The recent publication of a Discussion Paper by the FCA on distributed ledger technology (DLT) is the latest initiative by the Financial Conduct Authority (FCA) to better engage with technological developments and to help promote the UK as a centre for fintech internationally. The DLT Discussion Paper is the first step towards the FCA better understanding DLT, its future development and its likely impact on UK financial markets in the future.
What is distributed ledger technology?
A distributed ledger is a database that can be shared between non-trusting parties without the need for a central administrator or centralised storage. Using a peer-to-peer network and a consensus algorithm, distributed ledgers allow transactions to be recorded and verified independently across organisations, sites and countries. With its data spread across a network rather than held centrally, a distributed ledger could provide:
- greater security against cyber attacks
- improved data integrity and transparency to all parties with access to it.
DLT began with Blockchain in 2008 but has since evolved to incorporate alternative models.
What does the Discussion Paper cover?
The Discussion Paper is forward looking in its approach and the FCA admits that it is not considering making regulatory changes for DLT at present. Instead, it wants to follow emerging business models and identify potential risks and opportunities to the market as a ‘technologically neutral’ observer. The FCA is particularly interested to hear responses on:
- 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 consumer outcomes? How can regulated firms mitigate any risks?
- Do any DLT characteristics make it challenging to fit DLT solutions into the regulatory framework, despite the FCA’s approach of ‘technology neutrality’?
Some of the issues raised in the Discussion Paper:
- DLT can be permissionless, with no central point of authority, making the allocation of individual responsibilities very difficult.
- DLT offers considerable benefits for cyber-security (such as built in cryptographic encryption) but vulnerabilities still remain (for example making sure that levels of encryption are maintained to ensure cyber resilience).
- There are potential opportunities for improved efficiencies in back offices, including streamlining reporting requirements while improving transparency.
- The development and direction of smart contracts in view of existing challenges both technologically and from a practical perspective.
- The use of digital currencies to deliver financial services in light of initial concerns by regulators and the fact buying/selling digital currencies largely falls outside of the FCA's existing regulatory perimeter.
The full Discussion Paper published by the FCA is available to read online and interested parties have until 17 July 2017 to send their responses to the FCA.