contracts does raise several issues for consideration. For example, what is the legal status of a smart contract, which is written in code? Would consumers and businesses rely on smart contracts to perform certain services traditionally done by their banks or other intermediaries? Could the widespread automated interaction of multiple counterparties lead to any unwanted dynamics for financial markets? These and other considerations will be important factors in determining the extent of the application of smart contracts.”

Fed Governor Brainard reiterated the possible benefits and regulatory challenges presented by blockchain, smart contracts and other financial technologies. Governor Brainard announced that the Fed will study the need for 21st century financial services oversight and that the Fed expects to publish a research paper later this year to summarize its findings. As part of the Fed’s study, the Fed will “continue to deepen their engagement with a range of financial institutions, technologists, multi-stakeholder consortia, and academic experts to refine our understanding of financial technologies.”

Considering Blockchain and FinTech Regulation

The Fed’s support for the adoption of distributed ledger technology is encouraging and their continued focus on better payment, clearing and settlement systems is critical. The Fed should continue to work closely with Office of the Comptroller of the Currency (OCC) to maintain consistency with the OCC’s financial technology initiatives to consider any regulation that may impact the development of blockchain, smart contracts or other financial technologies. When studying financial technology, the Fed and OCC may enjoy listening to Commodity Futures Trading Commission (CFTC) Commissioner Christopher Giancarlo’s podcast and reading Commission Giancarlo’s May 10, 2016, speech on “Blockchain: A Regulatory Use Case” as well as his March 29, 2016 speech, “Regulators and the Blockchain: First, Do No Harm.” Because, when considering the safeguards for blockchain, smart contracts and other financial technologies, Commissioner Giancarlo is correct, “21st century markets need 21st century regulation.”