FCA examines blockchain technology in financial services in its new discussion paper
Whilst the FCA generally adopts a "technology neutral" stance, it has taken an active step into looking at DLT as it aims to lead the conversation about emerging trends and innovations in Project Innovate.
The FCA has released a discussion paper considering the future development of distributed ledger technology (DLT).
What is DLT and blockchain?
An ordinary ledger is maintained by a central authority and individuals must communicate with this authority to update the ledger. A distributed ledger on the other hand gives all participants in a network an identical copy of a ledger. This ledger can then be updated according to the rules of the network to reflect the transactions being undertaken.
Blockchain is the principal form of DLT. It collates records into "blocks" and links them using a unique signature. Each time a block is created it links to the previous, creating a chain. These blocks cannot be retrospectively altered therefore all information in each block is transparent, traceable and cannot be edited.
The FCA's discussion paper focuses on the risks and benefits of DLT in the following areas:
Governance and technology resilience;
DLT and distributed data;
Recordkeeping and auditability;
Smart contracts (which RPC have previously blogged about); and
The use of digital currencies to deliver financial services.
DLT, and blockchain in particular, maintain distinct advantages in recordkeeping and auditability and when distributing data.
In recordkeeping and auditability, the FCA highlights new commercially available options for owners of securities. An "auditable, transparent and fully verifiable electronic election" system can be used to track shareholder votes which could reduce proxy votes and empower individual investors. It can also be used to keep an accurate, up-to-date register of members which can be particularly useful for public companies.
Distributing data, particularly in the reinsurance market, can be improved by DLT. DLT can be used to validate contract versions by storing it, with other useful information, in each block. It can enable automated claims settlement through smart contracts. DLT can also improve data quality and transparency to facilitate the identification of participants in reinsurance contracts and retrocedants thereby highlighting risks and making it easier to avoid 'risk spirals'.
Notwithstanding its 'technology neutral' approach, the FCA is keen to promote technologies which it considers will improve the financial services sector. To that end the FCA has highlighted DLT as a technology which promotes transparency and which can help to make financial services more efficient. The FCA also perceives that DLT can ensure that evidence can be more easily gathered, will be more trustworthy and more easily traceable thereby making the job of the regulators easier.