What has happened?
The chairman of the Commodity Futures Trading Commission (CFTC) has said that his agency is "falling behind" on blockchain technology and that now is not the time for the agency's jurisdiction of the cryptocurrency market to be increased.
What does this mean?
Speaking at a congressional hearing on Wednesday before the House Committee on Agriculture, addressing questions about the agency’s priorities and its work, Chairman J. Christopher Giancarlo said that the CFTC was limited in its ability to test and generate proof of concepts about emerging technologies and systems.
In the written version of his testimony, Giancarlo said:
"The CFTC lacks the legal authority to partner and collaborate with outside entities engaging directly with FinTech and innovation within a research and testing environment, including when the CFTC receives something of value absent a formal procurement."
In his oral testimony, Giancarlo explained that innovators often ask the CFTC to participate in proof of concepts on some new technologies, especially in the area of blockchain.
For example, the CFTC was approached by a consortium of banks, service providers and tech firms to operate a regulatory node on a prototype of a blockchain system for trading credit default swaps, bank payments and other areas.
The CFTC could not participate in the project, because the sharing of data and information would be considered a gift, and the agency is prohibited from taking gifts.
Neither could the CFTC purchase or rent the ability to run a node because this would need to go through an appropriations process, with firms competing against each other.
As a result, Giancarlo said, "by the time we go through all that, this thing is already launched."
“We’re falling behind. Just two days ago, the Bank of England announced that they’re putting in a new bank-to-bank payment system in the UK, and it’s gonna be blockchain-compliant. And they’ve had the last four years […] to participate in all these blockchain beta tests that we’ve not been able to participate in and they've been able to get comfortable with the technology and they're now incorporating it. So I feel like we’re four years behind, because we do need to test it, […] we need to see how it can help us do a better job as regulator. […] Emerging financial technologies are taking us into a new chapter of economic history. There’s a lot of coordination going on.”
However, the CFTC Research Modernization Act, a bill recently introduced by Congressman Austin Scott should help the Commission go through programmes testing new technologies and enable it to learn from the process.
Representative Michael Conaway pointed out that, ironically, the CFTC can use existing powers to scrutinise blockchain projects that are already in place.
Giancarlo also addressed the question as to whether Congress should expand the CFTC's jurisdiction in respect of the cryptocurrency market.
He noted that the CFTC already has enforcement jurisdiction for fraud and manipulation; but it does not have jurisdiction to set standards, as for future exchanges.
According to Giancarlo, now is not the time for the CFTC to have this type of jurisdiction over the cryptocurrency market.
"I'm not in a position yet to advocate a grant of jurisdiction [in that area] to the CFTC and I have a range of concerns around that. … Historically, it has not been the role of the CFTC to set this type of requirements for cash markets."
He also noted that a broad policy conversation needs to happen around cryptocurrency and that there may be a time when the federal government needs to come in, but the question is when.
"The amount of ink that's devoted to [cryptocurrency] far outweighs their real role in the economy. It's a tiny market place. The total market capitalisation of all cryptocurrency is probably less than one publicly traded company," he added.
To conclude, he said:
"The best model that I like to point to in the 1990s when a Democrat White House and a Republican Congress worked together around this new thing called the internet and took a 'first-do-no-harm' approach. Regulation came slowly and let the technology evolve. I think we need to stay close to it, we need to be careful, but I think we can allow it to develop a little bit before we run in with regulation."
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