Address of CFTC Acting Chairman J. Christopher Giancarlo before the New York Fintech Innovation Lab
“LabCFTC: Engaging Innovators in Digital Financial Markets”
May 17, 2017
As Prepared for Delivery
Good afternoon ladies and gentlemen. Thank you for your kind welcome.
My thanks for that warm introduction and for hosting today’s program. I am grateful to Tom Farley and the New York Stock Exchange for giving the CFTC the honor of ringing this afternoon’s closing bell. I thank Jeff Sprecher and Kelly Loeffler for extending the invitation.
My thanks go also to my colleagues at the CFTC for their public service and for representing the agency in this afternoon’s ceremony. I thank my fellow commissioner Sharon Bowen for leading the bell ringing. Much more importantly, I thank her for gracing the Commission with thoughtfulness and intelligence in trading market policy and oversight. I am personally grateful for her support of today’s initiative. Our work together is an example of how Federal officials can serve the American people productively and without destructive partisanship.
I'd like to thank the Partnership Fund for New York City and Maria Gotsch for inviting me to keynote tonight’s annual reception for the New York Fintech Innovation Lab. The Partnership Fund has provided thoughtful leadership on the growth and diversification of the New York City economy, especially in fintech.
I also must thank Accenture and Bob Gach for sponsoring tonight's event and their continuing support for financial technology development and application here in New York.
Finally, I want to recognize and thank the New York Fintech Innovation Lab. This organization’s success in fostering development of fintech innovation and mentoring new leaders shows the strength of public-private partnerships. Your work is a testament to the power of active collaboration. It is also a reminder that America’s main trading centers and innovation hubs are found amongst the businesses where entrepreneurs are hard at work making ideas come to life, not confined to Washington D.C.
21st Century Digital Transformation of Trading Markets
Last September, I spoke to the American Enterprise Institute1 about the ongoing transformation of the world’s trading markets from analog to digital, from human to algorithmic trading and from stand-alone centers to seamless trading webs. I described how market regulation by the CFTC, particularly, and other agencies, generally, has not kept pace with this transformation. I said that it curtails the agency’s effectiveness in overseeing the safety and soundness of contemporary markets. I outlined a forward-looking agenda to keep pace with technological innovation in support of America’s vital national interest in maintaining the world’s deepest, most durable and most vibrant capital and risk transfer markets in the algorithmic, digital world of the 21st century.
Tonight, I will announce an important step forward in that agenda.
In that same AEI speech, I also told the story of a Texas farmer harvesting a field of wheat in the pitch black of night using GPS satellite navigation, vehicle telemetry and aerial drone technology. Farming, an occupation almost as old as mankind, always a daylight endeavor – has now become a round the clock activity, thanks to contemporary digital technology.
The Digitization of Financial Markets
So much of our world today – from information to music to manufacturing to transportation to commerce2 and, now farming, has undergone a digital transformation.3 And, it should be no surprise to anyone in this audience that our capital, commodity and futures markets are going through the same digital transformation. The electronification of markets over the past 30 to 40 years and the advent of exponential growth in digital technologies have altered trading, markets and the entire financial landscape with far ranging implications for capital formation and risk transfer.
Automated trading now constitutes up to 70 percent of regulated futures markets.4 Similarly, automated trading now makes up approximately 80 percent of cash equities markets and 70 percent of foreign exchange spot markets.5 It will continue to dominate trading with new and innovative developments far into the future.6
Other breaking digital innovations present equal regulatory challenges. They include “big data” capability to enable more sophisticated data analysis and interpretation,7 artificial intelligence to guide highly dynamic trade execution,8 “smart” contracts that value themselves and calculate payments in real-time,9 behavioral biometrics that can detect and combat online fraud,10 and distributed ledger technology, more commonly known as blockchain,11 that will challenge orthodoxies that are foundational to today’s financial market infrastructure.12
The pace of investment in these technologies, and in fintech more broadly, has accelerated in recent years. According to one measure, it has increased at a cumulative annual growth rate of over 45% from 2011 to 2016.13 We are seeing a powerful convergence, as the costs of launching new ventures applying these technologies have dropped enormously, while the speed and scalability with which they can be brought to market have increased dramatically.
The world is changing. Our parents’ financial markets are gone. The 21st century digital transformation is well underway. The digital technology genie won’t go back in the bottle. Nor should it.
Yet, despite these 21st century innovations, the CFTC remains stuck in a 20th century time warp. Most of the CFTC’s rulebook for listed futures was written for 20th century analog markets, in which trading pits in Kansas City, Minneapolis, New York and Chicago conducted open outcry trading with colorful shouting and distinctive hand signals. Today, those trading pits are dormant, largely supplanted with electronic trade execution by remote software algorithms and, increasingly, artificial intelligence. Yet, CFTC oversight is still founded on recognition of such occupations as “floor traders” and “floor brokers.” The CFTC remains an analog regulator of rapidly digitizing global markets.
A few weeks ago, President Trump issued an Executive Order establishing an American Technology Council14. The President said: “It is the policy of the United States to promote the secure, efficient, and economical use of information technology to achieve its missions. Americans deserve better digital services from their Government. To effectuate this policy, the Federal Government must transform and modernize its information technology and how it uses and delivers digital services.”15
I am also encouraged by the work of the bi-partisan Congressional Fintech and Payments Caucus (CFTPC) chaired by Representatives Sinema, Scott, McHenry, and Hultgren. Also Representatives Schweikert and Polis as well as others including OMB Director and former Congressman Mulvaney have shown great interest with their involvement with the Blockchain Caucus. I would like to acknowledge their thoughtfulness and support for fintech – indeed, LabCFTC draws inspiration from their efforts.
Catching Up to the 21st Century: “LabCFTC”
The first step in that transformation is for the CFTC and other U.S. market regulators to embrace innovation by direct engagement with innovators.
And that brings me to tonight’s announcement: the launch of the CFTC Fintech initiative. The launch of what we have titled: “LabCFTC”.
LabCFTC will be the focal point of CFTC fintech policy consideration and development. It will be the hub for our engagement with fintech innovators and the community in which they thrive. It supports President Trump’s call to transform the Federal Government into a modern, digital service provider.
The purpose of LabCFTC is twofold: The first is to provide greater regulatory certainly that encourages market-enhancing fintech innovation to improve the quality, resiliency, and competitiveness of our markets. The second is to identify and utilize emerging technologies that can enable the CFTC to carry out its mission more effectively and efficiently in the new digital world.
Simply put, 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.
Formal Launch of LabCFTC “GuidePoint”
LabCFTC includes two core components. The first is meant to help innovators engage with the CFTC. The second will guide the agency in engaging with them.
We call the first component: GuidePoint.
Guidepoint provides a direct point of contact for fintech innovators to engage with the CFTC, learn about the CFTC’s regulatory framework and obtain feedback on the implementation of innovative technology ideas for the market. GuidePoint is a tool for innovators to efficiently communicate with the CFTC to seek specific regulatory guidance about proposed applications of new technologies.16
Now, to be clear, we are not going to tell someone whether their business plan is a billion dollar idea, or even a good idea; others are far better positioned to do that. Nor will GuidePoint provide legal advice. That is not our job as regulators. We are not a substitute for good legal counsel. But, what we hope to offer is timely, meaningful and useful feedback on the regulatory context of proposed fintech innovations. This feedback may include information that, particularly at an early stage, could help innovators save time and money by helping them understand relevant regulations and the CFTC’s approach to oversight.
Since the purpose of GuidePoint is to assist innovators in their engagement with the CFTC, we have sought to make the process easy. Innovators may contact the LabCFTC Team via a link on the dedicated LabCFTC area of the CFTC website or via email.
I am pleased to announce that GuidePoint is officially open for business today. Its webpage is live on the CFTC website. It will soon have a dedicated office suite at CFTC’s offices at 140 Broadway here in lower Manhattan, where one can schedule a visit and interact with the LabCFTC team. We also hope to conduct additional outreach in Chicago, Silicon Valley and in other U.S. tech centers. We intend to engage with fintech businesses and entrepreneurs in places where they are innovating rather make them travel to Washington DC.
We anticipate a wide range of inquiries, from requests for basic information to requests that pose more challenging or novel issues and require greater analysis. In each case, a member of our LabCFTC Team will act as a “case officer,” a single point of contact, drawing on resources and coordinating with expertise across the CFTC.
Through GuidePoint, innovators may receive feedback on:
- existing law, CFTC regulation and policy;
- the application of the CFTC regulatory framework to a proposed innovation – a new business model or service, for example;
- publicly available information about current proposals and initiatives by CFTC;
- information about CFTC organization, processes, and points of contact; and
updates on the status of an inquiry and review process.
In some cases we anticipate that innovation may present situations that fall within the spirit, but not the letter, of our rules. GuidePoint will thus be a program that helps us detect “analog rules lost in a digital world”. These may require us to consider offering proportional or flexible relief, using regulatory tools already available to the Commission and its staff.
To be clear, LabCFTC itself will not have independent authority or decision-making power. GuidePoint can help innovators navigate the process to present requests for regulatory action, including no-action letters, interpretations or guidance, to appropriate CFTC staff for review. And where an inquiry we receive is “out of scope,” for example, involving an area that is overseen by a different regulator, we will try to point them in the right direction.
The objective of GuidePoint is simple: help fintech innovators engage with the CFTC and receive timely and meaningful feedback.17
Introducing “CFTC 2.0”
The other core component of this initiative is called “CFTC 2.0.” This effort conveys the CFTC’s goal to deploy emerging technology to keep pace with the markets we oversee and transform our agency into a 21st century digital regulator. CFTC 2.0 is designed to strengthen the agency’s understanding of new technologies, and to adopt them in support of our essential mission overseeing derivative markets.
We plan to do this in several ways going forward. We will establish an internal CFTC 2.0 Fintech/RegTech innovation lab to better understand new technologies and to identify potentially useful applications. We will look to explore ways to use fintech to enhance CFTC functions and duties. For example, we might collaborate with other authorities on leading development of best practices to support the development of “regulator nodes” on distributed ledgers, or experiment with collecting or distributing existing CFTC reports through blockchain technology.
We also will look to explore how LabCFTC could establish fintech innovation competitions under the America Competes Act18. Such competitions could provide innovators the opportunity to demonstrate solutions to challenges that enhance the public’s understanding -- and our own -- of the capabilities of emerging technologies that might apply in areas that relate to our agency’s important missions.
LabCFTC – Additional Components:
In addition to GuidePoint and CFTC 2.0, there are a number of other actions we will be taking as well. Let me mention those briefly.
To heighten Fintech and RegTech engagement, and help all of us at the CFTC to stay abreast of the latest developments, the CFTC is looking to partner in an annual fintech conference. We welcome the public's ideas for topics and areas of focus. I hope a conference will also serve as a forum for idea sharing that can help spur ongoing fintech development.
We will also seek to engage with academia at the faculty level, as well as with the next generation of students and budding young entrepreneurs. We are exploring the possibility of hackathons – technology challenges focused on areas of particular relevance or concern to the CFTC in executing its mission. Other organizations have used these to great effect.
We will consult with thought leaders across the fintech industry to gain the benefit of their insight. Moreover, we will draw upon the support of the CFTC’s Technology Advisory Committee to harness its members’ valuable expertise.
And, building on the outreach work we have already done, we will continue to engage directly with other regulators domestically and internationally to further regulatory interest in fintech innovation.
Let me give a complimentary shout out to our overseas regulatory colleagues. Many of them have already established their own initiatives to promote innovation, under the rubric of “sandboxes”, “accelerators”, “launchpads” and other names. It has been enormously helpful to learn from them as we seek to adapt their experiences and insights to our own needs and those of our markets. We appreciate their cooperative spirit and willingness to engage in open discussion. And we thank them for their leadership.
In particular I would like to compliment our friends in the United Kingdom – especially, the Financial Conduct Authority (FCA), which had the foresight to launch its “Project Innovate” in 201419, and the Bank of England, who launched its “Fintech Accelerator” just last year20. In only a short period of time, those British efforts have become the gold standard for thoughtful regulatory engagement with emerging technological innovation.
There is something else we have noted in our discussions with other authorities: their programs have started small. Our initiative is no different. We have limited resources. We too will start small, and do our best to work harder and smarter. And when it comes to fintech, we are very much still on the steep part of the learning curve. So I ask for your patience as we move forward with LabCFTC. We will do what we can, and build as we go. I am hopeful that the initiative grows and bears fruit over time.
Why do this?
As regulators, we know that our rules were mostly written for 20th century analog trading markets – the kind of markets in which Eddie Murphy famously bid up the price of orange juice futures in the movie, “Trading Places.” We also know that those analog markets are long gone – replaced by electronic trading in virtual marketplaces. We also know that our analog rules remain to be updated. What we do not know is which rules are most in need of updating in the face of new emerging technology.
We hope that LabCFTC and its engagement with technology innovators will assist the CFTC in prioritizing efforts to modernize its regulatory mission. It will provide us a market-based priority list for our modernization efforts. As we meet with more and more innovators, we can expect to see patterns emerge – to see which rules come up time and time again as the most problematic, the least able to adapt to evolving technologies. This will help us focus our limited resources much more effectively.
By engaging with fintech, we will learn where the friction points are between innovation and our regulations. Through LabCFTC, we will be able to put our rules under “the tension of innovation.” This is not only good for markets, innovation, jobs and growth, it is good for us too. It helps us do our jobs better too.
And, let me say this to Fintech Innovators: we have more in common with one another than you may think. Like you, LabCFTC is a start up. Our aspirations are lofty, though our resources are limited. This is a new endeavor for us too, so please be patient as we learn and grow. And I believe we also share a common vision: I am excited about what fintech innovation can bring to our markets. I am confident that these powerful new technologies will result in much stronger, safer markets that work better for participants.
Before I close, I want to take a minute to recognize an essential contribution to tonight’s launch. In January, I asked Jeff Bandman to advise me on fintech matters and lead a review of fintech innovation issues. The review was focused on three issues:
- How can fintech innovation help identify CFTC rules and regulations that need to be updated for relevance in 21st century digital markets?
- How should the CFTC leverage fintech innovation to make us a more effective regulator?
- What is the right role of the CFTC in promoting US fintech innovation in CFTC regulated markets?
That review is now complete and the result is LabCFTC.
I must acknowledge the extraordinary work of Jeff and his LabCFTC team,21 the previous fintech staff working group22 and others to make today’s launch possible. I am grateful to Jeff, in particular, for his fine work as the architect of LabCFTC.
I also want to thank again Commissioner Sharon Bowen for her support for the LabCFTC initiative. It signals the continuing bipartisan spirit of progress at the CFTC
In drawing to a close, the question of how U.S. market regulators handle the digitization of modern markets is critically important. It requires delicate balancing. To ensure vibrant, accessible and durable markets, regulators must cultivate and embrace new technologies without harming innovation. There certainly must be effective safeguards of market integrity and credibility with strong rule enforcement, but those safeguards should not bar promising innovation and continuous market development.
Good regulation should not inhibit technological innovation. Rather, innovation should foster better and smarter regulation. Regulators must engage in a constant and evolving dialogue with innovators precisely because we need to understand the impact they are having on the very marketplaces we are charged to supervise. We must partner with them, experiment with them, learn from them and innovate alongside them, if we are ever to keep pace with the digitization of modern markets and protect their 21st century participants.
Moreover, regulators have to do our part to unchain investors, innovators and job creators to spark America back to strong and sustainable growth and job participation. Healthy financial and risk transfer markets are essential to long-term economic growth.23 To enable broad-based prosperity, we must foster vibrant and competitive markets that support free enterprise, personal choice, voluntary exchange and legal protection of property. We must ensure that U.S. markets continue to play their essential role in marshaling resources and deploying them in productive ways: linking savers and investors, risk takers and risk transferors and shifting capital to those who can best utilize it and production risk to those who can best bear it. We must enable our rapidly evolving digital markets to be engines for economic freedom and opportunity24 – the ingredients that have always been, and always will be, essential for prosperity.
The world is changing. Our parents’ financial markets are gone. Tired, old command and control government solutions are bumping up against the new flexible, digital economy. Twenty-First Century markets require 21st century regulation.
It is time for government agencies like the CFTC to embrace innovation, repurpose obsolete rules and unchain U.S. trading markets. Federal regulators have a responsibility to ensure that today’s digital markets continue to serve our domestic end-users, whether Texas wheat farmers, North Dakota oilmen or Illinois manufacturers.
And beyond that, regulators must harness these new technologies in support of healthy U.S. capital and risk transfer markets. We must enhance our markets’ competitiveness in attracting the world’s capital. We must further enable investors, innovators and job creators to drive the U.S. economy back to strong growth and broad-based prosperity. We must ensure our markets remain the world’s deepest, most durable and most vibrant risk transfer markets in the algorithmic, digital world of the 21st century.
This is our challenge. It is in our vital national interest that we succeed.
1 Address of J. Christopher Giancarlo to the American Enterprise Institute, “21st Century Markets Need 21st Century Regulation, Sept. 21, 2016. http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-17 [hereafter, “Giancarlo AEI Speech”]
2 See generally Erik Brynjolfsson and Andrew McAfee, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (W.W. Norton & Company 2014).
3 See generally Martin Ford, Rise of the Robots: Technology and the Threat of a Jobless Future, 23-27 (Basic Books 2015).
4 A recent internal report by the CFTC's Chief Economist looked at over 1.5 billion transactions across over 800 products on the Chicago Mercantile Exchange over a two-year period. It found that the percentage of automated trading in financial futures – such as those based on interest rates, currencies or equity indices – was 60 to 80 percent. But even among many physical commodities, there was a high degree of automated trading, such as 40 to 50 percent for many energy and metals products.
5 McKinsey & Company and Greenwich Associates reprinted in Bank for International Settlements, Markets Committee, Electronic Trading in Fixed Income Markets, Jan. 2016, http://www.bis.org/publ/mktc07.pdf.
6 Automated trading can enhance trading liquidity, increase market access and lower transaction costs while increasing trader productivity through greater transaction speed, precision and sophistication. At the same time, automated trading presents a host of new challenges, including increased spikes in market volatility from sheer speed of execution, flawed algorithms and position crowding and the risk of data misinterpretation by computerized analysis and mathematical models that increasingly replace human thought and deliberation. See generally, Giancarlo AEI Speech.
7 Trevir Nath, How Big Data Has Changed Finance, Investopedia, Apr. 9, 2015, http://www.investopedia.com/articles/active-trading/040915/how-big-data-has-changed-finance.asp.
8 Tom Upchurch, Technology: AI and the Spectre of Automation, Euromoney, Aug. 2016, http://www.euromoney.com/Article/3575461/Technology-AI-and-the-spectre-of-automation.html.
9 Nigel Farmer, Making Contracts Smarter, TabbForum, May 3, 2016, http://tabbforum.com/opinions/making-contracts-smarter?print_preview=true&single=true&ticket=ST-14742885819637-OxE2RQ6CSK3LXd6HsvaWwJ8v3ewjlyh208guDvuC; Jay Cassano, What Are Smart Contracts? Cryptocurrency’s Killer App, Fast Company, Sept. 17, 2014, https://www.fastcompany.com/3035723/app-economy/smart-contracts-could-be-cryptocurrencys-killer-app.
10 Anna Irrera, Experian enlists behavioral biometrics startup to combat fraudsters, Reuters, April 7, 2017, at: http://www.reuters.com/article/us-experian-fraud-idUSKBN1792XT
11 Keynote Address of Commissioner J. Christopher Giancarlo before the Markit Group, 2016 Annual Customer Conference, May 10, 2016, http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-15.
12 Oscar Williams-Grut, WEF: Blockchain Will Become the ‘Beating Heart’ of Finance, Business Insider, Aug. 12, 2016, http://www.businessinsider.com/world-economic-forum-potential-of-blockchain-in-financial-services-2016-8; see generally, William Mougayar, The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology (Wiley 2016).
13 Sources: Venture Scanner April 2017, https://www.venturescanner.com/blog/2017/financial-technology-startup-market-trends-and-insights-q2-2017
16 We hope to reach the full range of innovators, from established incumbents to small disruptors.
17 To that end, the CFTC’s response will depend on the nature of the inquiry, taking into account relevant facts and circumstances.
18 15 U.S.C. 3719. The America COMPETES Reauthorization Act of 2010 added Section 24 of the Stevenson-Wydler Technology Innovation Act of 1980, codified at 15 U.S.C. 3719, which authorizes prize competitions. The American Innovation and Competitiveness Act of 2017 expanded the scope of authorized prize competitions.
21 In recent months, the LabCFTC team has met with dozens of firms, from the smallest start-ups to the largest market participants, market infrastructure providers, and technology firms. This engagement has also included visiting fintech incubators, attending fintech pitch days, meetings with venture capital and private equity investors, strategic investors, and investment bankers focused on fintech. They have also reached out to and visited academics researching new developments, in law, technology, business, economics and other fields, often interdisciplinary. They also met with industry consortia collaborating on some of the newest technologies.
22 The LabCFTC team built upon the efforts of the CFTC’s inter-divisional, interdisciplinary staff working group at the CFTC which was formed by former Chairman Timothy Massad to review and monitor fintech developments, including current distributed ledger/blockchain projects, and which has also met with industry groups, start-ups, clearinghouses, and exchanges, as they develop prospective uses for these technologies.
23 See generally Yongeok Shin, Financial Markets: An Engine for Economic Growth, St. Louis Fed., Jul 2013, https://www.stlouisfed.org/publications/regional-economist/july-2013/financial-markets--an-engine-for-economic-growth; Stanley Fischer, The Importance of Financial Markets in Economic Growth, Aug. 21, 2003, http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.200.5347&rep=rep1&type=pdf.
24 Markets for futures, swaps and other derivatives are especially important for economic growth by allowing enterprises to undertake or limit production, price and other risk thereby freeing up resource capacity for investment and expansion.
Last Updated: December 20, 2017