Blog: Financial Conduct Authority discussion paper on distributed ledger technology

David Gourlay
David Gourlay

By David Gourlay, Partner at MacRoberts

 

The Financial Conduct Authority (FCA) has published a discussion paper on distributed ledger technology (DLT) (DP17/3) which closes for comment on 17th July 2017.

What is DLT?

DLT is a rapidly developing technology which offers the potential to support consumer needs in financial services markets. DLT is a recent technological advancement that has gained increasing attention over the last few years. It combines various existing tools such as shared databases, cryptography and peer-to-peer networking to offer firms the ability to share data efficiently and securely.

What benefits does DLT bring?

DLT has the potential to provide various benefits for regulated markets. These benefits are likely to emerge in sectors where multiple participants need to share data or processes safely. DLT also removes the need for certain intermediaries, increases the speed of reconciliation and reduces costs. Regulated firms have invested resources in using this technology to provide financial services and the FCA expects more “real-world” deployments of DLT within the next year.

The popularity of DLT highlights the growing challenges firms have in managing their data safely and efficiently across all sectors. The adoption of DLT is most likely to be in areas where the efficiency advantages are large enough to outweigh the risks of technology transformation and the high costs of implementation. DLT also has the potential to help promote competition through disruptive innovation, however the FCA must balance this against their statutory objectives of consumer protection and market integrity.

The Discussion Paper

Although the FCA generally takes a “technology neutral” approach to regulation, it is interested in considering whether there is anything distinctive about DLT that would require a different approach to be taken. DLT has the potential to offer digitised assets which can be delivered directly to consumers, legal agreements that can be composed in software and enshrined in cryptographic layers, and secured data provenance for property or identity. This potential, along with the processing speed, has prompted the FCA to look at whether the existing rules may need to be reviewed in light of this new technology. In particular, the FCA seeks views on the potential benefits and risks of the following key features of DLT:

  • Governance and technology resilience.
  • DLT and distributed data.
  • Recordkeeping and auditability.
  • Smart contracts.
  • The use of digital currencies to deliver financial services.
  • The FCA are also looking at whether DLT is compatible with the existing regulatory framework to ensure consumer protection, market integrity and competitive markets. The FCA want to identify regulatory barriers to DLT innovations in areas such as:

    • Allocation of responsibilities in shared networks.
    • Digital asset trading and how the adoption of DLT to transact in financial instruments may impact upon market integrity.
    • Collateral management.
    • Data protection and potential issues with the right to be forgotten and other principles which protect consumers’ privacy.
    • The FCA welcomes responses up until the 17th July 2017.

      Share icon
      Share this article: