CFTC’s Giancarlo on Permissionless Innovation for the Blockchain

by on April 1, 2016 · 0 comments

Christopher GiancarloU.S. Commodity Futures Trading Commission (CFTC) Commissioner J. Christopher Giancarlo delivered an amazing address this week before the Depository Trust & Clearing Corporation 2016 Blockchain Symposium. The title of his speech was “Regulators and the Blockchain: First, Do No Harm,” and it will go down as the definitive early statement about how policymakers can apply a principled, innovation-enhancing policy paradigm to distributed ledger technology (DLT) or “blockchain” applications.

“The potential applications of this technology are being widely imagined and explored in ways that will benefit market participants, consumers and governments alike,” Giancarlo noted in his address. But in order for that to happen, he said, we have to get policy right. “It is time again to remind regulators to ‘do no harm,'” he argued, and he continued on to note that

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 [for the blockchain].

What Giancarlo is referring to is the approach that the U.S. government adopted toward the Internet and digital networks in the mid-1990s. You can think of this vision as “permissionless innovation.” As I explain in my recent book of the same title, permissionless innovation refers to the notion that we should generally be free to experiment and learn new and better ways of doing things through ongoing trial-and-error.

How did U.S. policymakers make permissionless innovation the cornerstone of Internet policy during the mid-1990s? In my book, I highlight several key policy decisions, but the most crucial moment came with the Clinton Administration’s 1997 publication of Framework for Global Electronic Commerce in July 1997.  As I have noted here many times before, the document was a succinct and principled vision statement that made the idea of permissionless innovation the cornerstone of Internet policy for America. The five principles at the heart of this beautiful Framework were:

1. The private sector should lead. The Internet should develop as a market driven arena not a regulated industry. Even where collective action is necessary, governments should encourage industry self-regulation and private sector leadership where possible.

2. Governments should avoid undue restrictions on electronic commerce. In general, parties should be able to enter into legitimate agreements to buy and sell products and services across the Internet with minimal government involvement or intervention. Governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures or new taxes and tariffs on commercial activities that take place via the Internet.

3. Where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce. Where government intervention is necessary, its role should be to ensure competition, protect intellectual property and privacy, prevent fraud, foster transparency, and facilitate dispute resolution, not to regulate.

4. Governments should recognize the unique qualities of the Internet. The genius and explosive success of the Internet can be attributed in part to its decentralized nature and to its tradition of bottom-up governance. Accordingly, the regulatory frameworks established over the past 60 years for telecommunication, radio and television may not fit the Internet. Existing laws and regulations that may hinder electronic commerce should be reviewed and revised or eliminated to reflect the needs of the new electronic age.

5. Electronic commerce on the Internet should be facilitated on a global basis. The Internet is a global marketplace. The legal framework supporting commercial transactions should be consistent and predictable regardless of the jurisdiction in which a particular buyer and seller reside.

It was and remains a near-perfect vision for how emerging technologies should be governed because, as I note in my book, it “gave innovators the green light to let their minds run wild and experiment with an endless array of exciting new devices and services.”

Commissioner Giancarlo agrees, noting of the Framework that, “This model is well-recognized as the enlightened regulatory underpinning of the Internet that brought about profound changes to human society. … 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.” And countless new exciting systems, devices, and applications came about, which none of us could have anticipated until we let people experiment freely.

By extension, we should apply the “do no harm” / permissionless innovation policy paradigm more broadly, Giancarlo says.

‘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. . . . 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.

And if America fails to adopt this approach for the Blockchain, it could be disastrous. “Without such a “do no harm” approach,” Giancarlo predicts, “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.” And that led Giancarlo to touch upon an issue I have discussed here many times before: The growing reality of a world of “global innovation arbitrage.” As I noted in an essay on that topic, “Capital moves like quicksilver around the globe today as investors and entrepreneurs look for more hospitable tax and regulatory environments. The same is increasingly true for innovation. Innovators can, and increasingly will, move to those countries and continents that provide a legal and regulatory environment more hospitable to entrepreneurial activity.”

This is why it is so crucial that policymakers set the right tone for innovation for blockchain-based technologies and applications. If they don’t, innovators would seek out more hospitable legal environments in which they can innovate without prior restraint. As he ellaborates:

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. Some regulators have already openly acknowledged the need for light-touch oversight. For instance, the UK’s Financial Conduct Authority (FCA) has committed to regulatory forbearance on DLT development for the foreseeable future in an effort to give innovators “space” to develop and improve the technology. The FCA is even going one step further and engaging in discussions with the industry to determine whether DLT could meet the FCA’s own needs. Similarly, a few weeks ago, Masamichi Kono, Vice Minister for International Affairs at the Japan Financial Services Agency, stated that regulators must take a “pragmatic and flexible approach” to regulation of new technologies so not to stifle innovation.

I have no doubt that the FCA’s intention to give DLT innovators “space” to innovate will be good for DLT research and development. I also suspect that it will be good for the UK’s burgeoning FinTech industry and the jobs it creates across the Atlantic. U.S. lawmakers concerned about the rapid loss of jobs in the U.S. financial service industry, especially in the New York City area, should similarly look to provide “space” to U.S. DLT innovation and entrepreneurship and the well-paying American jobs that will surely follow.

That is exactly right. I just hope other policymakers are listening to this wisdom. The future of blockchain-based innovation depends upon it. America should follow Commissioner Giancarlo’s wise call to adopt permissionless innovation as the policy default for this exciting technology.


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