Financial Regulators Address Blockchain Technology

March 11, 2019

The DC Blockchain Summit organized by the Chamber of Digital Commerce took place on March 6 & 7 on the grounds of Georgetown University in Washington, DC. The conference featured an address by U.S. Representative Tom Emmer (R-Minnesota) and panels with a number of key regulators from the CFTC, SEC, FINRA, Department of Treasury, and Department of State. Below is a brief summary of key points raised by each of these speakers, but some areas of common concern were among the issues raised:

  • All of the regulators in some form expressed that regulators cannot keep up with technological change, so market-based regulatory approaches may be the best approach.
  • Regulators are extremely keen on industry engagement and strongly desire affected companies to engage in dialogue.
  • AML is a paramount concern and there is no appetite whatsoever to relax applicable standards or enforcement focus.
  • There is broad endorsement of CFTC Chairman Giancarlo’s thought leadership on regulation of blockchain technology.

The following is summary of each speaker’s comments; note that these are not quotes but condensed to distill the essence of the messages conveyed:

U.S. Representative Tom Emmer

  • Congressman Emmer predicted that 2019 could be the year of blockchain, that is, “harnessing blockchain in the right use-cases to lower costs and efficiency.”
  • Congress Emmer emphasized that Congress needs to ensure that regulation is simple and precise and avoid a patchwork of regulation.
  • The congressman discussed the Blockchain Regulatory Certainty Act, a bill he introduced that would provide that blockchain developers that do not hold consumer funds do not need to register as money transmitter in the states in which they operate.

J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission

  • Chairman Giancarlo suggested that a new regulatory response model is needed because:
    • The speed of innovation is exponential, and regulators cannot, almost by definition, keep up. Actions by anonymous actors make the challenge even more difficult.
    • Regulators generally have poor tech literacy. In a complex area such as blockchain, generally there is only a limited number of people who have the requisite technical expertise, and most tend to congregate to the private sector where the pay is much better than what regulators can offer.
    • Ideally, any new regulatory response model should include:
    • An exponential growth mindset by regulators – it’s not going to slow down, so regulators must accept that they can’t keep up.
    • There is a need for each regulator to have a dedicated FinTech stakeholder, such as LabCFTC, to engage with industry.
    • Regulators must become quantitative regulators, and utilize processes like artificial intelligence and machine learning, and also begin the process to occupy nodes within blockchain structures as necessary.
    • Regulators should be prepared to embrace market-based regulation. For example, the listing of bitcoin futures on public exchanges allowed price discovery and may have contributed to popping an asset bubble before the damage became too large.
  • The technicalities of the current laws may be outdated, but the broad principles are not. And the laws remain enforceable.

Hester Peirce, Commissioner, Securities and Exchange Commission

  • Commissioner Peirce noted that although staff is working on guidance related to token issues, such guidance will not be Commission-level guidance, which Commissioner Peirce would like to see.
  • Commissioner Peirce reiterated numerous times the importance of companies engaging with regulators, especially if a company has a pending application or request for a No-Action Letter with the SEC. If staff is unresponsive, Commissioner Peirce urged companies to consider contacting her office directly.
  • Current regulations may have become outdated as a result of technological innovation (specifically transfer agent and custody rules). Commissioner Peirce highlighted the need to update those rules as necessary to account for the advances in technology.
  • Commissioner Peirce expressed disappointment that no Regulation A+ offerings have been approved and urged companies to contact her office directly for assistance if they felt that their Regulation A registration statements have been languishing with Staff.
  • Commissioner Peirce expressed her view that government-private partnerships may be undesirable. Innovation must come from the private sector – regulators are by nature reactive. The goal for regulators should be to observe and provide guidelines.

Kavita Jain, Director of Emerging Regulatory Issues, FINRA

  • Ms. Jain reported that based on a survey, about 1 in 10 firms FINRA regulates has expressed interest in engaging with digital assets.
  • Ms. Jain reported that FINRA is working on a number of broker-dealer issues regarding blockchain assets.
  • Ms. Jain also stressed the need to have more engagement with industry.

Valerie Szczepanik, Associate Director of the Division of Corporation Finance and Senior Advisor for Digital Assets and Innovation, Securities and Exchange Commission

  • Ms. Szczepanik reported that Staff is working on providing guidelines regarding issuances of crypto tokens, but that the process takes time.
  • Ms. Szczepanik emphasized that the area was rapidly evolving and that the SEC would provide principles based guidelines rather than a number of prescriptive items.

Craig Phillips, Counselor to the Secretary, U.S. Department of the Treasury

  • Mr. Phillips expressed his belief that digitization of finance is here to stay and that adopting regulator technology – “Reg Tech” – will become increasingly important for regulators.
  • As summarized in the Treasury Department’s recent report on FinTech, current laws need updating to remove barriers to the use of data and harmonize data breach notification laws.
  • Mr. Phillips reported that Treasury supports the OCC FinTech Charter.
  • Treasury also supports the use of regulatory sandboxes.
  • The Financial Stability Oversight Council has convened a working group on blockchain and digital assets that has focused on:
    • Information sharing between regulators on AML risk, operational risks (such as data breaches), and systemic risk;
    • ┬áTaking stock of current laws, and whether activities conducted by unregulated entities should be regulated; and
    • The international landscape and how other countries approach these issues.
  • Criminal activity involving digital assets is a major issue with national security implications. Accordingly, AML and OFAC issues are a “showstopper.”

Manisha Singh, Acting Under Secretary for Economic Growth, Energy, and the Environment, U.S. Department of State

  • Ms. Singh stated that an important goal of the State Department is to increase foreign direct investment in U.S. companies, including blockchain companies.
  • The State Department will push for “light-touch” regulations in foreign jurisdictions.

Seward & Kissel continues to monitor regulatory developments impacting blockchain and digital assets. Please contact any member of our Blockchain Group with any questions on any of the above.