CFTC

Technology

Advisory

Committee

October 3, 2019 Presenters:

Brad Levy

Yesha Yadav

Shawnna Hoffman

Distributed Ledger 

Technology

Sub-Committee
Agenda

2

DLT Beyond Crypto

DLT and Data Privacy

Market Applications

Ongoing Questions for Policymakers
DLT Beyond Crypto

 In addition to virtual currencies, traditional 

finance is becoming active in adopting DLT:

 Applications are proliferating

 Interplay between finance and crypto is becoming 

clearer and more concrete.

 The parts vs the whole chain

 Storage, movement and automation related but 

discreet areas

 Functional areas from execution to safe keeping 

through to servicing

 All asset classes in play globally

3
DLT Subcommittee Discussions (I)

4

Can be useful in collateral 

management, trade 

reporting, smart contracts 

and payments

Can gain utility by 

harnessing the power of 

the cloud and artificial 

intelligence

Represents a long-term 

project that remains in its 

early cycle of development

Subcommittee has highlighted the promise and drawbacks of DLT
DLT Subcommittee Discussions (II)

5

From the edge to the cloud, 

there is a push/pull of 

centralized and decentralized 

technologies

Advancements in processing 

power and networking matter

Balance between data 

protection, automation and 

efficiency will drive outcomes

Important to consider the wider set of technologies and

architectures that are rapidly evolving
The Importance of Privacy

6

Ensuring data privacy 

represents a central 

concern for financial 

markets

Financial data is 

highly sensitive

Parties value 

anonymity

Such data is 

attractive for theft or 

hacking

Operational 

disruptions to data 

are very costly.

At the same time, 

regulators need 

access to real-time 

data in order to 

understand risk 

Data cannot be 

vulnerable to being 

shared carelessly, 

conferring unfair 

advantage. 
Privacy, 

Confidentiality 

and DLT

7

A permissioned blockchain can be 

created to restrict information 

transfer and participation between 

a select group of users.

For example, a permissioned 

network may restrict access to a 

small group of dealers.

It can maintain the confidentiality 

of trades.

Privacy and confidentiality for markets can be enabled by 

how DLT networks are structured:

DLT networks can be developed to provide users with ways 

to safeguard their anonymity and ensure data integrity 

and confidentiality. 
Defining Data 

Privacy and 

Confidentiality

8

 A key challenge to the objective 

of ensuring data privacy in DLT 

lies in its definition

 Encryption standards constitute 

an essential mechanism by which 

DLT can secure data

 In interconnected financial 

markets, encryption standards 

must also enable interoperability

 International markets mean that 

the privacy offered by encryption 

meets with international 

rulemaking and standards
Encryption, Digital Identities 

and Securing Trading Data (I)

9

In decentralized platforms, 

users can create anonymity 

and privacy through 

“asymmetric encryption.”

Such an encryption system 

is based on users holding a 

public key as well as a 

private key.

A public key and private key 

are unique to users and are 

mathematically linked.

Information “signed” by 

user a’s private key is 

unlocked by reference to 

her public key.

Encrypting user identity and trading data is critical to realizing the 

advantages of DLT. 
Encryption, Digital Identities 

and Securing Trading Data (II)

 Hashing algorithms (e.g. SHA-256) 

convert data into an encrypted 

“fingerprint” that represents that data’s 

digital signature. 

 SHA-256 (for example) represents a oneway hash that means that it is impossible 

to reverse engineer and retrieve the 

underlying data in original form.

 This helps protect the data’s integrity. If 

this underlying data is changed in any 

way, a new hash is generated.

10

DLT is known for its ability to created an encrypted and immutable 

digital record of transactions. 
Encryption, Digital Identities and 

Securing Trading Data (III)

11

Once a transaction is concluded, the hashed fingerprint 

represent a trusted and immutable record for a network. 

Nodes within a DLT network maintain the hashed digital 

fingerprint of transactions rather than vast quantities of 

underlying trade data. 

Underlying documents (e.g. a swaps contract or a warehouse 

receipt) may be maintained elsewhere like on a secure cloudbased system, such as a peer-to-peer, distributed file storage 

system. 

DLT encryption can thus enable efficient storage and filing of documents.
DLT and the

Custody Function

12
Example: Custody (I)

13

The custody function is 

essential to financial markets –

and especially in derivatives.

For financial derivatives – such 

as options or Treasury futures –

require custody of such 

dematerialized assets.

For commodity-related 

derivatives, custody involves 

the storage and safe movement 

of assets like oil, wheat or 

livestock. 

Collateral: collateral in the 

form of securities or cash must 

be securely maintained and 

transferred.
Example: Custody (II)

14

Ensuring data privacy provides the basis for enhancing trust and supporting 

custody. 

DLT can securely verify transaction data, proof of ownership and individual 

exposures, encrypt and create a digital fingerprint for the network. 

Distributed networks can reduce the chance that any single entity possesses 

large swaths of information. 

It can thus limit damage that might arise from a failure to a central data 

custodian. 
Example: Custody (III)

15

Once identities and trade 

information is verified through 

a DLT network, trusted data 

can support the completion of 

a variety of trades.

Transfer of financial assets and 

cash between parties (e.g. 

collateral management).

Ensuring that physical assets 

are accounted for promptly and 

moved between parties.

Regulators can also ensure they 

have access to transaction 

information on the ledger and 

where assets are located and 

stored. 
DLT, Privacy and Custody

These processes can help build trust. It can lower the operational risk facing 

custodians where a central data repository experiences failure.

Once verified, this data can be relied on support custody in derivatives trades. 

Distributed ledgers automatically communicate with financial custodians or 

warehouses. 

DLT processes verify information underlying financial transactions, for example: 

Proof of Ownership Net Exposure of Parties

Type and Quantity of 

Assets in Derivatives 

Trade

16
Audits, Sharing Data and 

Facilitating Trades 

17
Audit and Compliance

18

Dlt-based networks 

collect transaction 

records from diverse set 

of financial systems

Append-only and 

tamperproof qualities 

create high confidence 

financial audit trail 

Privacy features ensure 

authorized user access

This can lower the cost 

of audit and compliance

Regulators can have 

“seek and find” access 

to data

 Financial data can be dispersed within firms

 Audit and compliance needs an indelible record of all key 

transactions over reporting period
Shared Reference Data

19

Each participant 

maintains their own 

codes within a 

permissioned DLT 

network

The network can create 

a single view of the 

entire dataset to those 

given access to this data

Consolidated, consistent 

dataset reduces errors 

and transaction costs as 

well as allows near realtime access for parties 

and regulators. 

DLT can supports code 

editing and routing code 

transfers between 

network participants

 Competitors/collaborators in a market (e.g. OTC swaps) 

need to share reference data, e.g. bank routing codes

 Traditionally, each member maintains their own codes, and 

forwards information to a central authority

 An information subset can be owned by organizations
Concluding Trades between Multiple 

Parties (e.g. Letters of Credit)

20

DLT can provides common ledger for 

transactions such as letters of credit

Allows all counterparties to have the same 

validated record of transaction and 

fulfillment

It can reduce transaction costs, execution 

times, currency fluctuation risks and 

improve monitoring.

 Bank handling letters of credit wants to offer them to a 

wider range of clients.

 Currently constrained by costs and execution times.
Ongoing Questions for 

Policymakers

21

Do DLT-based information 

verification standards meet 

various legal standards for data 

privacy and security in 

derivatives?

For interoperability, will 

markets demand just a handful 

of encryption standards? 

How should innovation in 

encryption take place, where a 

handful of standards support 

financial markets?

Should the CFTC lead 

international standard-setting 

in relation to data privacy and 

DLT?