Commodity Futures Trading Commission (CFTC) Chairman Heath Tarbert published an Op-Ed today which appeared in Fortune as well as the CFTC website. Tarbert called for a more principles-based approach regarding Fintech innovation – not more rules. Tarbert said that a principles-based approach can provide the leeway necessary for technology can develop without stifling positive change.
A principles-based approach should not be misconstrued as being soft on fraud. Quite the contrary as fraud and illicit activities will always be dealt with swiftly.
The rule upon regulation approach by policymakers has, at times, crushed innovation before it could fully develop. It is this same innovation that is vital to providing better and less expensive services to the population. Fintech technology, which continues to evolve, is touching all aspects of financial services. Chairman Tarbert explains that blockchain and digital assets are changing the way the derivatives markets work.
The rule upon regulation approach by policymakers has, at times, crushed innovation before it could fully develop. It is this same innovation that is vital to providing better and less expensive services to the…
“We must remember that how we regulate is just as important as what we regulate. That’s why a principles-based approach is the best way to govern this emerging market. Principles-based regulation involves moving away from detailed, prescriptive rules and relying more on high-level, broadly-stated principles to set standards for regulated firms and products. Companies will then be responsible for finding the most efficient way of satisfying those standards. Such an approach affords greater flexibility to the tech sector. It will also enable the CFTC to stay ahead of the curve by reacting more quickly to changes in technology and the marketplace,” states Tarbert.
In comparison, the UK has a more principled approach to financial regulation. This has enabled the UK to foster what is widely viewed as the most robust Fintech market in the world – fueled, in part, to its regulatory environment.
Tarbert points to the extent of regulatory abuse:
“If you make 10,000 regulations, you destroy all respect for the law.” Yet Titles 12 and 17 of the U.S. Code of Federal Regulations—which together cover banking, securities, and derivatives regulation—now total over 13,000 pages.”
Tarbert believes that flexibility is key. Some areas require more rigidity such as custody. Tarbert says CFTC staff is considering how the core principles applicable to exchanges and clearinghouses “can be better tailored for Fintech.”
“Digital assets face the unique operational risk of a systems hack that could result in loss or theft. Our core principles include a requirement that clearinghouses have systems to identify and minimize operational risk,” Tarbert states. “The CFTC does not have formulaic, prescriptive rules laying out what systems are required. The agency also does not spell out how operational risk must be allocated between clearinghouses and its members and customers. Yet derivatives clearinghouses are anything but lightly regulated.”
Tarbert uses Bitcoin as an example saying the CFTC took a principles-based approach in regulating the three clearinghouses handling digital assets. A principles-based approach will also provide additional time for policymakers to watch and learn.
In the end, this is about allowing innovation to blossom helping the US maintain its competitive position within the global world of finance. If innovation is stymied domestically in the US, it will find more receptive jurisdictions that recognize the positive benefits of change and competition.
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