CFTC Commissioner Rostin Behnam called on the agency to consider new initiatives to deal with the role of technology within the scope of CFTC regulatory and supervisory structures.
In remarks at the ASIFMA 2018 Conference, Mr. Behnam asserted that regulation creates "necessary friction" during the development stages of innovation to guarantee that processes and products satisfy established standards before being introduced to the public and financial networks. He criticized the United States' regulatory FinTech agenda for being overly enforcement-driven, saying that enforcement actions do not always lead to thoughtful collaboration between firms and regulators. Mr. Behnam emphasized that open and forthright dialogue without fear of repercussions allows regulators to learn from errors, which is crucial given that mistakes are inevitable with FinTech.
Mr. Behnam stated that market regulators will play a critical role in FinTech development by guaranteeing that innovators are "socialized into a culture of regulation and compliance that provides legal certainty." However, he cautioned that while regulation should not come prematurely and affect innovation, it cannot engage so late that the CFTC leaves markets, infrastructures and the public unprotected.
He urged the CFTC to take a step towards "standardized proficiency requirements for innovative developments" to ensure that new products are introduced to markets and meet minimum standards of resiliency. As an initial step, Mr. Behnam recommended that the CFTC engage in a collaborative exercise within its industry so that regulators, self-regulatory organizations and private industry can develop a closed environment for simulation, stress testing, and training new technologies. He specified that within the environment, FinTech providers could stress test their models to see if it is ready for the market. Further, he stated that the process could further entail sharing feedback on the environment to improve the environment itself and inform plans for standard setting or best practices.
Commentary / Bob Zwirb
At first blush, Commissioner Behnam's call for regulators "to work collaboratively" with Fin-Tech innovators to "get the right level of [regulatory] friction" seems appealing. Such an approach, often referred to as a "regulatory sandbox," avoids the costs associated with a more traditional "enforcement-driven" approach, as Mr. Behnam acknowledges. But while a collaborative approach may side-step one trap—stifling innovation through premature and aggressive enforcement—it may, in the words of another regulator, "fall into another." See Speech by SEC Commissioner Hester Peirce, "Beaches and Bitcoin: Remarks before the Medici Conference, (May 2, 2018). And that other trap, which is inherent whenever regulators and industry innovators work together in such a closed environment is that "[t]he regulator may insert itself inappropriately into the creative process." Id. It may also inappropriately attempt to shoe-horn new technology within the scope of a regulatory and supervisory structure created for a different era. As SEC Commissioner Hester Peirce explains:
"The regulator should be careful not to try to control the development of new technologies. Not only is it outside the regulator's proper function, but such micromanagement can result in the regulator forcing new technology to fit existing-and familiar-regulatory frameworks regardless of whether those frameworks are appropriate. The law deserves respect, but technological progress should not be bound by the limits of the regulator's lawyerly imagination."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
