Blockchain Not Ready for Regulatory Sandbox, Fed's Brainard Says

By Gregory Roberts

Oct. 7 — Federal Reserve Governor Lael Brainard doused the idea of the agency setting up a regulation-light “sandbox” for the testing of blockchain applications in the banking sector, telling a Washington conference Oct. 7 that the technology is “immature.”

Brainard's comments came in a panel discussion on blockchain, or distributed ledger technology (DLT), at a conference sponsored by the Institute of International Finance.

Brainard opened her appearance with lengthy prepared remarks, in which she said that the board would publish a report on DLT by the end of 2016. She referred to a board working group “that is engaged in a 360-degree analysis of financial innovation across the broad range of our responsibilities.”

A version of a regulatory sandbox was outlined in a House bill filed in September by Rep. Patrick McHenry (R-N.C.), a leader of efforts by the majority House Republicans to promote innovation in the financial services industry.

McHenry's bill (H.R. 6118) directs the Federal Reserve and 11 other regulatory agencies to set up offices to encourage innovation and outlines a mechanism for financial technology companies to propose tests of products or services that would not be subject to certain regulations the companies view as overly confining and outmoded. The tests would be subject to limitations on their duration and extent, and would include protections for consumers and financial systems.

Some fintech entrepreneurs suggest the U.S. is falling behind the increasing number of countries that have unveiled their own sandboxes, including the U.K. and Singapore.

But Brainard said it would be “premature” for the Fed to create a DLT sandbox.

Brainard praised the potential of DLT in her prepared remarks and identified several promising uses for it, such as international payments, trade finance, securities settlement and recovery from cyberattack.

She said, though, that “many potential applications are in their infancy.”

“The industry is eager to get on with adopting the various possibilities that distributed ledger technology may bring,” she said. “However, established players and, increasingly, new entrants understand that there are important guardrails that have been carefully developed over many years in the arena of payments, clearing, and settlement. The safety and soundness of financial institutions, safety and efficiency of the payment system, and broader financial stability are critical to a healthy financial environment that fosters innovation with broad public benefits over the long run.”

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