The CFTC Technology Advisory Committee (“TAC”) considered challenges posed by new technologies. Officials from both inside and outside the CFTC and non-government financial and technology executives discussed (i) blockchain and the potential application of distributed ledger technology to the derivatives markets; (ii) virtual currencies and related futures products; (iii) the future of machine learning, artificial intelligence and computing power; (iv) developments in automated trading technologies; and (v) cybersecurity developments and best practices.
CFTC Commissioner Brian Quintenz, the sponsor of TAC, commented that while there is a need to rationalize the current regulatory framework for virtual currencies, there should be further investigation before adopting any new regulation. He described the potential application of distributed ledger technology (“DLT”) in the derivatives markets and the benefits exhibited by a trial version. Noting the challenges posed by DLT – including scalability issues, the digitalization of derivatives contracts, and DLT’s compatibility with existing CFTC regulations – he urged further discussion before taking any action. He cautioned that the CFTC “should not attempt to make value judgments about which new products are worthwhile,” and urged the cryptocurrency sector to set up a self-regulatory organization to set standards for its activities.
CFTC Commissioner Rostin Behnam recommended the CFTC take more immediate steps. While applauding TAC’s plans to reintroduce some of the Regulation Automated Trading (“Reg. AT”), he urged the CFTC to take immediate action “before an automated trading system run amok causes harm to market participants.” He asserted that “the question of a market event, flash crash or otherwise, is not if, but when.” Mr. Quintenz, speaking separately on the matter, encouraged the Committee to discuss and identify the specific risks associated with automated trading, how those risks are being addressed through the market’s incentive structure, and then to determine if regulation can effectively alleviate those risks.
CFTC Chair J. Christopher Giancarlo stated the CFTC’s first duty was to learn everything about the emerging FinTech industry before adopting regulations. LabCFTC, according to Mr. Giancarlo, will lead their efforts to learn and communicate with those in the technology industries. Since its launch, LabCFTC has conducted over 150 meetings with relevant entities and plans to continue fostering open communication.
Lofchie Comment: Mr. Behnam is right, of course, in predicting that something bad will eventually happen. More difficult is predicting what specific bad thing might happen and proposing rules that are reasonably tailored to prevent or deal with it. The alternative is to propose rules that don’t prevent problems, to have problems in spite of those ineffectual rules, and then to “find” that government wasn’t “tough enough” and so to adopt more expensive and futile rules. Put differently, the question is not, should there be rules; the question is whether there are specific rules that can forestall reasonably likely specific problems at a reasonable expense.