The FCA has issued DP17/3 on distributed ledger technology to stimulate an open debate on the risks and benefits of DLT and asks for comments on its likely utilisation in financial services.
The Financial Conduct Authority asks for responses by 17 July 2017 on 17 specific questions, pertinent to diverse sectors and grouped around two sets of issues:
- What new risks and opportunities does DLT present to the FCA’s statutory objectives of market integrity, consumer protection and competition? Can DLT support more effective competition, financial system integrity and deliver better consumer outcomes? How can regulated firms mitigate any risks?
- Do any of DLT’s characteristics make it challenging to fit DLT solutions into the regulatory framework, despite the FCA’s preference for “technology neutrality”?
While exponents or detractors of DLT will have insights, I have these perspectives on this DP.
- The FCA reiterates its technologically neutral approach, a preference to regulate the outcome rather than the specific process. In paragraph 4.3, it is telling that the FCA calls out that it believes that DLT can obscure lines of responsibility. If true, that would be at odds with current UK policy that aims to deliver greater individual accountability, being delivered through the senior managers and certification regime and conduct rules, due to be extended across financial services in 2018.
- The FCA suggests (in paragraph 5.3) that DLT is not essential for beneficial change. Many potential benefits, it says, could be delivered by utilising existing, but latent, functionality. Does market preference dictate operational models or a limitation lying in technological necessity? The threat of DLT may provide the spur to unleash the potential of the existing set up. And, reading between the lines, perhaps some might say the FCA would be happy with that to achieve its statutory objectives.
- The ease and costs of adoption may be significant reasons why DLT may not be deployed, linked to the need for DLT and non-DLT legacy systems to interact. This is an area where exponents need to offer real challenge to the naysaying prevailing viewpoint. If DLT is to upscale, to bring benefits to markets and consumers, does the cost of the compliance burden for DLT need to be better understood?
- Investment in DLT is likely to be critical. Are investor perceptions relevant to the regulatory agenda? Does DLT innovation need the FCA to adopt a stronger, more permissive or facilitating position towards regulating DLT to gain investment traction?
- The FCA has gained some experience from working with firms in the Sandbox. Are governance, resilience, smart contracts and exchange of value the core issues?
- “At this stage it seems that our current requirements appropriately reflect our strategic objectives … in the context of expected uses of DLT”, it says in paragraph 5.2. Is it jumping the gun in proffering its conclusion or laying down the gauntlet to firms to change its mind?
In preparing responses to the FCA, bear in mind that they will be available for public inspection unless you specifically request otherwise –a mere confidentiality disclaimer is not sufficient.