CFTC Chairman on crypto regulation has published an op-ed in Fortune. He highlights the importance of accepting new technology but also warns against letting people off easy. A light handed approach is not acceptable to properly regulate markets.
These are exciting times for our derivatives markets. From blockchain to digital assets, innovative financial technologies are changing the way derivatives markets work.
The Commodity Futures Trading Commission (CFTC) has an important role to play in determining how these new products and technologies evolve.
Our mission is to promote the integrity, resilience, and vibrancy of derivatives markets through sound regulation. The trick with digital assets is to foster the development of exciting new products while mitigating potential risks. 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.
A more principles-based approach can help reduce the need for volumes of regulations that seek to dictate every aspect of a firm’s behavior. As Winston Churchill put it, “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.
It is important to recognize that principles-based regulation is not a euphemism for “deregulation” or a “light-touch” approach—far from it. Principles-based regulation is a different way of achieving the same regulatory outcomes as rules-based regulation. But it simply does so in what is, in many cases, a more efficient and flexible manner. That flexibility also prevents subversion of those outcomes through the kind of loopholes that revealed the inherent vulnerability of rules-based regulation in the run up to the financial crisis.
Of course, in practice, it is rare for to have either a purely principles-based or a purely rules-based regulation. Rather, they represent two ends of the regulatory spectrum. Every principles-based regulatory regime has some rules, and every rules-based regime has some element of principle. For this reason, we frequently see hybrid regulatory systems of principles and rules. The appropriate mix of each will depend on a number of factors, such as the regulatory objective, maturity of the market, the characteristics of market participants, and quality of the regulator.
Of course, our willingness to allow innovation to develop should not be confused with a tolerance of fraudulent behavior or a so-called light-touch approach. The CFTC has been actively policing the digital asset markets, having brought more than a dozen enforcement actions in this area against scammers and entities offering unauthorized derivatives. We have also recently brought actions for violations of our core principle obligations, demonstrating the high standards the CFTC has set even if we allow reasonable discretion in how those standards are met by regulated firms.
In many circumstances, principles-based regulation can provide a more effective regulatory approach for overseeing financial services in this global technological age than a highly prescriptive rules-based approach can. Ensuring that America remains a global fintech leader will be essential to our future prosperity. Principles can ensure sound regulation without unsound consequences for innovation.
