The rapid rise of interest in blockchain technology means that innovation is moving faster than legislation can keep up with. In the UK, there is currently no official legislation when it comes to the use of blockchain technology from the Financial Conduct Authority (FCA), the UK’s regulatory body on finance.
The rise of cryptocurrencies has sparked intense debate since the mysterious launch of bitcoin ten years ago. However, as our understanding has grown, interest has intensified around the underlying distributed ledger technology - blockchain.
This is still a fledgling area, but as big companies like IBM and Oracle enter the market with ‘blockchain-as-a-service’ options, adoption has never been easier.
Here, it is important to differentiate cryptocurrencies - which the FCA also does not regulate - with applications built on top of blockchain technology that relate to financial services, like the Bank of England's proof of concept using blockchain to synchronise payments.
A recent speech by Mary Starks, Director of Competition at the FCA, outlined the major applications of blockchain as: "Records, including records of contracts, transactions, asset holdings and proof of identity."
Back in April 2017, the FCA solicited responses from key stakeholders - including regulated companies, national and international trade associations, technology providers and law firms - on ‘the potential of future development of the technology’. The general consensus reached was that the FCA maintains its ‘technology-neutral’ approach towards blockchain regulatory issues.
Some respondents did express doubts about the compatibility of the FCA’s current regulatory approach with some blockchain systems which operate on an open, ‘permissionless’ basis - rather than the traditional, 'permissioned' environments which operate via a central gatekeeper - though. As it stands, the FCA remains open to both types of system, as long as potential risks are acknowledged and mitigated.
At a recent panel discussion on blockchain in fintech, as part of London Fintech Week 2018, Claire Wells, Director of Legal and Business Affairs, EMEA, at crypto finance firm Circle advocated for a regulatory approach similar to the internet as a whole.
“We don’t regulate the internet,” she said, but the services on it. Therefore, the financial services provided through blockchain should fall under the remit of regulatory bodies, but the underlying technology should not.
She made the point that the, "two purposes of regulation are to protect the consumer, and to help innovation flourish.” She noted the importance of ensuring global collaboration on this issue, pointing to Global Digital Finance as one such international body that is aiming to push forward the adoption of digital finance technologies.
The sandbox initiative launched by the FCA demonstrates the eagerness of financial firms to experiment with blockchain technology. The purpose of this initiative is to create a ‘safe space’ for businesses to test out business models, products, or services (among other things) in a ‘secure’ environment.
Of the 60 businesses who have made use of the initiative, a third have tested out DLT (distributed ledger technology) applications or cryptoaassets, according to the FCA. These have mainly focused on removing intermediaries from processes, increasing transparency and boosting operational resilience.
Another member of the panel, Teana Baker-Taylor, Chief Marketing Officer at Coinfloor, a group of internationally focused cryptocurrency exchanges, and advisory council member at Global Digital Finance, said: “Without regulatory certainty, business can’t thrive.”
She pointed out that given the requirement of businesses to protect customers, more businesses can enter this sphere once there is increased regulation. She also made the important point that any regulation introduced must function across different jurisdictions, or else risk a talent leak from countries with more restrictive regulatory controls.
To achieve this, another panel member, Juan Llanos, fintech and regtech lead at Consensys, a blockchain software technology company, advocates taking a less political approach, and involving engineers in the legislation side of matters, to get an expert perspective on the technology itself.
The members of the panel went on to discuss how blockchain can be disconcerting to regulators, due to the peer-to-peer paradigm embodied by the technology being at odds with how they usually enforce rules - through intermediaries.
In a piece published in December 2017, the FCA wrote that it “will continue to monitor DLT-related market developments, and keep its rules and guidance under review in the light of those developments. It will work collaboratively with industry, HM Treasury, the Bank of England, the Information Commissioner’s Office and other UK bodies to ensure a co-ordinated approach towards DLT in the UK.
"At an international level, the FCA will work closely with national and international regulatory bodies to shape regulatory developments and standards.”
The panel's predictions? Baker-Taylor expects that we will see interoperable regulation being introduced regarding blockchain services and applications in the next three to five years.
However, blockchain could have a greater impact on the UK's financial sphere than the requirement for new regulation. Starks points out that decentralised, peer-to-peer exchanges may upend the current way that financial markets function and how they are regulated. She holds up the development of automated trading processes with limited fees as a potential development that could, “change the nature of the markets we regulate.”