Policymakers and regulators should adopt a 'do no harm' approach to the use of blockchain technology in financial services, according to Commodity Futures Trading Commission (CFTC) Commissioner J Christopher Giancarlo, who also argues that the distributed ledger could be a boon for watchdogs by improving transparency.
In a speech at the Cato Institute, Giancarlo encouraged lawmakers to follow the example set 20 years ago when a "do no harm" approach was taken to regulating the Internet. This hands off approach encouraged innovators and investors, leading to numerous benefits, he argues.
Similarly, he says: "I believe that innovators and investors should not have to seek government’s permission, only its forbearance, to develop DLT [distributed ledger technologies]. Government must foster a regulatory environment conducive to the technological innovation needed to address the increased operational complexity and capital consumption of modern financial market regulation."
Regulators around the world should work together, says Giancarlo, creating a principles-based approach that gives the flexibility, certainty and harmonisation necessary for the technology to flourish.
The commissioner's enthusiasm for distributed ledger technology is partly rooted in his time on Wall Street during the 2008 financial crisis, when he worked on a major trading platform for credit default swaps.
"In 2008, prudential regulators had to call around to brokerage firms like mine searching for market confirmation of Lehman’s distress. What a difference it would have made if regulators had access then to a “golden record” of the real-time ledgers of all regulated trading participants, rather than trying to assemble piecemeal data to recreate complex, individual trading portfolios.
"I believe that, if regulators in 2008 could have viewed a real-time distributed ledger, and, perhaps, been able to utilize modern cognitive computing capabilities, they may have been able to recognize anomalies in market-wide trade activity and diverging counterparty exposures indicating heightened risk of bank failure. It would certainly have allowed for far prompter, better-informed, and more calibrated regulatory intervention instead of the disorganized response that unfortunately ensued.
"Moreover, had Lehman still failed, records powered by DLT and held by trading counterparties (and available to regulators) would have accurately shown Lehman’s open positions across asset classes. Imagine if, instead of requiring countless legal actions spanning eight years, we could have known all of Lehman’s exposures within minutes of its bankruptcy filing. Accelerated settlement of open positions and accounts could have taken weeks, not years."