On July 6, 2017, the Commodity Futures Trading Commission (“CFTC”) announced that it had granted LedgerX registration as a swap execution facility (“SEF”). LedgerX is a platform that will trade and clear options on bitcoin. LedgerX has also applied to become a derivatives clearing organization. If approved, LedgerX “would be the first federally regulated bitcoin options exchange and clearing house to list and clear fully-collateralized, physically-settled bitcoin options for the institutional market.” Bitcoin is a cryptocurrency whose creation and distribution is governed by an open source program, and whose exchange is governed by distributed ledger technology (“DLT”). A distributed ledger, as we have previously explained, “is a type of database in which identical copies of information are distributed and maintained among multiple parties or multiple nodes in a computer network.” In May 2016, the CFTC granted SEF registration to TeraExchange, LLC, which offers a U.S. Dollar/bitcoin swap.
The willingness of the CFTC to grant SEF registration to exchanges whose products will be based on innovative technology such as DLT is consistent with Acting Chair J. Christopher Giancarlo’s forward-thinking approach to FinTech. Indeed, Acting Chair Giancarlo has specifically “called for regulators to embrace distributed ledger technology.” He also often cites the potential of DLT when discussing the optimal regulatory approach to FinTech. In a May 2016 speech, Acting Chair Giancarlo argued that DLT “could be the biggest technological innovation in the financial services industry and financial market regulation in a generation or more,” and he specifically outlined the parameters of a “do no harm” regulatory approach that would enable regulators to “promote DLT and other financial technology.” These parameters for regulators include using “dedicated, technology savvy teams to work collaboratively with FinTech companies” and giving FinTech companies “breathing room” to pursue innovation without fear of enforcement action. Acting Chair Giancarlo has since repeatedly urged regulators to adopt his “do no harm” approach.