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LabCFTC Director Talks U.S. Fintech Regulation

With the explosion of the cryptocurrency industry in 2017 and the rapid advancement of game-changing technologies in the financial arena, there’s never been a more pressing need for financial regulators to rethink old ways of doing things.

With the launch of LabCFTC in May 2017, the Commodity Futures Trading Commission took a bold step toward achieving this end with its mission of facilitating open-door engagement with financial technology innovators and helping the agency stay abreast of new technologies that are rapidly iterating in the markets it oversees.

The initiative’s aspiration is to make the CFTC more accessible to innovators and startups, particularly those who may have limited prior experience operating in a regulated environment, while promoting the responsible development of these technologies in a manner that ultimately benefits the broader American public.

Forbes caught up with Daniel Gorfine, the CFTC’s Chief Innovation Officer and inaugural director of LabCFTC, at a recent event hosted by the Center for Financial Markets and Policy at Georgetown University’s McDonough School of Business to reflect on LabCFTC’s inaugural year and discuss the current U.S. fintech regulatory space.

Q: We recently passed the one year anniversary of LabCFTC’s launch. What are your big takeaways from the first year of this experiment?

It’s been a very busy and active first year for LabCFTC on the engagement front. We’ve met with over 200 different entities and organizations. I’m impressed with the broad range of where we are seeing innovation arising. It does go from startups to traditional financial institutions to tech companies – it’s really incredible breadth.

Machine learning and artificial intelligence are also common topics, especially as they relate to “RegTech” and supervisory technologies – the idea that we can basically do more with all the data that’s available today.

Q: What type of feedback have you gotten from the innovators whom you’ve met with?

In the early days we were getting folks that were coming in and, quite frankly, trying to better understand what LabCFTC was all about – what does it mean to engage with a regulator? The traditional regulatory approach hasn’t always been to have a very forward looking, forward leaning open door for innovators. So that’s where we started.

Now, we’re starting see more granular questions and next level of engagement on certain models. I will add that we started getting, around the later part of last year, questions around CFTC jurisdiction in the virtual currency space, and that’s a big reason why we published the virtual currency primer that we did last October.

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I have a colleague at another agency who once made the point that when it comes to innovation, regulators typically either say ‘no’ or they say nothing at all, which can be very frustrating. Here, it’s at least an effort to engage in a dialogue and put on paper how we’re thinking about a particular space. I think that’s been really well received. We are planning subsequent primers on other emerging technology topics.

Q: What are the biggest challenges or unexpected hurdles you’ve encountered?

We haven’t faced a lot of barriers per se because I think there’s such a clear recognition from an agency perspective to be keeping pace and make sure that we have the right tools and understanding to be able to regulate where our markets are moving. So from an internal perspective, we’ve had a lot of support, and I think it starts with CFTC Chairman Chris Giancarlo, and our Commissioners, including Commissioner Quintenz and Commissioner Behnam. When you have the support of leadership, that goes a long way.

From an external perspective, there are areas that we’re trying to figure out the limits of our authorities, so that has required us to work with our Office of General Counsel to understand the limits and parameters of what we can and can’t do. General Counsel Dan Davis and his team have been excellent colleagues and we have been well counseled.

I think we’ve been able to accomplish a lot of what we wanted to, and where we couldn’t, we’ve been able to say ‘Hey, here are some areas we can at least identify that we feel we have some limitations.’

Q: One of the identified challenges with the U.S. financial regulatory system for fintech companies is the number of agencies they must interface with. How is LabCFTC coordinating with other regulators to help lower these barriers to entry?

In the U.S., we have different regulators with different authorities – that’s the current lay of the land in terms of the regulatory framework. Like with anything else, there are pros and cons to the approach, but that is the system that we have.

That being said, if you look across the federal agencies, there are many that either have or are looking to stand up innovation initiatives like what you see with LabCFTC – the Office of the Comptroller of the Currency, for example, has its Office of Responsible Innovation under the leadership of Beth Knickerbocker. These are efforts to think about how you can take a holistic approach to engaging with innovators.

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I think that these types of activities and entities do a nice job of collaborating together. I know my counterparts well at our peer agencies and there’s definitely appetite to think about how do we, at a high level, share information about what we’re seeing and learning and how do we ensure that our rule sets are being interpreted as consistently as possible.

Q: We’ve heard a lot of chatter about fintech regulatory sandboxes lately both in the fintech report released last month by the U.S. Treasury Department and in Arizona, which became the first U.S. state to launch a sandbox of its own earlier this month. How do you see sandboxes fitting into the bigger picture of supporting fintech innovation?

In my view, the concept of a sandbox is but one tool that regulators may have at their disposal to interact with emerging technologies and innovation. It’s one that’s definitely worth exploring. From a U.S. jurisdictional perspective, and at least from a CFTC perspective, likely our current authorities to do something that’s in the realm of a sandbox would be around structuring no-action relief.

And this is something that the CFTC has noted is a possibility. More specifically, if folks come in and identify where there’s ambiguity or friction in current rules that is preventing market-enhancing innovation, then we can consider what types of recourse may be appropriate. In certain cases, no action relief could be pursued through our operating divisions in order to allow activity.

More broadly, we’re favorable on thinking about the different types of tools and approaches that you can have with fintech. My one caveat is that it can be dangerous to view a sandbox as a panacea and the be all, end all way that you’re supposed to engage with fintechs and emerging technologies. I think there are a lot of other tools that regulators need to be thinking about, such as direct engagement with innovators and market participants, innovation competitions designed to stimulate creative application of new models and technologies, and having research and testing authority so that we can work to develop proofs of concept to better understand how technologies could impact us or our markets.

On this last point, more specifically, I believe that through developing proofs of concept and truly kicking the tires on new innovations agency staff can properly understand the application of new technologies, which will subsequently drive more informed policymaking and technology strategies. In some instances, existing law may be an obstacle to participation in this type of testing, research, and proofs of concept. For this reason, our Chairman has expressed appreciation for current efforts of Members of Congress to suggest ways to provide the CFTC with the authority to fully engage with, research, and test emerging technologies (for example, Commodity Futures Trading Commission Research and Development Modernization, H.R. 6121, 115th Cong. (2018)).

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Q: Earlier this summer, you testified at a hearing of the House Agriculture Committee, which oversees the CFTC, on cryptocurrencies. What’s your view on how Congress has been approaching LabCFTC and these topics more broadly?

The view from Congress has been very positive about what we’re trying to accomplish. At the end of the day, it’s very hard to disagree with the idea that we need to truly understand technology, and that that’s the predicate to good policy making – identifying opportunities but also identifying emerging risks.

This is the type of an issue that fortunately has a lot of bipartisan support, so it makes sense that regulators have the tools and the understanding to keep up. If not, you end up in a scenario where five years from now something will happen and everyeone’s going to say ‘Well, what happened and why weren’t we prepared for it?’ In my view, a lack of technological literacy is a risk we must be vigilant to avoid.

Q: We’ve heard the term “agile governance” thrown around lately in regards to how governments and regulators stay relevant in the digital economy. What does that term mean to you?

It’s about differentiating between static and dynamic regulation. To modernize the approach of regulation, you should be able to actually collect and analyze data in order to understand what kinds of new risks are potentially presenting and be able to respond to them in real time. This approach can also help ensure that you are actually satisfying regulatory objectives in the most efficient way possible. It’s still very early days, and there’s a lot of thinking that has to go into how do you meld that approach into existing regulatory frameworks.

For instance, imagine you’ve got speed limit sign – that’s a static speed limit. The two regulatory objectives you’re trying to solve for with a speed limit is safety and the efficient flow of traffic. If you actually had a dynamic speed limit that measured road and weather conditions (imagine a digital display), you might be able to slow the speed limit down if it’s raining in order to better satisfy the safety objective or increase the speed limit — conditions permitting — in order to satisfy a safe, but more efficient, flow of traffic. It’s a good example of thinking about agile forms of regulation – it’s how do we start to incorporate that approach into broader sets of regulation.


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Mia Turner


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