UK Watchdog Concerned over Blockchain Bandits

Regulators are increasingly being challenged on how to prevent market abuse transferring into areas like blockchain and distributed-ledger technology (DLT), as the system begins to take hold in financial markets.

“This is not a question of us seeing necessarily new issues created by DLT,” said Chris Woolard, director of strategy and competition, and an executive board member at the UK’s Financial Conduct Authority (FCA). “It is more about existing issues that we see in other markets where there are already ledgers, where there are already information systems, where you can get issues of market manipulation or other forms of information getting into the market. How do you avoid the same kinds of issues appearing when new technologies are deployed like the DLT or others?”  

DLT is a database that uses independent copies of a ledger, called nodes. It removes the need for a central authority as the details of transactions are recording across multiple locations, all of which have to agree to changes in order for a record to be created and verified, known as a block. The most famous example of DLT is blockchain, the record-keeping system that underpins the cryptocurrency bitcoin, the name of which has evolved to become a shorthand expression for DLT as a whole.

Financial firms are particularly interested in the system due to its ability to provide a “golden source” of information relating to a transaction, or in other words, a master record that is infallible. A large amount of DLT deployment has so far been in the back office in areas including corporate-actions process and reconciliations, but most of the work has been in proof-of-concept stages, with relatively few live deployments. According to Eric Henry, head of innovation, trade finance and supply chain at BNP Paribas, there is a need to digitize. “We do consider that DLT is a great opportunity for changing the way that we are working and for moving from paper to digital,” he said. 

Some users of blockchain say that regulators need to play a more active role in regulating the technology. This would help bring a quicker resolution when disputes arise and build more confidence in the technology

However, others disagree, such as Frederic Dalibard, head of digital for corporate and investment banking, and the global blockchain coordinator for Natixis Group. “You have, in my opinion, to regulate the markets to allow for the use of the technology,” he said. “I don’t think the regulator should regulate the technology and [they] shouldn’t be too prescriptive about the technology itself. The regulator should set boundaries for certain markets, and either the technology is compliant with these boundaries, then be it.”

All were speaking to WatersTechnology on the sidelines of the second day of the CordaCon 2018 conference, held last week in London. In his closing remarks to the conference, David Rutter, CEO of blockchain consortium R3, said he expects the Corda platform to make the lives of regulators a lot easier.

When the FCA’s Woolard was asked about his comments while on the sidelines of the conference, he said the regulator took a “technology neutral approach” to technologiesit sees or uses in the market. “So no one particular kind of brand,” he said. “But certainly one of the things we are looking with our regulatory technology program is how can technologies like DLT actually make the job of regulations easier. This is definitely a space that we are interested in.”