Wednesday, May 11, 2016

Giancarlo details Hippocratic oath for blockchain regulations

By Mark S. Nelson, J.D.

The ancient Greek physician Hippocrates is often cited as the founder of medical study, even if attribution to him of the Hippocratic oath—first, do no harm—is sometimes elusive. CFTC Commissioner J. Christopher Giancarlo, whose father was a doctor, has pulled together his several recent speeches on FinTech into a Hippocratic oath for regulators who may stand to gain by adopting globally harmonized rules for the use of blockchain or distributed ledger technology (DLT), but only if they take a “do no harm” approach akin to regulators’ handling of the Internet’s early days.

According to Giancarlo, “five practical steps” can ensure that both regulator and regulated can benefit from the use of new technologies, like DLT. As he has done in earlier presentations (Harvard law School; CFTC Technology Advisory Committee; DTCC 2016 Blockchain Symposium), Giancarlo imagines a financial world in which events like the 2008 financial crisis might be dealt with faster and in a more proportionate manner, if only regulators can access real-time ledgers of all market participants’ trading portfolios. In 2008, those technologies were several years away and regulators had to make old-school phone calls to gain insight into the unwinding of complex financial instruments.

Giancarlo said one step would be for financial regulators and industry participants to work together in a more collaborative manner. He said the emergence of DLT and other FinTech innovations have left a vacuum regarding legal clarity and rules for the marketplace are unlikely to materialize for years.

A second step is to promote the use of a regulatory sandbox where FinTech firms can explain their innovations to regulators without fear of enforcement actions. Giancarlo suggested that a U.S. version of the regulatory sandbox could follow the precepts employed by the U.K. Financial Conduct Authority’s Innovation Hub, which FCA Director of Strategy and Competition Christopher Woolard said was to begin taking applications this week. Giancarlo also noted that Australia, Singapore, and Japan may implement regulatory sandboxes or other flexible approaches to FinTech.

Yet another corollary of do no harm is spurring regulators to participate in proof of concept (POC) events in order to gain insight into how DLT and related FinTech innovations can help them to oversee markets. Giancarlo noted ongoing POCs led by DTCC regarding smart contracts for single name CDS and repo settlement. He also cited a Barclays POC that applied smart contracts to interest rate swaps, an early use of the R3 consortium’s Corda platform. Last month, a blog post by R3’s CTO Richard Brown introduced Corda to the world.

The fourth step is for regulators to listen and learn from FinTech firms. Giancarlo suggested that federal regulators also listen to their global counterparts, such as the FCA, which are far ahead of them in understanding FinTech. He also suggested looking to the state of Delaware, which has announced various initiatives on DLT and related technologies.
Lastly, Giancarlo urged global collaboration on DLT issues to avoid a scenario that results in a lack of international harmonization of regulatory standards. He suggested this aspect of the do no harm approach in a speech last month at the Cato Institute, where he cited a similar view proposed by IOSCO Chairman Greg Medcraft. According to Giancarlo, too much regulation, especially across multiple jurisdictions, could prevent DLT from achieving its full potential.