The US derivatives regulator continues to foster FinTech adoption and leadership in US markets.

By Yvette D. Valdez, Douglas K. Yatter, and Deric Behar

The US Commodity Futures Trading Commission (CFTC) has affirmed its commitment to engaging the fast-moving financial technology world by elevating its LabCFTC unit to be an independent operating office within the CFTC, reporting directly to Chairman Heath Tarbert. LabCFTC is the agency’s FinTech hub, led since October 10, 2019, by Chief Innovation Officer and Director Melissa Netram. The announcement about LabCFTC’s new status was made at the agency’s second annual FinTech conference, “Fintech Forward 2019: Exploring the Unwritten Future,” held on October 24, 2019.

LabCFTC initiatives such as the annual FinTech conference provide a way for FinTech innovators to access the CFTC, while also allowing the CFTC to keep apace of new technologies and ideas impacting the financial markets. The CFTC also uses the forum to evaluate the potential of new technology for agency oversight activities.

AI for the Regulator and the Regulated

One particular technological area of interest for the CFTC is artificial intelligence (AI) and the growing role AI will play in markets regulated by the CFTC. In conjunction with the recent FinTech conference, the CFTC published a new LabCFTC primer, Artificial Intelligence in Financial Markets, highlighting the promises (and pitfalls) of AI for both financial market participants and regulators. According to the primer, AI has wide-ranging application to the financial markets, from trading and hedging to cybersecurity and compliance. The CFTC recognizes the benefits of AI and sees itself as responsible for promoting responsible innovation and implementation in markets that the agency oversees. According to the CFTC, responsible use of AI means that systems continually operate under principles of sound development, governance, and security.

The CFTC envisions that it could also use AI to promote sound and resilient markets with tools that enable enhanced risk monitoring. The CFTC asserts that with AI it could potentially decipher meaningful market signals and patterns of illicit behavior behind vast amounts of data “noise.” The CFTC has also expressed interest in using new AI tools to detect market abuse and disruptive events.

Innovation and Regulation: A Principles-Based Approach

Following in the footsteps of former CFTC Chairman J. Christopher Giancarlo, who established LabCFTC in 2017, Chairman Tarbert continues to demonstrate that the CFTC is committed to facilitating US leadership in FinTech innovation while maintaining market resilience and integrity. He acknowledged that the rise of AI, machine learning, blockchain, digital assets, payment systems, cloud computing, and other “transformative new products” requires full engagement by regulators. He recently made a public statement, for example, that ether (the world’s second-largest cryptocurrency by market capitalization) “is a commodity and therefore would fall under [the CFTC’s] jurisdiction,” and that regulated ether futures may be a forthcoming possibility.

Chairman Tarbert has also emphasized in various forums since beginning his leadership of the CFTC that finding the right balance between innovation and sound regulation is critical to market vibrancy and US leadership in the blockchain and digital assets space. To that end, he has stated that the CFTC should take a principles-based approach to regulating where technological progress is concerned. As opposed to a prescriptive, formulaic, rules-based approach applied to all market participants, a principles-based approach would set standards and allow for higher levels of discretion by individual firms to meet those standards. A principles-based approach applied to digital assets and other FinTech products, according to Chairman Tarbert, would provide US firms experimenting with evolving technologies the flexibility and efficiency they need to flourish. It would also allow the CFTC to observe new developments and assess emerging market risks, and to adopt tailored and targeted rules as needed to maintain market integrity and prevent fraud.

At a time when many global regulators and lawmakers are actively evaluating how best to engage with FinTech innovation, the CFTC’s elevation of LabCFTC, engagement on digital assets, and promotion of technology in the US financial markets all demonstrate the agency’s continued interest in charting a forward-looking path for technological development.