The Chairman of the US Commodity Futures Trading Commission (CFTC) called for the implementation of “principle-oriented regulation” of cryptocurrencies.
Heath Tarbert succeeded former President J. Christopher Giancarlo in July 2019. He said that adopting such a way of supervising digital assets would allow for a period of development and observation before adopting more targeted rules. On November 19th, Tarbert published a column on the CFTC website explaining his views on password regulation.
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Tarbert emphasized in the article that "principle-oriented regulation" does not mean adopting a loose approach or deregulation, he said, in fact, "is far from being so." He explained that this approach involves moving from detailed rules to relying more on “widely stated principles” to set standards for regulated companies and products.
The following is the content of the article published by Tarbert:
This is an exciting time for our derivatives market. From blockchain to digital assets, innovative financial technologies are changing the way the derivatives market works.
The Commodity Futures Trading Commission (CFTC) plays an important role in determining how these new products and technologies evolve. Our mission is to promote the integrity, resilience and vitality of the derivatives market through sound regulation. The advantage of digital assets is to promote the development of exciting new products while reducing potential risks.
We must remember that the way of regulation is as important as the object of regulation. This is why the principle-oriented approach is the best way to govern this emerging market.
Principle-oriented regulation does not require detailed statutory rules and relies more on high-level, broadly stated principles to set standards for regulated companies and products. The company will be responsible for finding the most effective way to meet these standards. This approach provides greater flexibility to the technology industry. It will also allow the CFTC to respond more quickly to changes in technology and markets to stay ahead.
A principle-oriented approach can help reduce the need for a large number of regulations that attempt to govern all aspects of a company's behavior. As Winston Churchill puts it: “If you make 10,000 rules, you destroy all respect for the law.” However, at this stage, the United States covers banking, securities and derivatives regulation. Articles 12 and 17 of the Code of Federal Regulations now exceed 13,000 pages.
We must realize that principle-oriented regulation is not a euphemism for “relaxation of regulation” or “mild regulation” – far from it. Principle-oriented regulation is the same regulatory outcome as rule-based regulation, but in a different way. In many cases, it does this in a more efficient and flexible way. This flexibility also prevents the use of vulnerabilities to subvert these results, which expose the inherent vulnerabilities of rule-based regulation before the financial crisis.
Of course, in practice, there are few purely principle-based or purely rule-based regulations. Instead, they represent the ends of the regulatory map. Any principle-based regulatory system has certain rules, and any rule-based regulatory system has certain principles. Therefore, we often see a hybrid regulatory system of principles and rules. The appropriate combination of aspects will depend on several factors, such as regulatory objectives, market maturity, characteristics of market participants, and the quality of the regulatory body.
Applying this analytical framework to digital assets and other financial technology products, I came to the conclusion that we should primarily adopt a principle-based approach in this area. Some of the issues related to customer protection—the processing of assets held by financial companies on behalf of customers, such as cash and securities as margin, are generally more appropriate for rule-based methods. But overall, CFTC staff are currently considering how to better tailor the financial technology to the exchange (where the derivatives are traded) and the clearing house (the entity that undertakes and manages the counterparty's credit risk after the transaction). Core principles.
For example, the core principle has always been at the heart of our assessment of the clearing house, where the clearing house will liquidate and deliver derivatives of Bitcoin. Digital assets face a unique operational risk, that is, the system is hacked and may result in financial loss or theft. Our core principles include requiring the clearinghouse to have systems that identify and minimize operational risks. The Commodity Futures Trading Commission did not develop formulaic and normative rules to define what kind of system is needed. The agency also did not elaborate on how to distribute operational risks between the clearing house, members and customers. However, the regulation of derivatives clearing houses is never loose.
Because we have adopted a principle-based approach, the three clearing houses we currently handle digital assets can use different methods to achieve bitcoin transfer and deal with the risk of loss. Every employee works with our frontline staff to comply with the CTFC's core principles of operational risk and loss allocation. This approach allows the market to develop under sound supervision, but market participants (rather than regulators) decide which specific arrangements are commercially viable.
Taking into account the rapid pace of innovation and the market that supports innovation, adopting a principles-based approach to regulating digital assets and other financial technology products will allow for a period of development and observation. After we fully understand the results and potential risks of digital assets, we may be able to adopt more specific rules or more balanced principles and rules. What we don't want to do is to take drastic measures to completely kill innovation.
Of course, our willingness to allow for innovation and development should not be confused with ways to tolerate fraud or low interference. The CFTC has been actively monitoring the digital asset market and has taken more than a dozen enforcement actions in this area against entities that fraud and provide unauthorized derivatives. We have recently filed a lawsuit against our breach of our core principles, which indicates that the CFTC sets a high standard, even if we allow regulated companies to reasonably decide how to meet those standards.
In many cases, in this global technology era, principle-based regulation can provide a more effective approach to financial services regulation than regulation based on highly statutory rules. Ensuring that the United States continues to be a global leader in financial technology is critical to our future prosperity. Principles ensure good regulation without negative consequences for innovation.