FCA starts dialogue on distributed ledger technology

The Financial Conduct Authority (“FCA”) yesterday released a discussion paper on distributed ledger technology (“DLT”). The FCA states that it will generally take a ‘technology neutral’ approach to regulating financial services and is interested in considering whether there is anything distinctive about DLT that would require it to take a different approach. This discussion paper is intended to start a dialogue on the future development of DLT.

DLT is a relatively recent advance that has received increasing amounts of industry, media, political and other stakeholder attention in recent years. The most well-known example of DLT is blockchain. DLT combines various existing tools such as shared databases, cryptography and peer-to-peer networking to offer firms the ability to share data efficiently and securely. Technology companies seeking to provide DLT-based solutions have grown sharply in number and size, and regulated firms are increasingly using this technology to provide financial services.

The FCA notes that DLT has the potential to provide various benefits for regulated markets. Most of these benefits will likely emerge in sectors where multiple participants need to share data and/or processes safely, particularly where firms are still reliant on paper-based records. DLT’s ability to remove the need for certain intermediaries, increase the speed of reconciliation and reduce costs has made it a popular subject of research for both regulators and industry. DLT’s increasing popularity has underlined the growing challenge of managing data safely and efficiently across all sectors. However, the adoption of DLT will take place only in areas where the advantages of increased efficiency are large enough to outweigh the costs of the associated technology transformation.

The potential for increased regulatory oversight of DLT is particularly significant. The FCA recognises that, while DLT is a new technology, some of the products and business models it enables may require consideration of whether regulatory requirements are appropriate. While DLT has great potential to help promote competition through disruptive innovation, this must be balanced against the FCA’s other statutory objectives of consumer protection and market integrity. The paper notes that DLT has the potential to offer digitised assets that can be delivered directly to consumers, legal agreements that can be composed in software and enshrined in cryptographic layers, and secured data provenance for property or identity.

The FCA states that while specific areas exist where DLT does not fit with its requirements, it can still achieve its desired outcomes. Therefore, the FCA understands the need to consider whether its rules prevent or restrict sensible development that would benefit consumers and hence whether changes may be needed.

Industry participants are invited to respond to the discussion paper by 17 July 2017. The FCA will then review any responses received and decide on its next steps. This might take the form of a Summary of Responses or a Consultation Paper.

The discussion paper can be found at www.fca.org.uk/publication/discussion/dp17-03.pdf .

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