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Regulators Prepare for Innovation in Distributed Ledger Technology

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Home Perspectives Regulators Prepare for Innovation in Distributed Ledger Technology

Regulators across the globe are considering how existing regulations may accommodate the development of new distributed ledger technologies (“DLT”) (also known as “blockchain”). In just the first two months of 2017, the U.S. Financial Industry Regulatory Agency, the European Securities and Markets Authority, and the International Organizations of Securities Commissions all have issued reports on DLT. The reports explain that integrating novel DLT products into existing regulatory regimes may prove challenging as DLT continues to develop. DLT market participants should pay close attention as regulators prepare to address perceived weaknesses or potential risks relating to blockchains in their regulatory frameworks, and be ready to voice any concerns to, or discuss potential DLT benefits with the relevant authorities. FINRA has requested comments on its report, which are due March 31, 2017.

Introduction

Regulators across the globe have turned their attention to consideration of how existing regulations may accommodate the development of new distributed ledger technologies (“DLT”) (also known as “blockchain”). In just the first two months of 2017, the U.S. Financial Industry Regulatory Agency (“FINRA”), the European Securities and Markets Authority (“ESMA”), and the International Organizations of Securities Commissions (“IOSCO”) all have issued reports on DLT.1 As usage of such technologies has become more widespread over the past few years, some regulators, such as the U.S. Commodity Futures Trading Commission (“CFTC”) and the U.S. Securities Exchange Commission (“SEC”), have attempted to incorporate DLT innovations into existing legal and regulatory frameworks. Others, such as the UK Financial Conduct Authority (“FCA”), the Swiss Financial Market Supervisory Authority (“FINMA”), and the Monetary Authority of Singapore (“MAS”), have created regulatory sandboxes for companies utilizing innovative technologies. But, as FINRA, ESMA and IOSCO all note in their recent reports, integrating novel DLT products into existing regulatory regimes may prove challenging as DLT continues to develop. DLT market participants should pay close attention as regulators prepare to address perceived weaknesses or potential risks relating to blockchains in their regulatory frameworks, and be ready to voice any concerns to the relevant authorities.

The recent reports on DLT demonstrate that market regulators across the globe are actively investigating potential applications of DLT and considering these innovations under the perspective of current and prospective applicable laws and regulations. Market participants should review the various reports to understand and assess whether they must comply with regulations as they develop new use cases for DLT or whether they should be meeting with regulators to help shape future regulations. ESMA noted in its report that “[a]t this stage, [it] believes that it is premature to fully appreciate the changes that the technology could bring and the regulatory response that may be needed, given that the technology is still evolving and practical applications are limited both in number and scope” and stressed the importance of coordination and engagement with regulators. FINRA stated that it “welcomes an open dialogue with market participants to help proactively identify and address any potential risks or hurdles in order to tap into the full potential of DLT, while maintaining the core principles of investor protection and market integrity.”

FINRA has requested comments on its report, which are due March 31, 2017. If you are interested in submitting comments individually or in collaboration with an industry group, such as the Chamber of Digital Commerce, please contact Kari S. Larsen (klarsen@reedsmith.com) or Michael S. Selig (mselig@reedsmith.com).

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  1. See FINRA, Distributed Ledger Technology: Implications for the Securities Industry – A Report from the Financial Industry Regulatory Authority (Jan. 2017), available at finra.org; ESMA, Report: Distributed Ledger Technology Applied to Securities Markets (Feb. 2017), available at esma.europa.eu; IOSCO, IOSCO Research Report on Financial Technologies (Fintech) (Feb. 2017), available at iosco.org.
  2. Keynote Address of CFTC Commissioner J. Christopher Giancarlo before the ISDA’s Trade Execution Legal Forum (Dec. 9, 2016), available at ctfc.gov.

Client Alert 2017-069