The Commissioner of the US Commodity Futures Trading Commission (CFTC), J. Christopher Giancarlo, this week gave a lecture at the Harvard Law School as part of the Fidelity Guest Lecture Series on International Finance
Giancarlo spoke about the rise of cyber threats in the 21st century and the development of technologies that will disrupt contemporary financial markets, namely automated electronic trading, financial cartography, and “blockchain ledger methodology.”
The Commissioner noted how the underpinnings of the current “closed ledger” financial system are inefficient and unstable. The fact that centralized third parties authenticate financial information in three-day settlement timeframes add risk, cost and volatility to the marketplace. He indicated that the 2008 financial crisis demonstrated that the archaic record keeping of the multi-trillion dollar swaps market, where handwritten tickets were faxed nightly to the back offices of market counterparties, was wholly inadequate.
Giancarlo explained how blockchain technology could totally change the global financial system:
Distributed open ledgers have the potential to revolutionize modern financial ecosystems. Unlike current settlement processes, distributed ledgers use open, decentralized, consensus-based authentication protocols. They allow people “who have no particular confidence in each other [to] collaborate without having to go through a neutral central authority.Distributed ledgers will have enormous implications for financial markets in payments, banking, securities settlement, title recording, cyber security and the process of collateral management that is made infinitely more complex by new regulations. Open ledgers may make possible new “smart” securities and derivatives that can value themselves in real time, automatically calculate and perform margin payments and even terminate themselves in the event of a counterparty default.
He highlighted how a great deal of investment was going into developing blockchain technology for financial markets, how it will disrupt human capital but also reduce enormous costs from financial laws and regulations.
Enormous resources are being invested in developing the distributed open ledger known as the blockchain. Over two dozen major global banks have joined together in a consortium to build a framework for using blockchain technology in markets. The London Stock Exchange, CME Group, Euroclear, Societe Generale and UBS have set up the Post Trade Distributed Ledger Working Group to look into how blockchain technology can be used in clearing, settlement and reporting of trades.30
The Bank of England has called the blockchain the “first attempt at an ‘internet of finance’” with the potential to de-centralize legal recordkeeping the same way the Internet de-centralized data and information. This transformation will not come without consequences, however, including a greatly disruptive impact on the human capital that supports the recordkeeping of contemporary financial markets. On the other hand, the blockchain will help reduce some of the enormous cost of the increased financial system infrastructure required by new laws and regulations, including Dodd-Frank.
Giancarlo’s speech is noteworthy as the CFTC stated early this year that it has jurisdiction over bitcoin and other digital currencies as it considers them commodities covered by the US Commodity Exchange Act (CEA). The CFTC made this assertion when it took action against a bitcoin options trading platform in September 2015.