By Lene Powell, J.D.
In a CNBC interview and opinion piece in Fortune magazine, CFTC Chairman Heath Tarbert made the case that the U.S. must remain a leader in fintech in order to ensure U.S. prosperity. Noting the recent example that the Libra Association chose to set up in Switzerland instead of the U.S., Tarbert said that principles-based regulation is the best way for U.S. regulators to mitigate risks yet facilitate critical innovation and maintain a leadership role.
"I think whoever ends up leading in this technology will end up writing the rules of the road for the rest of the world, and my emphasis is on making sure that the United States is a leader," said Tarbert.
Tarbert has made similar statements in the past. The Chairman has also previously stated that if the United States does not lead on this front, someone else will.
"Digital assets" not "cryptocurrency." On a terminology note, Tarbert says he never uses the term "cryptocurrency" and instead uses the term "digital assets." Bitcoin and other digital assets are not legal tender, they are not money, and they are not currency, he said. The CFTC has recognized such assets as commodities, and futures markets are currently trading Bitcoin futures, but that does not make it a "currency."
This marks something of a departure from current CFTC terminology, which has extensively referred to "virtual currency" and "cryptocurrency" in consumer advisories and brochures as well as a primer, backgrounder, and guidance.
U.S. needs to lead. According to Tarbert, ensuring that America remains a global fintech leader will be essential to our future prosperity. CNBC commentator Andrew Ross Sorkin observed that if any digital assets reached "escape velocity," it could upend the idea of a monopoly that the U.S. or any government has on currency. For example, said Sorkin, if Libra were to truly take off, billions of people would start operating with it virtually overnight.
So where does the U.S. stand in the ranking? In Tarbert’s view, the U.S. is not at the top, but probably not at the bottom. He noted that the Libra Association chose to set up in Switzerland, and his understanding was that Singapore would have been the second choice. As to what would accelerate the adoption of digital assets, Tarbert said a key development would be if countries started accepting them as legal tender, for example to pay taxes. He said we haven’t seen that yet in the U.S. and we are "far from that at this stage," but we are starting to see that in other countries.
On the question of whether there are "different forces fighting each other" in the U.S. government over cryptocurrencies, and whether Treasury Secretary Steven Mnuchin and President Trump have misgivings, Tarbert responded that he didn’t think there was any space between Mnuchin and himself. He does share concerns about anti-money-laundering, terrorist financing, and financial stability. But for commodities that are regulated by the CFTC, the agency wants to create an environment where these markets have integrity, the CFTC can regulate them, and they are able to innovate.
Tarbert stressed that fintech potential lies not only in digital assets, but also in the blockchain technology underlying it. Currently, it is being used primarily for digital assets. Ultimately, however, he could see it overtaking the internet, or being used in parallel to the internet, and powering other types of transactions besides financial.
Principles-based regulation. In the Fortune opinion piece, Tarbert urged that a principles-based approach is the best way to govern these emerging markets. Avoiding detailed, prescriptive rules and relying more on high-level, broadly-stated principles to set standards for regulated firms and products allows for flexibility and enables the CFTC to stay ahead of technology developments. It also allows for innovation, letting companies be responsible for finding the most efficient way of satisfying standards.
So what does principles-based regulation look like? Tarbert gave the example that the CFTC does not have formulaic rules for derivatives clearinghouse operational systems but rather outlines core principles that derivatives clearinghouses must follow in mitigating potential risk. According to Tarbert, this has allowed each of the three clearinghouses currently handling digital assets to adopt a different method of facilitating Bitcoin transfers and addressing the risk of loss. In working with CFTC front-line staff to comply with the CTFC’s core principles governing operational risk and the allocation of losses, the clearinghouses were able to determine which specific arrangements are commercially viable, yet the arrangement ensured that systems developed under sound regulation.
Adjusting the framing somewhat from comments by former Chairman J. Christopher Giancarlo that advocated a "do no harm" and "light touch" regulatory model, Tarbert emphasized strongly that principles-based regulation is not the same as "light touch" regulation. Tarbert noted that the CFTC has brought more than a dozen enforcement actions in this area against scammers and entities offering unauthorized derivatives. The CFTC has also recently brought actions for violations of its core principle obligations, he said.
Given the fast-evolving technology and product offerings in this space, favoring a principles-based approach over prescriptive rules does allow for greater flexibility. But laying out fewer specifics in detailed rules can also mean fewer safe harbors, more uncertainty, inadvertent violations, or even complaints of "rulemaking by enforcement." Nevertheless, the CFTC has repeatedly stressed that "the door is open" to market participants to meet with staff, particularly through the LabCFTC program, which was recently elevated to an independent office reporting directly to the Chairman. The CFTC has certainly set the stage for a lively conversation and potential leadership role in this area.