The UK Financial Conduct Authority (FCA) has published a feedback statement on distributed ledger technology (DLT) or Blockchain. The document comes following an earlier discussion paper published in April designed to commence a dialogue between interested parties and the regulator. The FCA has now responded to received feedback.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, commented on the report;
“The original paper opened a discussion about DLT and the volume and breadth of responses we received from the industry demonstrates the significance of this issue. DLT has the potential to transform practices across a number of markets, sharpening competition and improving risk management. At the same time we have to be alive to the risks of certain applications of it. We will continue to work with a range of agencies and firms to ensure a co-ordinated approach to the use of DLT in financial services.”
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The FCA received 47 responses including comments from regulated firms, national and international trade associations, technology providers, law firms and consultancies.
Respondents to the FCA request for feedback expressed support for the FCA maintaining a ‘technology-neutral’ approach to regulation and welcomed the FCA’s open and proactive approach to new technology, including their Fintech Sandbox and Regtech initiatives. All respondents suggested benefits and risks of using permissionless and permissioned DLT networks in financial services, contingent upon specific services. Most respondents were particularly interested in the use of DLT in the capital markets sector, for example underpinning market trading infrastructure, including the use of smart contracts. DLT holds the potential to substantially reduce costs for firms and regulators alike.
The FCA does not regulated cryptocurrencies but said they are monitoring the market. The regulator said the size of the market is not indicative of any system risk, at least for now.
The FCA said it would continue to monitor DLT-related market developments, and keep its rules and guidance under review in the light of those developments. At an international level, the FCA will work closely with national and international regulatory bodies to shape regulatory developments and standards.
Regarding the hot Initial Coin Offering market, the FCA is currently gathering evidence and is conducting a deeper examination of the market.
On the Initial Coin Offering (ICO) market, the FCA will gather further evidence and conduct a deeper examination of the fast-paced developments. Many respondents in the technology community considered ICOs as having the potential to boost the development of the broader DLT ecosystem while others raised concerns about risk. A “well functioning” ICO market must be aware of the regulatory obligations.
While stressing the potential for fraud, the FCA said that a number of ICOs have engaged with the FCA Innovation Hub and is open to economic benefits provided by this new digital asset class.
The next steps for the FCA may be summed up in their approach to observe, engage and collaborate.
The report is embedded below.