Tuesday, May 22, 2018

Coordination, innovation key in blockchain regulation, say NASAA FinTech panelists

By Anne Sherry, J.D.

Panelists at the NASAA Fintech Forum in Washington, D.C., examined the challenges and opportunities ahead as regulators grasp with blockchain-related innovations. At a morning panel about virtual currency regulation, regulators and a defense attorney debated whether regulatory certainty is a help or hindrance in this emerging area. A more tech-focused afternoon session focused on the evolution and future of blockchain technology.

Virtual currency regulation. Representatives from the SEC, CFTC, and Conference of State Bank Supervisors, along with a Ballard Spahr partner, discussed the regulatory landscape around virtual currencies. This conversation focused around innovation, cooperation, and coordination.

Ballard Spahr partner Marjorie Peerce said that uncertainty in the landscape makes it difficult to counsel clients about the rules. There is no confusion or disagreement when it comes to fraud, but the number of different agencies—both federal and state—overseeing licensing and registration leads to confusion, especially among innovators who have never before been in the financial space. Peerce believes that the Uniform Law Commission’s Regulation of Virtual-Currency Businesses Act is a step in the right direction, but the track record for adoption of uniform laws is low.

Brian Trackman, the lead attorney for the CFTC’s LabCFTC initiative, responded that the agency needs to be careful not to stifle innovation. “There’s a loud call for certainty, but be careful what you wish for,” he countered. “We’re in a better place letting these technologies play out and taking time to educate ourselves as regulators.” Peerce clarified that while it is important to enable technology, it is the absence of consistency that is confusing. Different states have different perceptions, or even no perceptions, on these issues, and the Howey test for identifying securities is hard to analyze in these circumstances.

SEC Attorney Valerie Szczepanik said that the agency is always willing to engage with the public. The SEC encourages innovators such as Peerce’s clients to bring counsel and talk about their ideas; the agency can throw down a red flag if they see it. Trackman said that the CFTC has the same policy and has “taken meetings with the smallest of entities, including individuals literally wearing hoodies.” Internally, LabCFTC is like a think tank, but externally, it is a point of contact, he explained. John Ryan, President and CEO of the Conference of State Bank Supervisors, also offered that Pennsylvania Securities Commissioner Robin Wiessmann completed a project of compiling a single point of contact for innovation at every state.

Blockchain technology. Wiessmann moderated the next panel, which focused more heavily on technology and its impact on the securities industry. Isabell Corbett, senior counsel at R3, defined four use cases for blockchain in the industry: (1) anti-money-laundering and know-your-customer requirements; (2) repo clearing; (3) derivatives clearing; and (4) cross-border payments. Together, blockchain can save up to $80 billion across these use cases, she said.

R3’s Corda blockchain platform differs from a proof-of-work system like Bitcoin in that data is not broadcast to the entire system, but rather is provided to those who have a right to see it and a need to see it. This is borne out of the fact that R3 is a consortium of banks, who are legally barred from sharing certain data. Corda, which is open-source, also allows for regulators to pull certain data fields on transactions they have a right to see. Charles De Simone, First Vice President, SIFMA, agreed in the importance of regulators being able to pull data in a usable format, rather than the current model of industry participants pushing massive amounts data as less useful Excel files or flat files.

Fredrik Voss, Vice President of Blockchain Innovation at Nasdaq, opined that blockchain is a foundational technology. Changing the foundational components of capital markets is a long process, but he cited DTCC and central counterparty clearing as examples of how valuable it can be. The most viable commercial opportunity in the near term is on markets that are already structured on a peer-to-peer basis but are using less efficient technology, he added. FINRA’s Haime Workie agreed that improvements will be most dramatic in inefficient markets. But he emphasized that distributed ledger technology is just that, a technology or tool. Where it goes depends on what market participants desire and whether the tool exists to speak to those desires—the tools will not change the desires.

An audience member asked whether it was really improving efficiency in the capital markets to create various blockchains for different purposes and for different firms. Corbett predicted that the market will eventually converge around two to three major blockchains, with interoperability between them. Workie seemed skeptical: regulators want to see a convergence, he said, but market forces work against this in favor of discrete systems. The networking effect will determine what platforms take off. Finally, De Simone said that the core assumption among SIFMA members is that use cases should be allowed on existing regulatory platforms, with modifications to rules as needed. Furthermore, regulators’ role should be limited to activities, markets, and products—not technologies themselves. As use cases and markets evolve, there should be a way to incorporate them into a framework that is technology-agnostic.