In a span of 48 hours this week, two noteworthy developments occurred on the U.S. regulatory front:

  1. A major bank regulatory agency, the Office of Comptroller of Currency (the “OCC”), published Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective; and
  2. A commissioner from the Commodity Futures Trading Commission (the “CFTC”), J. Christopher Giancarlo, addressed the Depository Trust & Clearing Corporation 2016 Blockchain Symposium, delivering his personal observations on the development of financial technologies in a speech entitled Regulators and the Blockchain: First, Do No Harm.

This posting will summarize the OCC’s publication and provide excerpts from CFTC Commissioner Giancarlo’s speech.  As we explained in a February 2016 posting (Doing Business with Regulated Market Participants: Why Regulations Are So Important Even (Especially?) To the Unregulated), we believe that these regulatory developments are as important to regulated market participants (like banks) as they are to the unregulated innovators looking to sell services to those regulated market participants and, in many cases, compete with those participants for market share.

Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective

On March 31st, the OCC published its perspectives on responsible innovation in the Federal Banking System.  In short, the 11-page white paper outlined the OCC’s commitment to make sure that “banking institutions with federal charters have a regulatory framework that is receptive to responsible innovation along with the supervision that supports it.”  In conjunction with that publication, the OCC also announced that it will host a forum on responsible innovation on June 23, 2016, at Constitution Center in Washington, D.C. 

The publication is notable for several reasons.

Definition of Responsible Innovation – The OCC provided the following definition of responsible innovation:

The use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with sound risk management and is aligned with the bank’s overall business strategy.

Guiding Principles for Responsible Innovation – The OCC formulated eight principles to guide the development of its framework for understanding and evaluating innovative products and services that OCC-regulated banks may offer or perform:

  1. Support Responsible Innovation – The OCC has a goal of implementing processes that “will provide a clear path for banks and other stakeholders to seek the agency’s views and guidance.” One of the ideas mentioned was the implementation of pilot periods during which banks could “test or pilot new products or services on a small scale before committing significant bank resources to a full rollout.”
  2. Foster Internal Culture Receptive to Responsible Innovation –  As an internal administrative matter, the OCC has a goal of fostering a culture that is receptive to responsible innovation.
  3. Leverage Agency Experience and Expertise – The OCC will work to ensure that experts across professional disciplines – examiners, compliance, legal, IT, etc. – benefit from the expertise throughout the entire agency.
  4. Encourage Responsible Innovation – The OCC will encourage responsible innovation that provides fair access to financial services, including by sharing success stories of how national banks and federal savings associations have innovated “to increase the speed, efficiency, effectiveness , and transparency of financial transactions.”
  5. Further Safe and Sound Operations Through Effective Risk Management – The OCC will consider how national banks and federal savings associations “identify and address risks resulting from emerging technology.” In respect of this principle, the OCC specifically cited to previous guidance bulletins, including its 2011 Supervisory Guidance on Model Risk Management and its 2013 Third-Party Relationships bulletin.
  6. Encourage All Banks – Large and Small – to Integrate Responsible Innovation Into Their Strategic Planning – The OCC will encourage banks to apply traditional strategic planning criteria to their consideration and discussion of innovative products and services.  Specific consideration should be given to “the bank’s long-term business plan rather than following the latest fad or industry trend.”
  7. Promote Ongoing Dialogue Through Formal Outreach – The OCC views outreach as a significant tool for the development of responsible innovation and will bring together banks, nonbanks, and other stakeholders through forums, workshops, and meetings.  One specific idea was to “host ‘innovator fairs’ to bring together banks and nonbank innovators with OCC experts to discuss regulatory requirements and supervisory expectations in the financial services industry.”
  8. Collaborate with Other Regulators – The OCC will work with other bank regulatory agencies with the goal of providing banks with “greater confidence that regulators who share responsibilities will consider innovative ideas consistently.”

The OCC also solicited comments on a series of nine questions, many of which were targeted to the use of innovative technologies by community banks.

The publication and related information is available here.

Commissioner Giancarlo’s Address – Regulators and the Blockchain: First, Do No Harm

On March 29th, CFTC Commissioner Giancarlo addressed the Depository Trust & Clearing Corporation 2016 Blockchain Symposium, delivering his personal observations on the development and regulation of Blockchain, distributed ledger, and other financial technologies.  The remainder of this posting consists of excerpts from Commissioner’s speech (with footnotes omitted for the sake of “readability”).

Today, as you know, a new technology is at hand that may offer a similarly profound tool to share networks of information. Yet, its development is at risk of being stymied by disparate and uncertain regulation…

The Emerging Technology of Distributed Ledgers

The emergence of distributed ledger technology, which all of you know is sometimes referred to simply as “DLT” or “blockchain,” may revolutionize the world of finance. In fact, the Bank of England has called DLT the “first attempt at an ‘Internet of finance.’”…

There is no doubt that DLT has sparked an incredible amount of interest within the financial industry… Billions of dollars are being invested in dozens of new ventures and innovations…

Yet, this investment faces the danger that when regulation does come, it will come from a dozen different directions with different restrictions stifling crucial technological development before it reaches fruition.

The Need for a “Do No Harm” Regulatory Approach to Distributed Ledger Technology

I believe that innovators and investors should not have to seek government’s permission, only its forbearance, to develop DLT so they can do the work necessary to address the increased operational complexity and capital consumption of modern financial market regulation…

Fortunately, there is a good model for fostering the healthy development of DLT – the U.S. approach to the early Internet…

In February 1996, Congress recognized that “the Internet . . . ha[d] flourished, to the benefit of all Americans, with a minimum of government regulation” and thus sought to ensure that Internet-access services would remain “unfettered by Federal or State regulation.”  The Federal Communications Commission (FCC) agreed that Internet services “should exist in a minimal regulatory environment that promotes investment and innovation”and accordingly issued a series of orders affirming that Internet service providers would be governed under a comparatively relaxed framework…The U.S. also engaged with the Organization for Economic Cooperation and Development to adopt a similar light-touch Internet regulation regime.

During the period of this “do no harm” regulatory framework, a massive amount of investment was made in the Internet’s infrastructure. It yielded a rapid expansion in access that supported swift deployment and mass adoption of Internet-based technologies…“Do no harm” was unquestionably the right approach to development of the Internet.

Similarly, “do no harm” is the right approach for DLT. Once again, the private sector must lead and regulators must avoid impeding innovation and investment and provide a predictable, consistent and straightforward legal environment. Protracted regulatory uncertainty or an uncoordinated regulatory approach must be avoided, as should rigid application of existing rules designed for a bygone technological era.

Regulators Must Coordinate in Their Response to DLT to Allow it to Flourish

Much like the Internet, U.S. and foreign regulators must coordinate to create a principles-based approach for DLT oversight in order to provide the flexibility, certainty and harmonization necessary for this technology to flourish…

Regulation of DLT must indeed be coordinated on a multilateral level based on the principle of “do no harm.” Just as many financial service firms are joining together in broad DLT consortiums, regulators must do the same…

Without such a “do no harm” approach, financial service and technology firms will be left trying to navigate a complex regulatory environment, where multiple agencies have their own rule frameworks, issues and concerns.  The industry is already starting to express these concerns…

It is therefore critical for regulators to come together to adopt a principles-based approach to DLT regulation that is flexible enough so innovators do not fear unwitting infractions of an uncertain regulatory environment…

Revisit Existing Regulation

While international regulatory coordination and the adoption of a principles-based approach are important, each regulatory agency can take steps now to ensure that its existing rules do not inhibit DLT development and adoption.

For the CFTC, one example comes to mind – recordkeeping rule 1.31…

The CFTC should revisit this rule and make it technologically neutral such that it can accommodate DLT and other innovations that promote efficiency, accuracy and security in recordkeeping. The CFTC should also examine and, as necessary, revise other rules that may inhibit DLT innovation. Other regulators should similarly examine their recordkeeping and other rules.


The United States’ global leadership in technological innovation of the Internet was built hand-in-hand with its enlightened “do no harm” regulatory framework. Yet, when the Internet developed in the mid-1990s, none of us could have imagined its capabilities that we take for granted today. Fortunately, policymakers had the foresight to create a regulatory environment that served as a catalyst rather than a choke point for innovation. Thanks to their forethought and restraint, Internet-based applications have revolutionized nearly every aspect of human life, created millions of jobs and increased productivity and consumer choice.

Regulators must show that same forethought and restraint now…

Of course, as Commissioner Giancarlo noted at the beginning of this address, these were his own views and do not necessarily constitute the views of the CFTC, his fellow commissioners or the CFTC staff.  And, given the scope of his comments, we can also add that his views may not represent the views of other regulators in the U.S. and throughout the world.  Nevertheless, Commissioner Giancarlo’s views are interesting and “worth the read,” as the saying goes.

Commissioner Giancarlo’s address is available in its entirety here.

Good day.  Good week for regulatory developments.  DR2