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.
- 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.
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Should you have any questions or concerns related to the Report, please contact Kari S. Larsen (klarsen@reedsmith.com), or Michael S. Selig (mselig@reedsmith.com).