Blockchain Needs Regulators’ Involvement to Take Off
“It is important for regulators to become comfortable with the new technologies serving the industries they oversee.”
Distributed-ledger technologies (DLT) have the potential to be as disruptive as everyone hopes they will be. Yet some have misunderstood regulators’ involvement in the blockchain field. A common topic at industry conferences is fear that regulators will hinder that long-awaited disruption.
At the FIA International Derivatives Expo held in London last June, many of the questions addressed to the blockchain panel centered on whether the technology could ever take off in the face of regulations. The argument was that if both the financial services and technology industries allow regulators to step in, then we might as well forget about any progress that has been made so far.
But I think it’s the other way around—the financial services industry knows that regulators are part of the community and not necessarily against it. In fact, Leda Glyptis, director at Sapient Global Markets, pointed out that in the past few years, and especially after 2008, regulators have transformed into active market participants, abandoning their role as external observers and supervisors, with occasional interventions when “things seem to be derailing.”
Staying Alive
In late September this year, Christopher Woolard, director of strategy and competition at the Financial Conduct Authority (FCA), said during his speech at the BBA Fintech Banking Conference in London, that the Authority sees real opportunities with DLT, especially regarding know your customer (KYC) and anti-money laundering (AML) requirements. “We will continue to monitor development of this technology while remaining alive to any future risks it may pose,” he said.
The financial services industry knows that regulators are part of the community and not necessarily against it.
Philippe Ruault, chief innovation and digital officer at BNP Paribas, told me that a number of large financial services firms believe that a regulatory framework needs to exist to make DLT applicable to the industry. He said that regulators should be an integral part of the process as they’re the only ones who can control and monitor the changes blockchain will introduce.
When the European Markets and Securities Authority (ESMA) released a discussion paper last summer asking 24 critical questions around blockchain, it was evident that they were not only seeking to understand the technology and keep up with developments, but they also wanted to explore every potential benefit and implication to the markets under their jurisdiction. This paper was welcomed by the majority of involved parties. For example, the World Federation of Exchanges, the official representative of over 200 financial market infrastructure providers, released an official response to the 10-page report, saying that ESMA’s paper will help shape the future of blockchain.
Charley Cooper, managing director at R3, told me he thought that it was good news that ESMA had participated in the discussion. “It is important for regulators to become comfortable with the new technologies serving the industries they oversee,” he said. While acknowledging that there are reservations from various tech firms about the issue, he said that not involving regulators would be a huge mistake, and innovation should be encouraged within the regulatory community as it could prove useful in terms of how authorities legislate in the future.
There is also a sociological aspect to this story. All of the above interviewees agreed that what is at stake, among other things, is the protection of workers in the financial services industry. What all businesses are attempting to do with DLT is reduce costs and change the way they operate on a day-to-day basis. It is the regulators’ responsibility to ensure that there is a smooth transition to the new reality blockchain promises to bring about, not only from a functional perspective but also from a workforce point of view. If, for any reason, certain groups prove surplus to requirements when this technology takes over, who else then secures their future?
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