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  • Keynote Address of Daniel Gorfine, Director of LabCFTC and Chief Innovation Officer before the 33rd Annual FIA Futures & Options Expo, Chicago, IL

    FinTech Innovation: Building a 21st Century Regulator

    October 19, 2017

    Introduction

    Good afternoon everyone and thank you to the FIA for having me here today.

    I am pleased to join so many innovators at this Conference, and applaud the FIA for its forward-looking “Innovators Pavilion” initiative that is focused on highlighting FinTech startups seeking to improve global markets. I am also honored to have the opportunity at the conclusion of my remarks to moderate a panel of global leaders who are all actively working to facilitate innovation in their respective cities and locales.

    Before we turn to our panel, I would like to take some time to outline our thinking at the CFTC regarding FinTech innovation and our recently announced LabCFTC initiative. We are excited to unveil a number of current and forthcoming projects today, and believe that our efforts, combined with those of our domestic and international peers,1 can help to establish a model or blueprint for how to build a 21st century financial regulator.

    The Launch of LabCFTC

    In May of this year Chairman Chris Giancarlo announced the launch of the LabCFTC initiative at the New York Stock Exchange alongside the Partnership Fund for New York City and the New York FinTech Innovation Lab.2 His vision for the effort can best be summarized by paraphrasing his own words – that the CFTC can no longer be an analog regulator in an increasingly digital world. He went on to state that:

      LabCFTC is intended to help us bridge the gap from where we are today to where we need to be -- Twenty-First century regulation for 21st century digital markets. LabCFTC will help the CFTC:

    • cultivate a regulatory culture of forward thinking;
    • become more accessible to emerging technology innovators;
    • discover ways to harness and benefit from FinTech innovation; and
    • become more responsive to our rapidly changing markets.3

    The Chairman’s remarks in announcing the launch of LabCFTC resonated strongly with me, and I am grateful for all of the hard work that my colleagues Brian Trackman and Jorge Herrada, along with former CFTC FinTech Advisor, Jeff Bandman, did in the months leading up to the formal announcement.

    The reason this vision struck a chord in me is that I have spent significant time in my professional career at the nexus of law, policy, financial markets and services, and technology-driven innovation, and have recognized the critical role that regulation plays in facilitating market-enhancing innovation. Given the nature of FinTech innovation, policymakers and regulators can only accomplish these key goals if they have appropriate and modern tools, frameworks, and regulatory approaches to deploy. This reality serves as the predicate for the establishment of LabCFTC.

    What is FinTech and What Makes It Different?

    A threshold question frequently asked is what is FinTech, and how, if at all, is this different today from technology-driven innovation we have seen for decades and certainly since the advent of the ATM or electronic trading platforms?

    FinTech innovation today covers broad swaths of financial activity -- ranging from efforts to disrupt components of retail banking and wealth management to aspects of capital markets, trading, and market infrastructure. On the retail-facing side, Fintech innovations are occurring across platforms involving:

    • Payments;
    • Lending;
    • Crowdfunding;
    • Virtual Currencies;
    • Open Data and Finance Analytics; and
    • Robo-Advisory.

    And on the capital markets side, we are witnessing significant activity involving:

    • Distributed Ledger and Blockchain Technologies;
    • Smart Contracts;
    • Artificial Intelligence and Machine Learning;
    • Predictive Data Analytics;
    • Algorithmic Trading;
    • Cloud Computing;
    • Digital Identity; and
    • RegTech (or technologies that can enhance or improve compliance activities).

    It may seem elementary – but should not be understated – that one critical common thread that runs through all of these areas of innovation is the central role of the internet, which has over time helped to transform aspects of nearly every major industry in our modern economy. Other characteristics that are common across many of these innovations, include:4

      1. The Rapid Pace of Innovation and Adoption. Exponential increases in computing power,5 combined with rapidly decreasing costs, have contributed to the simultaneous increase in the pace and impact of innovation. Powerful, interconnected computers permit rapid iteration, while also driving frictionless popular adoption. For example, whereas a traditional brick-and-mortar enterprise would potentially take decades to scale across geographic regions, a mobile application today can gain hundreds of thousands of users across the world in little time at all.

      2. The Disintermediation of Traditional Functions or Actors. Financial innovations typically seek to transform the operations of traditional intermediaries or bypass them altogether. Whether one considers exchanges, clearinghouses, banks, broker/dealers, or financial and investment advisors, the functions these actors perform or the identity of those performing the functions are likely to evolve over time.

      3. The Industry Convergence Technology Drives. New technologies and the internet reduce the cost of entering new markets, and are accordingly driving increased competition between distinct industry sectors. For example, traditional financial institutions, telecom providers, technology companies, and startups are increasingly competing for the same set of users in the realm of financial markets and services.

    Opportunities and Challenges FinTech Innovation Presents

    There is little doubt that FinTech innovation has the potential to -- and already is -- benefitting the American public. Whether through increased efficiency, lower transaction costs, or improved access, our society stands to improve based on such innovation.

    Indeed in the realm of distributed ledger and blockchain technologies these innovations hold promise in transforming clearing and settlement processes, or improving information capture, delivery, and analytics. Smart (or self-executing) contracts can incorporate compliance provisions and potentially decrease execution risks. The cloud is allowing data to flow seamlessly and at lower cost, which is helping to develop a surrounding ecosystem of innovation and analytics. And in the related realm of machine learning, we see the potential for smart automation and systems to improve outcomes based on data – whether in health, manufacturing, or financial markets.

    These innovations are not without their risks, however. The disintermediation of traditional actors or their functions will strain rules written for a different, analog era. Proper recognition of new actors in markets will necessitate regulatory consideration, though always with the careful balance of not prematurely stemming innovation. New hazards will emerge, whether around data security and cyber security, questions regarding governance and accountability, or risks around new asset classes, including those in the virtual realm.

    Building a 21st Century Regulator

    With this backdrop of innovation, opportunity, and new challenges, what does it mean for a regulator to be fit for purpose? How can we keep pace with change, facilitate market-enhancing innovation, ensure market integrity, and proactively plan for where our markets are heading?

    Our vision is that LabCFTC can help serve as a blueprint for building a 21st century regulator. Chairman Giancarlo housed this initiative within our Office of General Counsel so that LabCFTC can leverage the expertise of our General Counsel, Dan Davis, and his team to help manage the interface between technological innovation, regulatory modernization, and existing rules. The initiative is designed to make the CFTC more accessible to FinTech innovators, and inform the Commission's understanding and incorporation of emerging technologies.

    To achieve its goals, the LabCFTC initiative has three core components:

    First, what we call ‘Guide Point’ is our newly established dedicated point of contact for innovators to meet with the CFTC, learn about our regulatory framework, and obtain feedback. Such feedback may provide innovators with valuable information that could help them save time and resources. Guide Point is also the conduit for innovators to identify potential friction in existing rules that may be addressed by working with our colleagues across our divisions to leverage proper regulatory tools, including no-action relief, Guidance, or rulemakings. Internally, the value proposition beyond facilitating innovation is for us to better understand emerging technologies, as well as proactively consider potential regulatory opportunities, challenges, and risks.

    Second, LabCFTC’s ‘CFTC 2.0’ fosters the understanding, testing, and potential adoption of new technology that can make the Commission a more effective and efficient regulator. While US regulators do not currently appear to have the same authority to engage in certain sandbox or proof of concept trials as do our global counterparts, we will continue to explore all tools that permit us to ‘kick the tires’ and truly understand emerging technologies and systems. We will also strive to support and stimulate innovation through prize competitions that can solve public policy challenges.

    Finally, LabCFTC’s ‘DigitalReg’ is designed to support the Commission’s effort to build a modern regulator. DigitalReg will help the Commission identify and develop regulatory tools, approaches, and culture that promote market-enhancing innovation and satisfy key regulatory objectives. DigitalReg will serve as a CFTC-wide internal resource to help educate staff on Fintech-related developments. DigitalReg will also act as a hub to help the Commission coordinate with other regulatory authorities, and engage with external organizations, including academic institutions and think tanks, in order to share best practices and help drive FinTech related research.

    Executing on the Vision

    Our plan for LabCFTC and transforming into a 21st century regulator is a bold one, but the need is real and the time is ripe. We are excited to share with all of you today some updates on our initiative that highlight what executing on the vision articulated by Chairman Giancarlo in May of this year looks like:

    • Engagement. Since the LabCFTC initiative was launched, we have already held multiple office hour sessions with innovators in New York City and Washington, D.C., and will be doing so this week in Chicago. We look forward to visiting Silicon Valley, Austin, and Boston in the coming months. In total, we have met with over 100 entities ranging from startup to established financial institution to leading technology companies. This form of engagement is our bread-and-butter, and the mechanism that provides us with the knowledge, questions, and insights that drive our broader work. We will be sharing some of our aggregated learnings through regular publications, including an annual white paper.
    • LabCFTC Primers. Underscoring this approach, we are pleased to announce that this week we released our first “LabCFTC Primer” on the topic of virtual currencies. The primer seeks to: (1) provide a brief overview of virtual currencies; (2) explain the CFTC’s role in overseeing this space; and (3) educate the public on potential risks. It is our belief that publications like this one can educate the public, add clarity to the market, and provide a high-level roadmap regarding our current thinking.
    • Prize Competitions. Next, in-line with our mission of fostering market-enhancing innovation, I am very pleased to share that in the coming months we will be seeking public feedback regarding a series of innovation prize competitions we intend to begin in 2018 under the Science Prize Competition Act.6 These competitions will afford us the ability to spur innovation that can solve public policy challenges and enhance our markets. Such competitions may involve, for example, novel ways to use or share data, make our rules machine readable (i.e., developing a “robo rulebook”), or build a more dynamic, digital, and “smart” notice-and-comment platform.
    • Regulator Collaboration. Next, we see significant opportunity to formalize our collaboration efforts with international and domestic regulators who are similarly focused on facilitating market-enhancing innovation. These relationships may foster information-sharing on market trends and developments, permit “warm handoffs” of innovators, and facilitate learnings from regulatory sandbox and proof of concept activities.
    • Advisory Committee. Finally, we are excited to have the work of LabCFTC augmented by the recently reconstituted Technology Advisory Committee (TAC) under the sponsorship of Commissioner Brian Quintenz.7 I am honored to have been named the Designated Federal Officer for the TAC. The TAC will be comprised of industry leaders and subject matter experts who will make recommendations to the CFTC regarding technological innovations and advances.

    I again want to thank all of you for joining us today, and am now looking forward to sitting down for a deeper discussion with leaders from around the world to discuss how innovation can be fostered at the local level. These are important and exciting times for our markets, and we look forward to continuing to share with you our evolution as we strive to keep pace.

    Thank you.

    1 See generally U.S. Office of the Comptroller of the Currency, OCC Issues Responsible Innovation Framework (Oct. 2016), available at https://www.occ.gov/news-issuances/news-releases/2016/nr-occ-2016-135.html; U.S. Consumer Financial Protection Bureau, CFPB Launches Project Catalyst to Spur Consumer-Friendly Innovation (Nov. 14, 2012); U.K. Financial Conduct Authority, Innovation Hub now open for business, says FCA (Oct. 2014), available at https://www.fca.org.uk/news/press-releases/innovation-hub-now-open-business-says-fca.

    2 Address of J. Christopher Giancarlo to the New York FinTech Innovation Lab, “LabCFTC: Engaging Innovators in Digital Financial Markets,” May 17, 2017.

    3 Ibid.

    4 Substantial portions of the below are derived from the following publication – Chris Brummer and Daniel Gorfine, FinTech: Building a 21st-Century Regulator’s Toolkit, Milken Institute (Oct. 21, 2014), available at http://www.milkeninstitute.org/publications/view/665.

    5 See Harald Bauer, Jan Veira, and Florian Weig, Moore’s Law: Repeal or Renewal?, McKinsey & Company (December 2013), available at

    http://www.mckinsey.com/insights/high_tech_telecoms_internet/moores_law_repeal_or_renewal.

    6 15 U.S.C. § 3719.

    7 Press Release, U.S. Comm. Fut. Trading Comm’n, Commissioner Quintenz Named Sponsor of the Technology Advisory Committee (Sept. 18, 2017), available at http://dc2kt11.cftc.gov:8080/PressRoom/PressReleases/pr7611-17.

    Last Updated: October 23, 2017