On February 6, 2018, J. Christopher Giancarlo, the Chairman of the Commodity Futures Trading Commission (CFTC), provided written testimony to the US Senate Banking Committee that clarified the CFTC’s role in regulating virtual currencies like Bitcoin. In doing so, he recommended a light regulatory touch in dealing with blockchain technology in the early years of its development, drawing parallels to the successful approach taken by Congress and then president, Bill Clinton, regulating the Internet in the early 1990s.
In his written testimony, Giancarlo acknowledged concerns by some that the meteoric rise of Bitcoin was just the latest “bubble”, in a long history of bubbles, with some comparing it to the “Tulip” craze of the 17th century. He also highlighted that bad actors are always quick to piggy-back on technological innovations to perpetrate fraudulent schemes, all of which calls for some regulatory oversight to protect investors and the economic system more broadly.
However, Giancarlo also acknowledged the potential benefits touted by supporters of blockchain technology in creating “a decentralized, rules-based and open consensus mechanism” that could replace the need for central authorities or intermediaries to validate transactions. Such a system, according to the Chairman, could “enhance economic efficiency, mitigate centralized systemic risk, defend against fraudulent activity and improve data quality and governance”. Giancarlo also cited a number of studies that estimated these innovations could allow financial institutions to save as much as $20 billion in infrastructure and operational costs each year, cut trading settlement costs by $16 billion per year, and cut capital requirements by $120 billion.
In the face of such promise, Giancarlo recommended replicating the “enlightened foundational principles” the US government took with the then nascent technology of the Internet in the early 1990s. Specifically, these principles dictated that, “the Internet was to progress through human social interaction; voluntary contractual relations and free markets; and government and regulators were to act in a thoughtful manner not to harm the Internet’s continuing evolution”. Giancarlo advocates taking the same approach with distributed ledger (i.e. blockchain) technology:
“Do no harm” was unquestionably the right approach to the development of the Internet. Similarly, I believe that “do no harm” is the right overarching approach for distributed ledger technology.”
Giancarlo’s testimony should provide some comfort to supporters of virtual currencies and blockchain technology who remain concerned that a clumsy, overly aggressive regulatory approach by governments and centralized authorities will strangle this new technology before it is able to mature into the transformative technology some supporters believe is inevitable.
However, Giancarlo also acknowledged that virtual currencies “likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space.” Giancarlo reiterated the CFTC’s enforcement jurisdiction against fraud and manipulation in virtual currency derivatives markets and in underlying virtual currency spot markets, as well as its enforcement and regulatory jurisdiction over derivatives on virtual currencies traded in the United States, including imposing registration requirements, among other safeguards.
Supporters and detractors of virtual currencies will watch with great interest what approach Congress ultimately adopts with respect to blockchain technology in the years to come.
Read the full written testimony of the CTFC Chairman (PDF).