Monday, October 08, 2018

CFTC’s inaugural FinTech Forward Conference explores rapid technological advancements and regulatory challenges

By Brad Rosen, J.D.

Technology innovators, market participants, thought-leaders from industry and academia, as well as representatives from various regulatory agencies convened in Washington, D.C., at the first-ever CFTC FinTech Forward Conference 2018. Over two days, attendees examined a wide range of fintech developments impacting markets, including crypto assets, machine learning, cloud technologies, regtech and other emerging financial technologies. The conference was organized by the CFTC’s LabCFTC unit in conjunction with the agency’s Office of Customer Education and Outreach.

In prepared remarks, CFTC Chairman J. Christopher Giancarlo stated, “Emerging financial technologies are taking us into a new chapter of economic history. They impact trading, markets, and the entire financial landscape with far ranging implications for capital formation and risk transfer,” he continued, “By bringing together the best minds from industry and many of the agencies that regulate financial markets, products, and technologies, we also hope to facilitate a number of introductions and ongoing dialogs.”

The content-rich conference featured numerous panel discussions, keynote speeches, and a fireside chat. A summary of a few resulting insights and observations follow:

Tokenization: Exploring “the Other Side of the Coin.” Aaron Wright, Associate Clinical Professor of Law at Cardozo Law School expressed optimism regarding continued growth in the tokenization of assets at the conference’s second panel. He noted this trend will likely include native digital assets like Bitcoin, but will also extend to intellectual property rights, interests in real property, as well as the digitization of securities.

Wright noted tokenization will lead to more liquidity, greater ease in transferring assets on a global basis, and a flowering of business opportunities and emerging activities. However, Wright recognized that in a digital world an asset which is properly described as a commodity might also appear to be security. He cautioned, “This creates a landmine from an entrepreneur’s perspective. Lawyer’s cannot even provide opinions.” He noted this makes for a very difficult regulatory environment in which to conduct business.

Scams, fraud, and education in a technology-driven world. Joe Rotunda, director of Texas State Securities Board’s Enforcement Division, noted that state securities administrators have been floored by what they are seeing in the cryptocurrency space during the conference’s third panel. Rotunda indicated that 40 jurisdictions were involved in the latest North American Securities Administrators Association (NASAA) cryptocurrency sweep. That initiative resulted in 200 investigations and 45 enforcement actions.

Rotunda noted that fraudulent businesses are going to great lengths to look like established and legitimate enterprises. They are using slick video, stock photos, fake testimonials and other high-end tools to perpetuate their scams according to Rotunda. He also indicated these fraudsters are expert at using high pressure sales tactics associated with the boiler rooms of penny stock promoters. He added their victims come from every demographic—from young people in their twenties just starting out, to retirees and the elderly living on fixed incomes.

21st century regulatory approaches and frameworks. Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation at the SEC, observed that regulators need to be increasingly proactive, not just reactive during the conference’s fifth panel. She also remarked that the younger generation is very comfortable regarding technology which explains, in part, its ready acceptance of peer to peer financing, robo-advising, and crowdfunding.

Szczepanik also noted that her move from the SEC’s division of enforcement to its corporate finance section reflects the agency’s interest in engaging with industry with respect to technological innovation. She sees the SEC as often playing a lifeguard role. We’ll let market participants know when they are heading to danger. Szczepanik also suggested that the agency will be providing innovators with further guidance in form of interpretive and no-action relief in the near future with regard to crypto-assets.

A fireside chat. Commissioner Rostin Behnam explored the bigger meaning of blockchain and virtual assets in a fireside chat with Kabir Kumar, Director of Policy and Ecosystem Building at Omidyar. The two discussed the larger benefits society might reap from digital ledger technologies. Behnam, echoing some of his comments made at the United Nations in June, pointed to specific blockchain use cases which promote food purity and the sourcing and tracking of various agricultural commodities. Behnam also pointed to the positive contributions blockchain technology could make with regard to improving health care, as well as financial inclusion in development countries.

Behnam also pointed noted that the involvement and interest of large companies like IBM in blockchain technology, and the importance of institutional involvement in this burgeoning space. Behnam concluded by articulating a common theme expressed by many of the regulators at the conference—“Policymakers must assure that things happening within bounds, but at the same time, we must give innovators room to experiment.”