Innovate Finance, along with partners EY & Hogan Lovells, has published a report on Blockchain adoption. Entitled Blockchain, DLT and the Capital Markets Journey: Navigating the Legal and Regulatory Landscape, the publication addresses distributed ledger technology (DLT) and the current regulatory environment. The report also provides recommendations on policy and industry adoption.
Rachael Kent, Global Head of Hogan Lovells’ Financial Institutions Sector, explained that the marketplace was at a “point of convergence” where regulation and technology needs to evolve so distributed ledger technology may realize its full potential.
“Understanding the wider legal context is crucial to mitigate early adopter risk whilst the law races to catch-up, knowing not only how regulation will categorise technology, but how and when dialogue with regulators should form part of the process. Industry collaboration will be key to integrating DLT into the capital markets.”
Lawrence Wintermeyer, CEO of Innovate Finance, said that Blockchain could substantiall reduce the complexity of capital markets. DLT will need to comply with the legal framework. A significant challenge is the need to operate across national boundaries – a key issue for the technology to thrive.
The document is structured in a Q&A format that covers 10 different legal and regulatory questions. Securities is one example the document tackles but it is impossible to implement without a change in legislation, which requires the involvement of Central Security Depositories (CSDs) and being able to satisfy regulators that it manages the risks that intermediaries such as Central Clearing Parties (CCPs) or CSDs currently mitigate.
Smart contracts are another key topic. The technology is being designed to encode financial contract obligations on to a DLT, but the legal status of such smart contracts is still vague.
Brexit is presented as an opportunity for the UK to be more flexible than under EU law, favouring equivalence rather than current approach to specific requirements. Rachel Kent, Global Head of Hogan Lovells’ Financial Institutions Sector said that Brexit would mean that the UK’s regulatory framework would need to be re-cast.
As one would expect, regulators are urged to foster a supportive environment by consulting on key issues and to promote a culture of collaboration with the industry.
“High quality thinking on the regulatory and legal aspects of blockchain, for the most part, has been deferred whilst IT and business leaders have tried to come to grips with the technology and where it might best be applied,” said Imran Gulamhuseinwala, EY Global FinTech Leader. “We believe that now is the right time to bring the regulators and law makers more actively into the debate to help mitigate some of the inherent blockers in the current frameworks and, more importantly, to shape the future architecture of blockchain.”
These are challenging and very technical issues but both the PRA and FCA could help create a supportive regulatory environment for DLT solutions. The Bank of England has already proven its ability to think outside the box with the publication of a report earlier this year on the possibility of creating their own digital currency. Innovate Finance is spot on in taking a proactive stance in engaging policy makers as incorporating DLT within financial services will most certainly take a good amount of time.