On December 15, the UK Financial Conduct Authority (FCA) published a feedback statement (Feedback Statement) on its April 2017 discussion paper (Discussion Paper) on distributed ledger technology (DLT).
The purpose of the Discussion Paper was to encourage dialogue in the UK on the regulatory implications of current and potential developments of DLT in the financial markets. The Feedback Statement summarizes and is a response to the feedback received on the FCA’s Discussion Paper. It also sets out the FCA’s views on recent developments in the DLT market and the FCA’s next steps.
Highlights in the Feedback Statement include the following:
- Respondents to the FCA’s Discussion Paper were supportive of the FCA’s “technology-neutral” approach to regulation. They welcomed the FCA’s open and proactive approach to new technology, including its “regulatory sandbox” (a live market environment where businesses can test innovative products, services and business models), its regulatory technology initiatives and its practical engagement with innovators. Feedback from respondents indicated that the FCA’s current rules were sufficiently flexible to deal with DLT without requiring any specific rule changes.
- Although all respondents suggested numerous benefits and risks associated with using permissionless and permissioned DLT networks in financial services, some doubted the compatibility of permissionless networks with the FCA’s regulatory regime because, for example, they lack governance and tend not to identify participants. However, nearly all respondents generally agreed with the FCA that there are no substantial barriers to adopting DLT under the FCA’s rules.
- Respondents who commented on initial coin offerings (ICOs) agreed with the FCA’s view on the risks to consumers and that the legal and regulatory position of each ICO proposition has to be considered on a case-by-case basis.
- Most respondents were interested in the use of DLT in capital markets, for example by using smart contracts. However, they pointed out that they would need greater clarity on issues such as the legal status of digital assets and the enforceability of smart contracts before they considered using such solutions at scale.
- All respondents highlighted the global nature of DLT and urged the FCA to collaborate even more proactively with other national and international regulatory bodies and industry associations to make a globally harmonized approach to DLT possible.
Next steps proposed or actioned by the FCA include:
- Gathering further evidence on the ICO market and conducting a deeper examination of its developments to determine whether there is a need for further regulatory action in this area, beyond the consumer warning it issued in September 2017 (Consumer Warning on ICOs). The FCA has also already highlighted how an ICO-related business proposition needs to be designed so that it would satisfy the “consumer benefit” criterion when gaining access to the FCA’s Innovation Hub (Innovation Hub), where new and innovative businesses are supported by the FCA when trying to launch new products on the market.
- Continuing to monitor DLT-related market developments and reviewing the FCA’s rules and guidance in light of those developments.
- Working closely with national and international regulatory bodies to shape regulatory developments and standards.
- Engaging further with other regulatory authorities at a UK level, to ensure a coordinated approach in the UK.
- Continuing its close engagement with DLT use cases and industry stakeholders through its Innovation Hub.
The FCA’s Feedback Statement is available here.
The FCA’s Discussion Paper is available here.
The FCA’s Consumer Warning on ICOs is available here.