GAO Assesses FinTech, DLT Landscape

On Thursday, the Government Accountability Office offered an in-depth examination of distributed ledger technology (DLT) and accompanying financial regulation. The GAO found that 1) DLT remains in its infancy and 2) inconsistent and complicated regulation may threaten to suffocate development.

  • On March 22, 2018, the US Government Accountability Office (GAO) published a 132-page report at the request of Congress entitled “Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight.”

    The report included extensive commentary on blockchain and distributed ledger technologies, focusing heavily on issues of licensing and cybersecurity.


    “The complex U.S. financial regulatory structure can complicate fintech firms’ ability to identify the laws with which they must comply and clarify the regulatory status of their activities,” said the GAO. “As noted in our past reports, regulatory oversight is fragmented across multiple regulators at the federal level, and also involves regulatory bodies in the 50 states and other U.S. jurisdictions.”

    This is a familiar foe in the cryptocurrency world. In fact, to support virtual currency businesses, Coin Center strongly advocates for a federal licensing system for money transmitters rather than the state-by-state licensing that is currently standard. Unsurprisingly, the GAO learned through interviews that FinTech firms have been struggling to research and abide by labyrinthine licensing requirements that vary by state.

    Without a doubt, uniform licensing standards could help tremendously. However, the GAO noted, there are potential advantages to having state regulators oversee money laundering concerns and similar matters. Essentially, state regulation might defray government costs (anything to reduce the deficit, right?).

    What’s terrible, though, is that smaller firms struggle to meet the costs of compliance research and licensing, which contributes to a regulatory environment more suited to dominant monopoly (but that’s an issue that extends far beyond the blockchain ecosystem).

    Unclear laws are an additional challenge. The GAO said, “In particular, understanding the laws and regulations that may apply to fintech firms was not easy because existing regulations were sometimes developed before the type of product or service they are now offering existed.” With the sophisticated instruments and programs under development in the blockchain industry, firms don’t always know what regulation might apply to them.

    Unfortunately, this means that American companies are in danger of falling behind, and the United States risks the loss of forward-looking, risk-loving entrepreneurs. The report explained, “Fintech payments and DLT firms and other market participants told us that navigating this regulatory complexity can result in some firms delaying the launch of innovative products and services—or not launching them in the United States—because the FinTech firms are worried about regulatory interpretation.”


    The GAO also explored virtual currency and tokens, paying special attention to the activities of federal regulators like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The GAO provided a light summary of recent and significant actions by the regulators.

    The office demonstrated special concern about the irreversibility of transactions, saying that virtual currencies could “pose some unique risks to consumers.” The ostensible irreversibility of transactions (notwithstanding the DAO) also raises red flags and possible legal challenges, per the Federal Reserve.

    The GAO report explained that DLT is “in the early stages of development,” and noted that the Fed and the CFTC have cautioned that there are potential “cybersecurity and operational risks.”

    Still, the GAO wasn’t all doom and gloom. Among other potential benefits, the report noted, “Innovations in payments, including the use of DLT, could reduce the cost of payments for consumers.” The GAO also highlighted that “using DLT may greatly reduce settlement times for currency, derivatives, and securities transactions by improving processes or reducing the number of entities involved in a transaction.”

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