Address of CFTC Acting Chairman J. Christopher Giancarlo before the New York FinTech Innovation Lab, as prepared for delivery.
LabCFTC: Engaging Innovators in Digital Financial Markets
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 Commodity Futures Trading Commission (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 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 the 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. 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.
Other breaking digital innovations present equal regulatory challenges. They include “big data” capability to enable more sophisticated data analysis and interpretation, artificial intelligence to guide highly dynamic trade execution,8 “smart” contracts that value themselves and calculate payments in real-time, behavioral biometrics that can detect and combat online fraud,10 and distributed ledger technology, more commonly known as blockchain, that will challenge orthodoxies that are foundational to today’s financial market infrastructure.
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 the following: 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.