U.S. CFTC Embraces Emerging Technologies

Smart regulators are open to responsible innovation. (Getty Images license)

The U.S. CFTC's Technology Advisory Committee (TAC) will hold a public meeting on January 23, 2018 at CFTC’s Washington, DC, headquarters to set its agenda for 2018. My LinkedIn contact Mr. Daniel Gorfine, Director of LabCFTC, will be the officer in charge. Those overseas can use the international dial-in numbers to listen to the public proceedings. 

The CFTC rescheduled its public meeting, which had been cancelled due to a lapse in appropriations, to Feb. 14 at CFTC’s Washington, DC headquarters.

The CFTC wants to keep "abreast of market evolution and technological change to successfully meet the challenges of the modern economy". It is the function of the TAC members to provide recommendations "on existing or emerging technological advances and associated potential regulatory issues.”

Specifically, the TAC will discuss: "(1) the scope, plan, and approach for the Committee’s efforts in 2018; (2) explore timely topics and issues involving financial technology in CFTC regulated markets, potentially including blockchain/DLT, data standardization and analytics, algorithmic trading, virtual currencies, cybersecurity, and RegTech; and (3) identify work streams and/or subcommittee groups that can help generate actionable recommendations to the Commission on select issues." The Committee will also be accepting public comment letters on these crucial issues. I plan to submit my comment letter to the Committee before the end of December 2017.

The U.S. leading the way on crypto issues. (public domain)

I must say that the U.S. regulators are one of the few currently taking innovations in the banking and financial sectors seriously in light of emerging technologies. As someone who is based in Hong Kong for the moment and is in tune with the regulatory tone here, I find that the U.S. regulators are significantly ahead of the learning curve and have demonstrated their willingness to gradually introduce innovations into the world market place. For example, both the CME (in December 18, 2017) and CBOE (in December 10, 2017) have been approved to offer bitcoin futures contracts. This is a way for retail and institutional investors to participate in bitcoin trading.  Several hours after the CBOE opened bitcoin trading on December 10, bitcoin contracts expiring in January 2018 spiked 20% and triggered two trading halts. There was also a spike in internet traffic to the CBOE website which caused delays and outages.

In stark contrast for example, one day after the CBOE offered bitcoin futures trading, the Hong Kong Securities and Futures Commission "HKSFC" put out a "circular" reminding investors that bitcoin futures are regulated as “futures contracts”. As such the HKSFC is concerned about Hong Kong investors who wish to trade bitcoin futures through an intermediary which is a member of the CME and CBOE exchanges. The Hong Kong regulators reminded investors that those who relay or route bitcoin futures orders are required to be licensed by the HKSFC. This "circular" demonstrates the seemingly short-sighted nature of certain global regulators when it comes to handling financial innovations and ignoring investor demand for 21st century financial products. Instead, I believe the circular should have said that the Hong Kong regulators will consider liberalizing innovative fintech driven financial products for Hong Kong investors in light of new developments unfolding in the U.S. exchanges.

To show what in my humble opinion is the relative backwardness of Hong Kong in the crypto sector, it recently introduced gold futures as an investment vehicle in July 2017. At a time when some global investors are seeing bitcoin as being set to replace gold as a storage of value (and when global demand for gold is now at its lowest level since third-quarter 2009), why aren't the Hong Kong regulators keen in trying to allow local exchanges to offer bitcoin futures? Last July at a public fintech meeting I asked financial executives in Hong Kong about the chances for Hong Kong allowing the launch of bitcoin futures and they said it will take more than "20 years" for the local regulators to even consider that idea. This is very unfortunate and unfair for local investors who choose to participate in the apparent opportunities offered by bitcoin and other leading cryptocurrencies.  

Cryptocurrencies are changing the world. Will regulators change with them? (Getty Images license)

Hopefully the HKSFC can also put together a committee like the U.S. CFTC's Technology Advisory Committee to advise it of emerging trends in fintech in order to keep Hong Kong's status as a "financial center" relevant in the 21st century (and its notoriously high residential and commercial property prices sustainable.)

As seen from the popularity of bitcoin futures on the CBOE (and perhaps next week on the CME), the market has been accepting favorably innovative investment asset classes like bitcoin. Unlike most regulators, it seems that the U.S. CFTC and SEC are not afraid to take the lead in fostering responsible banking and financial innovations for the 21st century.

#financial innovation

#bitcoin futures