In his keynote address before the Cato Institute’s conference, “Cryptocurrency: The Policy Challenges of a Decentralized Revolution”, held on April 12, 2016, CFTC Commissioner J. Christopher Giancarlo highlighted the potential benefits of harnessing blockchain technology for a variety of financial and commercial activities – from purchasing hockey tickets and magazine subscriptions to voting corporate proxies, title recordation, and securities settlement.  Going further, he suggested that financial industry regulators may themselves be among the primary beneficiaries of such a technological revolution.

In so doing, the Commissioner implicitly framed a contrast with the SEC and its Chair, Mary Jo White, which have approached the developments in blockchain technology and their potential application to financial markets with thoughtful, but more tentative, attention.  The CFTC, on the other hand, having asserted jurisdiction over Bitcoin as a commodity, continues to lead the way among U.S. regulators grappling with novel technologies, both from an enforcement and a regulatory angle.

Referring to blockchain technology as an “emerging distributed ledger technology” or “DLT”, Commissioner Giancarlo raised the possibility of “new ‘smart’ securities and derivatives that can value themselves in real-time, report themselves to data repositories, automatically calculate and perform margin payments and even terminate themselves in the event of counterparty default.”  The Commissioner recalled both the upheaval of the 2008 financial crisis and the U.S. Government Accountability Office’s recent report that found that U.S. regulation of financial markets has not meaningfully improved in the years since that crisis to conclude that the benefits of DLT are potentially “enormous for both financial services firms and the regulators who oversee them.”

In this context, the Commissioner applauded the recent successful test organized by the Depository Trust & Clearing Corporation of a blockchain-based method for recording a month’s worth of trades in the single-name CDS market. This test of the potential application of a blockchain to a multi-trillion dollar industry brought together Bank of America, Credit Suisse, J.P. Morgan, Citigroup, and Markit, working alongside Axoni. The Commissioner also pointed to initiatives by DTCC to evaluate ways that repos – the short-term lending arrangements widely used between securities markets participants, including banks and hedge funds  – could be efficiently settled using blockchains.

Commissioner Giancarlo’s comments echoed the ideas that he presented at the Depository Trust & Clearing Corporation 2016 Blockchain Symposium earlier this year, in which he likened the potentially revolutionary impact of blockchain technology to that of the Internet, and advocated for a “do no harm” approach to blockchain technology similar to that adopted with respect to the Internet by the Clinton administration and the Republican-led Congress at the end of the last millennium.  While in his remarks at the Cato Institute, the Commissioner observed that some predict that streamlining certain elements of recording and processing financial transactions could eliminate up to 2 million jobs, in his previous presentation he emphasized that blockchains could ultimately have an impact similar to that of the Internet, which, freed to expand and evolve rapidly by the hands-off approach adopted by legislators, “created millions of jobs, transformed our economy forever and improved standards of living across the globe.”

The Commissioner prefaced his remarks with a standard disclaimer that they represent only his views, and not the views of the CFTC.  And he was realistic in presenting the current state of regulation with respect to the use of blockchains in financial markets – “Rules regarding DLT are currently unwritten and likely years away, leaving the industry with little clarity.”  But he offers a voice and direction for regulators, both in the United States and around the world, who want to help propel regulation to keep pace with this rapidly developing technology.