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LabCFTC Releases Smart Contracts Primer

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The Commodity Futures Trading Commission’s LabCFTC has released, “A CFTC Primer on Smart Contracts”. The primer is part of LabCFTC’s effort to engage with innovators and market participants on a range of fintech topics, and follows on from a 2017 primer on virtual currencies. 

“Smart contracts are being used to drive further automation in our markets and may have an impact across a range of economic activities,” says LabCFTC director Daniel Gorfine. “This primer is focused on explaining smart contracts, exploring how they may impact our markets and highlighting potentially novel risks and challenges.”

The primer sets out to define “smart contracts”, including by exploring their history, characteristics, and potential applications that may eventually impact daily life. The primer explains early self-executing software logic evolving into current smart contract technology – for example, starting with a simple vending machine illustration and then discussing more complex examples, including credit default swap contracts. 

The primer works through a range of operational, technical, cybersecurity, fraud and manipulation, and governance risks and challenges. The primer goes on to speak to the CFTC’s role to protect market users and their funds, consumers, and the public.  

The primer looks at some of the potential use cases for smart contracts in financial market operations. Among these are derivatives, whereby LabCFTC says smart contracts could potentially streamline post-trade processes, real time valuations and margin calls. It also notes that in the realm of trade clearing and settlement, smart contracts could improve efficiency and speed of settlement with less misunderstandings of terms. Additionally, smart contracts could provide greater standardisation and accuracy of data reporting and recordkeeping (e.g., swaps data reporting, regulator nodes for real time risk analysis); as well as automated retention and destruction.

The primer also sets out the potential for such contracts to streamline trading of products subject to oversight by the CFTC (e.g., options, futures, and swaps) and enhance efficiency from pre-trade through post-trade (e.g., price discovery, execution, clearing, and settlement). Among the potential benefits noted are a reduction of duplicative confirmation; a reduction oftrade, capital, and margin risks; automated fulfillment of contracts; enhanced compliance with internal written policies and procedures and with legal obligations and regulatory requirements; as well as Improved regulatory reporting.

FSB Outlines Potential Financial Stability Issues from Crypto-Assets

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October 10th 2018
The Financial Stability Board (FSB) today published Crypto-asset markets: Potential channels for future financial stability implications. The report sets out the analysis behind the FSB’s proactive assessment of the potential implications of crypto-assets for financial stability.

The report includes an assessment of the primary risks present in crypto-assets and their markets, such as low liquidity, the use of leverage, market risks from volatility, and operational risks. Based on these features, crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value, or a mainstream unit of account, says the report.

Crypto-assets do not pose a material risk to global financial stability at this time, FSB finds. However, vigilant monitoring is needed in light of the speed of market developments, it says. Should the use of crypto-assets continue to evolve, it could have implications for financial stability in the future. Such implications may include: confidence effects and reputational risks to financial institutions and their regulators; risks arising from direct or indirect exposures of financial institutions; risks arising if crypto-assets became widely used in payments and settlement; and risks from market capitalisation and wealth effects.

Crypto-assets also raise several broader policy issues, FSB says, such as the need for consumer and investor protection; strong market integrity protocols; anti-money laundering and combating the financing of terrorism (AML/CFT) regulation and supervision, including implementation of international sanctions; regulatory measures to prevent tax evasion; the need to avoid circumvention of capital controls; and concerns relating to the facilitation of illegal securities offerings. These risks are the subject of work at national and international levels and are outside the primary focus of this report, says FSB.

Additionally, FSB says members have to date taken a wide variety of domestic supervisory, regulatory, and enforcement actions related to crypto-assets. National authorities and standard-setting bodies have issued warnings to investors about the risks from crypto-assets, as well as statements supporting the potential of the underlying distributed ledger technology (DLT) that they rely on to enhance the efficiency of the financial system. These actions are balanced between preserving the benefits of innovation and containing various risks, especially those for consumer and investor protection and market integrity, it says.

The FSB coordinates at the international level the work of national financial authorities and international standard setting bodies and develops and promotes the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with 65 other jurisdictions through its six regional consultative groups.

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.