As discussed in our alert of 2 March 2017 [reedsmith.com] global regulators are paying increasing attention to distributed ledger technology (DLT) (also known as blockchain). The European Securities and Markets Authority (ESMA) [esma.europa.eu] and the U.S. securities self-regulatory organisation, the Financial Industry Regulatory Authority (FINRA) [finra.org] both have asked for, and received, stakeholder feedback on issues around surrounding DLT, and the International Organization of Securities Commissions (IOSCO), has also recently published reports and held a roundtable with leading market analysts to discuss potential DLT issues.
Regulators globally are trying to understand industry participants’ and customers’ views on DLT’s potential perils and possibilities, as well as how DLT can potentially increase cost and time efficiencies and resiliency. Also, on 10 April 2017, the UK Financial Conduct Authority (FCA) published discussion paper DP17/3 on distributed ledger technology (FCA Discussion Paper). This followed a speech by the Executive Director of Strategy and Competition at the FCA, Christopher Woolard, at the Innovate Finance Global Summit. The FCA’s initiative on DLT follows on from its Project Innovate, which has included the creation of the FCA’s ‘regulatory sandbox’, whereby firms, including those developing DLT platforms, have been able to test innovative products and solutions in regulated financial services. [fca.org.uk]
The FCA Discussion Paper is aimed at users and providers of DLT technology in the financial services sector that falls within the FCA’s supervision. Generally, the tone of the FCA Discussion Paper is positive, noting and requesting examples of benefits of DLT, while recognising that DLT is a nascent technology and its uptake will ultimate depend on the willingness of firms to adopt it. Compared with IOSCO, which takes a more conservative approach towards public blockchains in its reports, the FCA is interested in feedback on the potential risks of closed networks that exclude non-incumbents.
The FCA encourages market participants to send their comments by 17 July 2017 through the online response form on its website. The FCA will then review the comments and publish a summary of responses or a formal consultation paper.