Financial Regulatory Report

The Financial Industry Regulatory Authority (“FINRA”) published a report on January 18, 2017, regarding Distributed Ledger Technology (“DLT”) (also known as blockchain technology) that provides an overview of different DLT use cases and related regulatory considerations for market participants (the “Report”).  The Report provides valuable guidance to both the financial services industry and the broader technology sector as U.S. lawmakers and regulators begin to focus their attention on the development of these swiftly evolving technologies.   FINRA requests public comment on its conclusions, highlighted in this article, by March 31, 2017. FINRA acknowledges the impact that DLT may have on the securities and commodities industries and has consulted with industry participants to better understand the technology and monitor its development. After studying DLT and its various applications, FINRA has determined that many of its and the SEC’s rules must be considered by market participants in conjunction with the development and use of the technology. The Report notes that DLT may impact the equity, debt and derivatives markets in a meaningful way and provides the following examples:
  • DLT-based applications for tracking trading and ownership of private company shares;
  • DLT-based platforms for the issuance and trading of public company stock;
  • Use of DLT to facilitate clearance and settlement of repurchase agreement (repo) transactions; and
  • Smart contracts that operate on a DLT system and facilitate the trading of commodities and securities.
FINRA explains that these technologies may benefit securities market participants by facilitating enhanced transparency and other market efficiencies. However, DLT may also blur the lines between execution and settlement, creating thorny legal and regulatory issues. The Report offers insight into areas where the Securities Exchange Commission (“SEC”) and FINRA (and potentially the Commodity Futures Trading Commission and National Futures Association) may enforce their regulatory requirements with respect to DLT applications.  Potential legal and regulatory concerns associated with DLT include issues such as:
  • Custody and protection of customers’ digital assets (i.e., how and by whom will such funds and securities be received, delivered and held?);
  • Using DLT to keep and maintain books and records in compliance with various regulatory requirements;
  • Net capital requirements (i.e., how will digital assets be computed?);
  • Ensuring that DLT clearing and settlement platforms are compliant with current regulations and do not blur the distinction between execution and settlement;
  • Anti-money laundering and customer identification programs (i.e., AML/CIP/KYC obligations);
  • Compliance with laws and regulations concerning the protection of financial and personal data and customer information;
  • Reporting of transactions;
  • Maintaining appropriate supervisory policies and procedures and surveillance systems in accordance with regulatory requirements;
  • Fees and commissions for wallet management, key management on-boarding;
  • Customer confirmations and account statements;
  • Filing a Continuing Membership Application in connection with material changes to business operations due to DLT implementation; and
  • Business continuity planning.
The Report discusses each of these issues and offers lists of factors to consider in connection with each topic. In June 2016, the European Securities and Markets Authority (“ESMA”) issued a similar request for comments regarding the impact that DLT may have on securities markets and the related benefits and challenges for regulators.  The FINRA Report continues this trend of seeking more information about novel applications of DLT and related regulatory questions.  As regulators across the globe become more informed about these technologies, more tailored regulations may follow.  Accordingly, comments received by FINRA on the Report may play a role in the direction of both domestic and global regulation of DLT, given the opportunity for coordination across borders. FINRA and other regulators are likely to rely heavily upon the legal and regulatory conclusions in this document in setting policy with respect to use of DLT. As such, it is important to review the use cases detailed in the Report and determine whether it would be appropriate to voice concerns relating to FINRA’s suggested regulatory approach during the comment period, which ends on March 31, 2017. The full text of FINRA’s analysis is available here.

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Should you have any questions or concerns related to the Report, please contact Kari S. Larsen (, or Michael S. Selig (