On Tuesday the CFTC’s Technology Advisory Committee (TAC) met to discuss a few issues including “Blockchain and the Potential Application of Distributed Ledger Technology to the Derivatives Markets.” A mouthful to be sure, but a timely discussion.
As the first time the TAC has held a public panel on blockchain, the quick take-away was summed up by commissioner Christopher Giancarlo who said it is difficult to know where this will all lead but regulators should not stand in the way of a potentially important technology.
Sandra Ro from CME opined that 2016/2017 is when we will start to see blockchain really get hammered out, yet it was clear from the discussion there is very little consensus on what it will look like. Some of the potential benefits are increased transparency and speed of execution for financial transactions, but even those came with questions.
One question several people asked, including CFTC chairman Timothy Massad, was what problem blockchain was a solution for? Is it a solution in search of a problem? Many in the industry have viewed blockchain as a faster and more efficient settlement tool. But that comes with its own set of problems. Larry Tabb of The Tabb Group wondered if blockchain technology sped up the process enough to change T+3 to T+0, would that actually remove the benefits of a slower settlement period. The panel responded that while blockchain would speed things up, T+0 would never happen and each market would find its own sweet spot for an ideal settlement time.
There has been much discussion of whether blockchain will put clearinghouses out of business, but panelists at TAC said there is still a role to play for clearing facilities. In a world that does not reach T+0, clearinghouses will still maintain a role. It is not clear, however, if blockchain would be used for the trade itself or only clearing or both or neither.
Brad Levy of MarkitSERV said the big difference for the CFTC is that with blockchain, the regulators would be a “node” in the network. Rather than standing outside the industry as they do in the current structure, they would be on the inside with an insider’s view. Basically, due to the transparency blockchain could potentially bring, regulators would have a much better picture of what is going on in the markets on a close to real time basis.
Levy said blockchain presents an unusual situation for the financial markets, where industry participants may have to cooperate to design a standardized technology and find other areas to compete. If the promise of blockchain is to be fully realized it cannot be a Balkanized system. In an industry as fiercely competitive as this it remains to be seen how that will play out.
Participants also said it’s important to make sure the legal framework works across all jurisdictions, and that regulators are careful not to be so prescriptive that they throttle innovation.
Perhaps more interesting is how an industry that values the secrecy of their data will feel about a system that can be as transparent as blockchain can be. Of course, it need not be transparent and there are now differing implementations ranging from crystal clear and open source to opaque and private.
Ultimately, the panel’s message was clear. Blockchain will become a part of the financial system in the next few years. But it will be an evolutionary process that sees some succeed and others fall by the wayside.