The U.S. Commodity Futures Trading Commission (CFTC) is considering Blockchain technology according to a recent report by Nik Mathews and Jonas Robison from Orrick, Herrington & Sutcliffe LLP in JD Supra Services online.
The CFTC has begun to consider the implications of DLT with respect to the derivatives markets. For example, a meeting of the CFTC Technology Advisory Committee (the “TAC”) on February 23, 2016 featured a panel presentation, titled “Blockchain and the Potential Application of Distributed Ledger Technology to the Derivatives Markets.” In addition, CFTC Commissioner J. Christopher Giancarlo has recently given numerous speeches on the topic to various groups, including Markit Group and the Depository Trust & Clearing Corporation. An overview of DLT is provided below, followed by a summary of certain points, including legal considerations, from the TAC meeting and CFTC Commissioner J. Christopher “Chris” Giancarlo’s speeches.
A recent TAC meeting featured panelists from clearinghouses, providers of trade processing services and others and the panel presentations and subsequent discussion including the CFTC Commissioners covered several topics including among others, possible applications of Blockchain technology to derivatives, the appropriate point(s) of the derivatives post-trade lifecycle that should involve Distributed Ledger Technology (DLT), and certain legal issues that could be implicated by the application of Blockchain technology to derivatives.
In contrast to current labor-intensive reconciliation systems, the use of a distributed ledger in the post-trade lifecycle of a derivatives transaction is expected to: (i) create substantial operations efficiencies through automation; (ii) reduce the time interval between trade and initial settlement; (iii) release capital; and (iv) reduce bilateral counterparty risk.
DLT may allow dealers and other market participants to create smart contracts for derivatives that automate tasks and functions traditionally performed by back-office, middle-office, collateral management, and other personnel. Derivatives contracts are essentially legal agreements with “algorithms” (i.e., logical instructions that can form the basis of computer code) described in legal language.
Certain distributed ledgers currently in development would allow participants to develop and enter into derivatives smart contracts. Such “programmable” distributed ledgers could publish and record not only trade and settlement records but also the terms and “output” of a smart contract, such as contract valuation, settlement of variation margin payments, calculation of initial margin, custody of initial margin, novation and netting, and management of closeout in connection with a counterparty default.
Over the past two years, Commissioner Giancarlo has given numerous speeches focused on DLT and in his most recent speech on the topic, he stated that DLT:
“…could be the biggest technological innovation in the financial services industry and financial market regulation in a generation or more.”
Giancarlo elaborated that distributed ledgers have the potential to:
- (i) reduce some of the dependence on a trusted-third party;
- (ii) mitigate centralized systematic risk;
- (iii) defend against fraudulent activity; and
- (iv) improve data quality and governance.
He also stated his expectation that DLT will develop hand-in-hand with “smart” 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 a counterparty default. In addition, he noted that DLT could enable market participants to significantly reduce their enormous infrastructure, operational, and settlement costs.
Commissioner Giancarlo also addressed the regulatory implications of DLT. Specifically, he stated that DLT could mitigate the operational, transactional, and capital complexities that U.S. and non-U.S. regulators impose on market participants. He also pointed out that DLT, by providing a real-time distributed ledger, possibly coupled with “modern cognitive computing capabilities,” could have helped financial regulators recognize anomalies in market-wide trading activity and diverging market exposures and allowed a “far prompter, better-informed, and more calibrated regulatory intervention” during the 2008 financial crisis.
Finally, the Commissioner advocated that the CFTC and other regulators take a “do no harm” approach to DLT. In particular, he outlined five practical steps that regulators should take to encourage DLT innovation:
- designate technology savvy teams to collaborate with companies to address how existing regulatory frameworks apply to products and services derived from DLT and other innovative technologies;
- foster a regulatory environment that allows companies, working collaboratively with regulators, to develop and test innovative solutions without fear of enforcement actions and regulatory fines;
- participate directly in financial technology proofs of concept to advance regulatory understanding;
- work closely with innovative financial technology companies to determine how rules and regulations should apply to “21st Century” technologies and business models; and
- provide a dedicated team to help companies navigate through the various state, federal, and foreign regulatory regimes across jurisdictions.
Read more here.
- WAX Partners with Xsolla to Offer Its Platform to More Than 2,000 Video Games - November 20, 2017
- Pundi X integrates NEM blockchain to Bring Cryptocurrency Payments Into Retail Stores - November 20, 2017
- Fujitsu Develops Security Technology to Safely Connect Blockchains - November 20, 2017
- Jibrel Network Announces a Highly Successful Pre-sale Round - November 20, 2017
- KRAFTWERK on Blockchain - November 20, 2017
- MintHealth: Empowering Patients to Take Control of their Health and Data via Blockchain Technology - November 20, 2017
- IBM Completes PoC Of Blockchain-based Shared KYC With Deutsche Bank, HSBC, MUFG And Cargill, IBM Treasuries - November 20, 2017
- LetsEnhance.io to process images on Neuromation Platform - November 20, 2017
- Blockchain And AI Researchers Propose A New Model To Return The Control Over Human Life Data To The Patients And Accelerate Biomedical Research - November 20, 2017
- Storiqa Makes Cryptocurrency Closer To The World – Usual E-shop With A Few Peculiarities For Unusual Currency - November 17, 2017
- American Express Cuts Deal with Ripplenet – Giving Visibility and Speed to Global Commercial Payments - November 16, 2017
- CapLinked Named One of 20 Most Promising Collaboration Technology Providers By CIO - November 16, 2017
- Global Blockchain Technologies Corp. Announces $20M Fund to Invest in Steem SMTs - November 16, 2017
- Augmate Announces First IoT Device Management Platform Using Distributed Ledgers - November 16, 2017
- BitDegree Teams up with Zcoin to Develop Cryptography Course - November 16, 2017
- With Backing from the Biggest Poker Names, CoinPoker Launches Pre-ICO - November 15, 2017
- Jeff Garzik – Metronome GitHub is now public - November 14, 2017
- Livestreaming Pioneer YouNow Doubles Down on Decentralization with Storj Labs Partnership - November 14, 2017
- OriginTrail – Winner of Walmart 2017 Food Safety Innovation Award Announces Presale - November 14, 2017
- Revain Announces Release Of The First Test Version Of The Platform - November 13, 2017
- PikcioChain Receives Huge Pre-ICO Boost by Winning a Place on BNP Paribas’ Fintech Accelerator - November 13, 2017
- Fluree PBC Launches FlureeDB — Scalable, Blockchain Cloud Database - November 13, 2017
- CoinTracking – The Personal Portfolio Monitoring Tool and Tax Tracker for Digital Currencies - November 13, 2017
- OTC Exchange Network Announces that DMALINK has Joined their Early Adopter Program OTC Exchange Network Announces that DMALINK has Joined their Early Adopter Program - November 13, 2017
- Leondrino Exchange, Issuer of Digital Branded Currencies, Announces Its Own Digital Currency XLEOLeondrino Exchange, Issuer of Digital Branded Currencies, Announces Its Own Digital Currency XLEO - November 13, 2017
- Blockchain Executive and Cryptocurrency Investor David Drake joins eSport and Gaming platform Play2Live Advisory Board - November 13, 2017
- UHUB.IO Seeks to Bring Their Decentralized E-commerce Platform to Life - November 13, 2017
- Eidoo Hits 100,000 Downloads As Cryptocurrency Customers Seek A Simpler Way To Store And Use Their Assets - November 13, 2017
- Ethereum Goes to Hollywood – Award-Winning Crypto Film Project Premieres in Hollywood - November 13, 2017
- Santa Claus Is Moving To Blockchain! Bye, Bye Chimney! - November 13, 2017
- Safinus Platform Wants to Unite Investors and Traders in One Place - November 13, 2017
- Exscudo Uses Multisignature Technology To Protect User Accounts - November 13, 2017
- Lykke To Support ERC20 Tokens In Latest Lykke Wallet Release - November 13, 2017
- Can Blockchain Revolutionise The Third Sector? Introducing The World’s First Recycling Intiative - November 13, 2017
- JBOX Announces Initial Coin Offering for Blockchain-Powered Decentralized Video Platform - November 13, 2017
- Perkins Coie Selected as a Founding Steward in Self-Sovereign Identity Network - November 13, 2017
- Waves Claims it Will Become the Fastest Blockchain Platform in the World - November 13, 2017
- Binary.com Announces ICO - November 13, 2017
- Finova Financial Announces The JOBS Crypto Offering (JCO): A Path To A Regulated Public Securities Offering for Non-Accredited Investors Using Cryptocurrency - November 13, 2017
- Dash Transactions Now 215 Times Cheaper Than Bitcoin After New Network Upgrade - November 13, 2017
- Tech Bureau’s mijin Opens Applications for Powerful New Enterprise Blockchain - November 13, 2017
- Human Discovery Platform Launches Token Sale to Build the Largest Storage of Human Behavior Powered by Blockchain - November 13, 2017
- CarFix Will Repair Your Vehicle For A Fraction Of The Price, With Help From The Ethereum Blockchain - November 13, 2017
- Neufund, Receives 10M Euro In Funding To Create ‘Equity Token’ - November 13, 2017
- Beenest Begins Decentralized Future For Short-term Housing Rentals - November 13, 2017
- CanYa Wants to Eliminate Crypto Volatility within Online Gig Economy Marketplace - November 13, 2017
- Allianz Pioneers Blockchain Prototype for the Captive Insurance Market - November 13, 2017
- Third Generation Cryptocurrency SkyCoin Aims to Shake up the Market - November 7, 2017
- DAO PlayMarket 2.0 – a New Era of Mobile Applications - November 7, 2017
- The International Scientific and Practical Association Jus Naturale – The first NGO with Blockchain-Based Membership - November 7, 2017