On Monday, the U.S. Securities and Exchange Commission (SEC) hosted a Fintech Forum at its Washington, D.C. headquarters to discuss technological innovations in the financial services industry. SEC Chair Mary Jo White explained why she is a strong proponent of fintech development: “fintech innovation has the potential to change the face of the financial services industry and through the Commission’s Fintech Forum, we will explore the various issues and challenges surrounding these groundbreaking technologies. There are real opportunities for investors and our markets to benefit from fintech developments and, together with the industry, we must examine ways to ensure our regulations keep pace with these rapidly evolving innovations.” Consistent with these comments, the SEC has been proactive in exploring blockchain technology and its vast potential for use in the financial services industry.
The Forum consisted of four panels featuring speakers ranging from regulators, academia, fintech companies and organizations, as well as financial service businesses. The agenda for the forum included topics related to “financial technology innovation in the financial services industry.” Panelists were invited to “discuss issues such as blockchain technology, automated investment advice or robo-advisors, online marketplace lending and crowdfunding, and how they may impact investors.”
Valerie Szczepanik, Head of the SEC Distributed Ledger Technology Working Group and Assistant Director of the SEC Division of Enforcement, moderated the Impact of Recent Innovation on Trading, Settlement, and Clearance Activities panel, which focused on blockchain technology. The following individuals participated in the panel:
- Brad Peterson, Executive Vice President and Chief Information Officer/Chief Technology Officer at Nasdaq
- Chris Church, Chief Business Development Officer, Digital Asset Holdings
- Mark Wetjen, Head of Global Public Policy at DTCC
- Professor Emin Gun Sirer, Cornell University
- Grainne McNamara, Principal in the Capital Markets team at PricewaterhouseCoopers
The panel began with a brief description of blockchain technology and its many potential use cases, including real time financial transmissions, art registries, securities transactions, voting, medical/clinical trial record keeping, supply chain, and visual grids for energy. During the discussion, each of the panelists mentioned that smart contracts and the ability to transfer data on the blockchain were unique features that would undoubtedly transform the financial services industry.
Chris Church from Digital Asset Holdings emphasized the need to look past the initial hype when considering the many benefits of blockchain technology. Instead of buying into the general belief that blockchain will eliminate jobs or entire industries, he stated his belief that it is crucial to understand that the blockchain is more likely to alter the roles and procedures of existing sectors. He further opined that the companies who fail to incorporate this technology into their businesses would become less competitive over time.
The discussion also covered issues on which regulators should focus their attention in order to be in the best position to create rules for blockchain-related companies. Professor Sirer from Cornell University encouraged regulators to use resources from the blockchain community, with the caveat that in such a newly developing arena it is easy to find resources that are not credible or published without proper documentation. In that regard, even though they are already well-versed in law and finance, in order to effectively regulate blockchain technology, SEC regulators may be forced to step outside of their routines to gain expertise in information technology and software development.
Perhaps the most pressing issues for the panel were those concerning the current hurdles to mainstream adoption of blockchain technology. The panelists agreed that privacy, confidentiality, and security are some of the most common concerns expressed by those wary of adopting the technology. Grainne McNamara of PricewaterhouseCoopers offered four “Ps” of an adoption curve that blockchain technology would most certainly have to go through before she could see her company or clients adopting it: proof of concept, prototype phase, pilot phase, and production application phase. Most use cases involving blockchain technology are currently still in the early phases.
Mr. Church identified three hurdles that companies must overcome in order to have their use cases adopted into the mainstream: network effect, regulations, and standards. Network effect is a “phenomenon whereby a good or service becomes more valuable when more people use it. The chief hurdle for any good or service which uses the network effect is to get enough users initially so that the network effects take hold. The amount of users required for significant network effects is often referred to as critical mass. After the critical mass is attained, the good or service should be able to obtain many new users since its network offers utility. If too many people use the good or service, negative network effects can occur, such as congestion. Thus providers of goods and services which use a network effect must ensure that capacity can be increased sufficiently to accommodate all users.” In order for blockchain technology to be adopted into mainstream applications, backend infrastructure that ensures scalability must be perfected. For example, if a major banking institution were to implement blockchain technology for all of its consumer transactions, there would have to be enough computing power for a large number of transactions to be validated quickly.
A uniform set of regulations related to blockchain technology will undoubtedly assist with mainstream adoption. While many state governments and IRS have set forth regulations related to virtual currencies such as the New York BitLicense or North Carolina Money Transmitters Act, there are no comprehensive guidelines for blockchain technology. Congress recently passed H.Res. 835 in which it recognized the importance of blockchain technology, which will hopefully draw attention to the need for comprehensive regulations. While regulators and legislators at the state, federal, and international level are all working to establish virtual currency financial service business requirements, consumer protection measures, and standards for virtual currency transactions using blockchain technology, one key element is missing in the existing regulatory regime—communication between different regulatory bodies. In order to most effectively regulate virtual currency/blockchain technology a comprehensive set of federal regulations must be enacted that do not stifle growth but still protect consumers. When asked what regulators should be investing in or doing in relation to blockchain technology regulation, Mr. Church said it best: “One of my suggestions if you are a regulator is to speak with other regulators. There are a number of them out there who are doing some really good stuff. It's great to see the SEC doing this event. Chat with the British, chat with the Canadians, the Singaporeans, the Australians, they’ve got teams of people working on this stuff."
The third hurdle, standards, is notably one largely in the hands of the blockchain community itself—by holding themselves to a higher standard when incorporating blockchain technology into financial service businesses, the community can hasten the path to widespread mainstream adoption. Since there is little regulatory guidance in this arena, it would be in the best interest of blockchain entrepreneurs to self-regulate and implement responsible business practices so that the technology and use cases are taken seriously and its reputation is not tainted.
The clear takeaway from this discussion is that each member of the panel was very upbeat with respect to the potential of blockchain technology, its many positive uses in the financial services sector, and the ability for growth and eventual adoption on a larger scale. The panel ended with the general consensus that widespread adoption of blockchain technology was a question of “when, not if.”