Christopher Woolard, Executive Director of Strategy and Competition at the FCA, welcomed innovation in an opening speech at Innovate Finance Global Summit in London where he said: “as long as firms are developing innovative products, services and solutions that offer better outcomes for consumers, we’re open for business.”
He further told the attendees that FCA was opening a debate on the risks and benefits of blockchain technology (DLT), with a discussion paper [PDF] published today inviting for comments until early July. The paper says:
“The FCA’s philosophy has been one of ‘technology neutrality’ i.e. not to regulate specific technology types, only the activities they facilitate and the firms carrying out these activities. This approach is designed to accommodate innovation but avoid arbitrage and unfair competition. However, there may be specific areas where DLT does not fit with our requirements but still achieves our desired outcomes. We may, therefore, need to consider whether our rules prevent or restrict sensible development that would benefit consumers and hence whether changes may be needed.”
In a questions section, the regulator highlights a number of benefits blockchain’s use may provide to numerous industries such as re-insurance. It further asks for comments on smart contracts, raising a number of questions that have been topic of public discussion, such as governance in digital currencies.
One interesting question may be the relationship between public and private blockchains. The paper, for example, asks “what are the benefits and risks of using a public, permissionless DLT network on an existing protocol, rather than the development of proprietary DLT protocols? What are the risks to competition of a group of incumbents operating a closed network to the exclusion of others?” It further says:
“Digital currencies can also be used as a record-keeping system… These types of systems do not necessarily mean exposure to the price of a digital currency (in these cases Bitcoin or Ethereum respectively) or using digital currencies as a means of exchanging value. However, one key consideration for firms to bear in mind is whether there are competition issues in a self-selected group of firms operating a network to the exclusion of other competitors.”
A Historical Consultation?
This is the most detailed regulatory paper on blockchain technology written so far. The authors appear very knowledgeable of the entire area, the questions are fairly detailed and interesting, the overall tone appears to be more of a studious kind and the attitude seems supportive of the technology.
Moreover, this is likely to be the most influential consultation for this space as British regulators are looked up to across the world due to their forward-looking approach towards this technology and law changes to accommodate this new innovation appears to be on the table.
UK is the only English speaking jurisdiction which does not apply double taxation to digital currency transactions. They were the first to create a sandbox, which has been copied across the world. Studies consistently rank them as the best regulatory environment for FinTech companies, a finding which may have contributed to London’s retention of “The Financial Capital of the World” title.
A title which comes with great benefits as well as risks. In 2008, for example, the British government sank into huge debts following a banking collapse. Regulators say they want to make the banking industry more competitive, welcoming disruptive innovation, setting up a Payments Systems regulator, opening an innovation center, as well as allocating millions towards incentives and research.
The outcome of the consultation, therefore, may set a legal framework to be copied across the world. In particular, America remains very behind on the regulatory front regarding FinTech innovation. So much so that a paper by Yale Law school launched a scathing attack on USA’s balkanized regulatory framework saying “the requirement of individual state licensure can kill a startup early in its life.”
When Will America Catch-Up?
The Democratic administration was keen to emphasize “responsible” innovation, but I would argue the USA regulators have been very irresponsible in their approach towards this space. That includes the CFTC commission, which continues to deny margins and futures functionalities, forcing the public to use amateur and risky platforms which can and have been hacked.
The republican administration is expected to take a very different approach once it finds the time to address this space. They are more ideologically aligned with free market competition and a small government, like the conservative government in Britain. They may, therefore, like the approach of British regulators and perhaps even copy it.
That would mean a sandbox, an end to double taxation, potentially passporting so that license in one states means license in all states, hopefully an innovation center as well as funding for research and incentives.
Even then, they would still be playing catch-up. The released consultation paper, for example, shows great knowledge of this area, while the last regulatory paper I read by American agencies appeared to have a quality lower than a university essay written after an hour of googling.
That means this consultation is very important as FCA appears to be considering whether laws should be changed to accommodate this new invention and if they do so conclude it would probably set the way forward for this space on a conceptual and intellectual level.
As such, all knowledgeable and affected participants will probably want to send their comments, with discussions around governance, smart contract risks, potential anti-competition in private blockchains, etc, likely to be very interesting if influential figures from the public blockchain space, like Vitalik Buterin, as well as from the private blockchain space, choose to engage in this great and potentially historical democratic process.
Featured image from Shutterstock.