UK regulator the Financial Conduct Authority (FCA) is taking a closer look at fintech and related new innovations. It says it’s responding to a “Wild West” approach in the sector so far that sees jurisdictions competing for business — at the expense of standards.
In related news, the FCA also wants to start a dialog on distributed ledger technology (DLT). DLT is a broader term that can include blockchain-based financial networks.
Fintech Sandboxes May Lead to ‘Wild West’ Competition
The FCA’s head of strategy and competition, Christopher Woolard, called for an international regulatory framework for fintech startups. He pointed to the number of regulatory “sandboxes” different jurisdictions are applying to the fintech industry. Too many of these would create the kind of reckless competition Woolard fears.
Sandboxes allow small fintech companies to experiment with new ideas outside of regular financial laws. However they also place stringent restrictions on the companies’ scope, e.g.: limiting customer numbers to 50.
Some see sandboxes as an opportunity for tiny bitcoin and digital currency startups to flourish — but the restrictions could also limit their chance to gain a network effect.
The FCA in-part superseded the UK’s Financial Services Authority (FSA), which the national government abolished in 2013. This followed its failure to adequately regulate UK banks in the wake of the 2007-08 financial crisis.
As a regulatory body the operates independently of government. It is concerned mainly with consumer services.
Examining Distributed Ledgers and Blockchain
The FCA has also called for “a discussion to start a dialogue on the potential for future development of distributed ledger technology (DLT)”. It released a 30-page discussion paper introducing its aims and DLT itself, and called for comments by 17th July 2017 before examining next steps.
The paper does mention Bitcoin, Ethereum and other cryptocurrencies by name, saying Bitcoin is “the first use of DLT”. It defines distributed ledgers as “any publicly available electronic medium of exchange that features a permissionless distributed ledger and a decentralised system for exchanging value”.
DLT is possibly more accurate than the buzzword “blockchain” to describe many shared-ledger networks that banking conglomerates and fintech startups are developing.
“While there is no formal definition of DLT, it can be described as a set of technological solutions that enables a single, sequenced, standardised and cryptographically-secured record of activity to be safely distributed to, and acted upon by, a network of varied participants. This record could contain for example, transactions, asset holdings or identity data. This contrasts with a traditional centralised ledger system, owned and operated by a single trusted entity. We consider a blockchain to be a type of DLT where records are collated into “blocks” and linked using a cryptographic signature.”
As well as digital currency payments, it said, DLT is useful for recordkeeping and auditability, smart contracts, plus governance and technology resilience.
The document also explores the issue of responsibility when DLT technology fails, giving last year’s example of The DAO. Ethereum’s solution to that issue — rolling back the blockchain — remains controversial and caused the network to fork into two. Both networks remain today.
Do We Even Need This Technology?
The FCA is careful to avoid hype and hyperbole, asking if DLT technology is even necessary.
“One question which remains is the extent to which DLT itself is actually essential to any of these potential market developments. Many appear to be equally achievable through more traditional technology.”
The comparatively slower settlement times of today’s systems is based more on market preference than technology limitations, it said.
It appears the FCA remains open-minded yet skeptical about DLT, deferring to industry participants to answer its questions.
The full discussion paper is available here.
Is the FCA taking the right approach? Would you consider commenting? Let us know.
Images via FCA, Pixabay