The financial tech revolution is nigh — our next move is critical

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A 21st-Century vision is needed to re-wire and restructure the financial system for its digital destiny, not the backward-looking effort to rewrite the 20th-Century Glass-Steagall Act.

The technology of the future that is thought capable of revolutionizing financial institutions and its regulators is already here. But with no national plan to harness it for economic betterment or regulatory transparency, it may well represent another missed opportunity to restructure the financial system.  

{mosads}Instead of a myriad of regulators and industry members approaching this piecemeal, a comprehensive industry/government partnership is needed to guide the country and to lead the world in rewiring the financial system. 


One need only look to the evolution of the internet, with its revolutionary concepts of distributed communication that fundamentally changed how the world and its financial institutions communicate. A similar revolutionary technology, distributed ledger technology (DLT), is promising to fundamentally change how financial institutions store and report information, but only if it can become a common good like the internet.

The internet’s early use for fail-safe communication for defense purposes later evolved as generalized technology for communications of all types. This occurred when the government removed itself from its early development and governance role in 1991 and turned it over to commercial interests.

This time, the new generation of revolutionary technology is already in the hands of commercial interests, primarily financial institutions. However, unlike the internet, which government nurtured to maturity, we may be allowing premature competition among regulators and financial industry members, preventing efforts at refining the technologies for developing common interest solutions.

Distributed ledger technology is an underlying infrastructure technology of the blockchain. Both DLT and the blockchain were conceived in 2008 by academics, later to be implemented by entrepreneurs to support the digital cryptocurrency Bitcoin. Distributed ledger technology works through the use of the distributed communications technology of the internet.

It acts like a huge ledger (a single decentralized book-of-record) which records every transaction and distributes this information across computer nodes that are connected to the internet. It is a single immutable ledger, one copy shared by all.

It has tremendous promise to remove many of the hundreds of data intermediaries and financial market utilities that reconcile separate, non-standard ledger data kept by each financial institution, each different in content and format. Regulators need to reconcile and normalize this data before it can be aggregated and understood. 

There are many collaborations, start-ups and regulatory initiatives supporting DLT proofs-of-concept for various uses, from trading, to payment systems, to securities settlement, to inventory management. 

In the regulator space, the Office of the Comptroller of the Currency (OCC), a leading regulator for national banks, is evaluating charter applications from financial technology (fintech) companies  for delivering services to retail customers. The Federal Reserve has also engaged in the fintech debate, claiming OCC’s chartering of fintech companies raises issues of access to Federal Reserve loans and other services.

The Conference of State Banking Supervisors (CSBS) filed a complaint against the OCC, arguing that it lacks the legal authority to offer such a license and that OCC fintech chartered companies threaten consumer protection rules.

The Commodity Futures Trading Commission (CFTC) has proposed using DLT for its future data collection efforts after admitting that attempts at collecting and aggregating futures and swaps data reported to it has been a failure. At the same time, the Securities and Exchange Commission (SEC) is in the midst of rolling out the largest data collection effort ever attempted — the Consolidated Audit Trail (CAT) — for collecting data on bonds, stocks and options.

With the CAT rollout and data collection not yet begun, a more robust and comprehensive DLT solution could be proposed, one which combines important CFTC products with those of the SEC in a shared data collection undertaking.     

Already, many DLT proofs-of-concept are indicating far narrower objectives than DLT’s potential, even though, or perhaps because, DLT’s promise is to eliminate or create alternative roles for these same financial market participants.

One of the prevailing views among industry members is that DLT will not realize its full potential, not because of the technology not working, but rather because of the hindrances imposed by existing financial regulations.

However, as noted in a recent fintech research report authored by the International Organization of Securities Commissions (IOSCO), “One of the benefits of DLT is that regulators can participate as one of the nodes in the DLT, thereby having automated access to all the data. This in turn would allow regulators to have more complete and more traceable, real time records.”

The U.S. needs a comprehensive fintech and regtech (regulatory technology) plan to efficiently deploy DLT. Without such a plan, we may have set in motion competitive forces prematurely, while pulling things out of current regulations that have significant implications for the financial system’s digital future.

For example, the Dodd-Frank replacement bill, The Financial CHOICE Act, eliminates the Office of Financial Research (OFR). The rationale for elimination focuses almost exclusively on its duplication of economic analysis done by multiple federal agencies. This analysis fails to recognize the OFR’s key role in driving data standardization, a necessity for making both DLT and systemic risk analysis possible.

With standardization, fintech and regtech innovation can enable virtual global views of financial data that is disbursed throughout local computer nodes (data collection points) across the globe. But this is only possible if these nodes conform to both common data standards and common networking protocols. 

President Trump should establish a new national office to center the dialogue, guide the standardization of new technologies and realize the vision for rewiring finance for its shared 21st-Century destiny. This new office should be the center of research and innovation to build links between evolving technologies and new regulations.

Regulatory oversight would be less costly and more precise as analysis of transaction data would utilize learning algorithms that get smarter each day as data is accumulated and patterns emerge. 


Allan Grody is the president of Financial InterGroup Advisors — strategists, consultants and researchers in financial services with particular focus on bank regulation and the design and implementation of innovative enterprise solutions. Grody is also an editorial board member of the Journal of Risk Management in Financial Institutions. His work, writings and research focus on the intersection of risk, regulation, data and technology.

The views expressed by contributors are their own and not the views of The Hill. 

Tags Bitcoin Blockchains Cryptocurrencies DLT economy Finance Financial markets Financial services Financial technology Money Regulatory technology Systemic risk

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