CFTC

Technology

Advisory

Committee

July 16, 2020

Presenters:

Shawnna Hoffman

Mark Pryor

Yesha Yadav

Distributed Ledger 

Technology

Sub-Committee
Agenda

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Resiliency and Scalability in DLT

Introduction and Challenges

Market Applications

Regulatory Implications and Questions
Resiliency & Scalability in DLT

 Resiliency and Scalability are critical to the 

functioning of any DLT system in derivatives.

 Both values are connected: the more scalable a 

system, the greater the need for resiliency. 

 Scalability can implicate considerations of systemwide risk and stability, making resiliency a priority 

in market design.

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Introduction & Challenges: 

Key Features of DLT 

 A digital system of data verification for 

transactions, assets and users...

 That is decentralized and automated. Network 

nodes automatically apply pre-set verification 

protocols to ensure that the data is authentic.

 Network nodes rely on consensus to verify data 

accuracy and authenticity. 

 Once verified, data is cryptographically recorded 

on the ledger. The ledger is immutable and aims 

to be impervious to tampering. 

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5

Market Applications
Asset Tokenization in 

Agricultural Commodities.

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Mark Pryor, CEO

The Seam
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An abstract digital 

representation of some “fact”, 

claim or physical object.

Token:
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Physical and Non-Physical Assets
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1995

Historic Forms of Tokenization

Electronic Warehouse Receipt
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Fungible Non-Fungible

Carbon Credit (ton) Identity Preserved 

Commodity (specific 

physical bale of cotton)

Sustainable Production Claim 

(kilo) 

Unique art, collectible

U.S. Dollar

Types of Tokens
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Sustainable 

Farming Practices

The sustainability practices used in 

the production of agricultural goods 

must be digitally linked with the 

actual production.
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Physical 

representation, 

actual bale

Certified claims

1 token = 1 kilogram 

of verified sustainably 

produced cotton.

Fungible Tokens Non-Fungible Tokens
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Represents the right to one ton of carbon 

dioxide removals. 

Created from verified sustainable farming 

practices, farmers remove carbon from the 

atmosphere and store it in their soil. 

Carbon Credit 

Tokens

By 2030, Microsoft commits to become carbon 

negative, meaning that it will remove (buy down) 

more carbon from the atmosphere than it emits.
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Token Standards

Standard Description

ERC-20 Fungible token, useful for bulk commodities, 

interchangeable, volume-based claims, 

certificates

ERC-721 Non-Fungible token. Identity Preserved 

Commodities. Unique, one-of-a-kind.

ERC-998 Non-Fungible, composable token. Represents 

more than one digital asset (containerization)

ERC-1155 Multi Token Standard. A single deployed 

contract may include any combination of 

fungible tokens, non-fungible tokens or other 

configurations.
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One (1)

ERC-1155

Ninety (90)

ERC-721’s
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The InterWork Alliance (IWA) is a non-profit, member-led 

organization creating platform-neutral specifications and 

trusted certification to define how digital token business 

processes can interwork regardless of location or market 

segment.
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Agriculture is Advancing with DLT

and Asset Tokenization.

Thank you!
Regulatory Implications

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Introduction & Challenges:

Design Choices

 Regulatory implications depend on design choices for any 

DLT system. Some key ones include:

 Permissioned vs. Non-Permissioned: Non-permissioned 

systems may be more scalable, but they can lack resiliency 

and accountability.

 Use of Smart Contracts: DLT systems can be combined 

with specific code, e.g. to automatically transfer 

money/securities/reporting data. Use of smart contracts 

add utility and scaling but requires attention to ensure 

resilience and resistance to error and tampering.

 Interoperability: DLT systems that connect into existing 

infrastructure (e.g. for payments/securities settlement) 

raise concerns about ensuring continuity, resilience, 

systemic stability and accountability. 19
Regulatory Issues: Resilience

 DLT systems can be permissioned or non-permissioned.

 Permissioned systems can offer greater resilience and 

control. Participants must be cleared to participate by DLT 

system operator. They can also be held accountable.

 This helps ensure that all nodes are cleared and deemed to 

be non-malicious, deploying strong technology, cryptography 

and adhering to in compliance with eligibility conditions. 

 Permissioned systems may encourage greater use of 

automated smart-contracts within closed, trusted networks.

 Permissioned systems rely on an operator that has the 

expertise, experience and resources to run the DLT system. 

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Regulatory Issues: Resilience 

 Resilience means investment in top-quality 

compliance and technology. It also implicates 

accountability and liability. 

 High compliance costs can exclude smaller players 

that lack resources from offering innovations

 Resilience also requires attention to phasing in 

migration and interoperability of DLT systems with 

existing market infrastructure.

 This can limit scalability and network effects. Market 

participants may be discouraged from adapting to DLT 

if the timetable for phase-in is long and initial use 

cases are discrete or small-scale. 21
Regulatory Issues: Scaling

 Scaling implicates a number of regulatory concerns for DLT 

systems:

 Non-permissioned systems are likely more scalable. But unlikely 

that they be used in derivatives markets without risking resilience. 

There is no locus of accountability, monitoring and control. 

 Scaling will mean a system that processes vast quantities of data. 

Will this demand add latency? Will it increase the chance of errors, 

outages, tampering or manipulation? 

 How will the data embedded in a digital ledger be “stored” and 

“protected?” If a system is international, how will issues in relation 

to privacy, data portability, and cybersecurity be regulated?

 How will regulators access data on the ledger? Will data access 

create regulatory cooperation or competition between states? 

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Regulatory Issues: Scaling

 Scaling also raises issues in relation to how an emerging DLT 

system will be governed:

 Permissioned DLT systems, especially if widely used, will 

require attention to their governance model.

 What powers will an operator have to control the workings 

of the system? What responsibilities will attach to the 

monitor? How will the monitor be held accountable?

 Who gets to join a DLT network? Will criteria for entry 

entail new conditions distinct from those required to join 

an exchange today (e.g. specific cryptographic expertise)?

 How will risk and responsibility be allocated between the 

members of the DLT network? If costs for joining the 

network are high, membership will be lower. 23
Some Regulatory Approaches?

 How should regulatory approaches in relation to emerging 

DLT be crafted?

 Challenge owing to a new and emerging technology. Use 

cases are being highlighted, but development takes time. 

The technology can change and improve rapidly. 

 Should we use and tweak existing regulatory approaches, 

such as applying Title VII’s approach where a technology 

seeks to provide services in relation to swaps settlement?

 Do the Principles for Financial Markets Infrastructures 

provide a starting point?

 Or, are existing approaches too costly and likely to 

discourage innovation (especially by smaller, niche players)?

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Some Regulatory Approaches?

 Proportionality provides a possible way forward, offering a 

risk-based, tailored model. 

 This allows ratcheting up of regulations and compliance 

burdens when a technology becomes more scalable.

 It can allow small players room to innovate within 

established parameters without causing prudential risk.

 Where DLT systems are proven and ready to be adapted on 

a larger scale, they can be more rigorously overseen.

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Ongoing Questions and 

Concerns

 How to build cross-border DLT systems to verify data for 

international transactions? Derivatives are international. 

 Success of DLT systems internationally will depend on 

cooperation and coordination between regulators.

 Data regulation, liability, monitoring, governance questions 

require cross-border standards to ensure international scaling. 

 How will this be achieved? Is standard-setting viable in this 

area? Will CFTC take the lead?

 How should market participants proceed in the meantime? Are 

industry standards a partial substitute?

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Questions?

Thank you!

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