The Financial Conduct Authority (“FCA”) has opened for consultation its discussion paper on distributed ledger technology (“DLT”). The FCA is accepting responses until 17 July 2017.

Overview

The FCA has issued a discussion paper on the potential for future development of DLT in the markets it regulates. The FCA acknowledges that DLT is a rapidly developing technology with exciting potential but is conscious that it may also present new challenges and potential risks. The FCA is keen to engage in discussion with users and providers of DLT solutions in order to explore where the balance of risk and opportunity lies.

The publication of the discussion paper follows the introduction of several schemes by the FCA in an effort to encourage innovation, such as the Innovation Hub and the Regulatory Sandbox.

The consultation

The FCA describes DLT as technology that “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” and it anticipates several DLT solutions will move “from ‘Proof of Concept’ to ‘real-world’ deployments” in the second half of 2017 into 2018. A variety of DLT solutions are already being deployed in regulated financial services through the various mechanisms of the FCA’s ‘Innovate’ initiative – including the Regulatory Sandbox and Direct Support. With the brisk pace at which DLT is developing, the FCA is mindful of the need to engage in dialogue with stakeholders to ensure the current regulatory framework is appropriate.

The FCA acknowledges that consideration of how specific regulatory requirements apply to DLT may be required. The overarching issues the FCA is inviting discussion on are:

  • the risks and opportunities DLT presents to the FCA’s statutory objectives of market integrity, consumer protection and competition (and how any risk can be mitigated by regulated firms);
  • can DLT support more effective competition, financial systems integrity and deliver better consumer outcomes; and
  • whether any characteristics of DLT make it challenging to fit DLT solutions into the regulatory framework, despite the FCA’s approach of ‘technology neutrality’.

The FCA has traditionally taken a technology neutral approach to regulating financial services. However, the discussion paper notes that the FCA needs to consider whether that approach may prevent or restrict sensible development of DLT and whether it therefore requires adjustment.

Once the FCA has received responses to the discussion paper, the replies will be reviewed and the FCA will then consider its next steps. This might take the form of a Summary of Responses or a Consultation Paper. The FCA is also planning a series of events, roundtables and bilateral discussions on DLT.

Interested parties can respond to the consultation here.