Financial regulators in the UK have a well earned reputation for an open and progressive approach to cutting edge technology, with the Financial Conduct Authority (FCA) operating Project Innovate and a regulatory sandbox, as well as the Bank of England's fintech accelerator.
However, there is still no firm regulatory framework in place for the potentially disruptive blockchain technology to be used by financial services firms. So what needs to change?
Blockchain as a term grew to prominence as the distributed ledger technology underpinning of the crypto currency Bitcoin. It is essentially an electronic ledger of records which are organised into data batches, called blocks, which automatically reference one another, forming an unbroken chain which theoretically cannot be tampered with as it is 'distributed' and does not reside anywhere central.
The reason financial organisations are so interested in the technology is because of the possibility of having an irrefutable record of transactions, and effectively eliminating the possibility of fraud.
Speaking at London Blockchain Week on Tuesday, three lawyers and a fintech founder spoke about where they see the UK's regulatory framework in regards to the distributed ledger blockchain technology, and what needs to happen for use cases to go mainstream.
John Salmon, a partner at law firm Hogan Lovells said that there tends to be two camps when it comes to regulating blockchain, and that they resemble the way regulators spoke about the early internet during the dotcom boom. He said: "Either it was the Wild West and it cannot and shouldn't be regulated, or there is a camp saying that this had to abide by existing laws."
He gave the example of music pirating sites like Napster as an early indicator that online businesses need to abide by the same rules as incumbents, and that this should be taken into account by regulators looking at a technology as potentially disruptive as blockchain. "The lessons to be learned are that we need to apply existing laws and regulations, and we absolutely have to think about putting in new ones," he said.
On that note, Mark Carney - the governor of the Bank of England - made a speech at the Deutsche Bundesbank G20 conference this week where he spoke about some of the considerations the Bank makes when deciding whether something like blockchain should be brought into its regulatory perimeter.
He said: "Just because something is new doesn’t necessarily mean it should be treated differently. Similarly, just because it is outside the regulatory perimeter doesn’t necessarily mean it needs to be brought inside." In short: we are no closer to a clear regulatory framework for blockchain in the UK.
Later on Jonathan Galea, assistant legal counsel at online gambling company NetEnt, helpfully took a step back too, adding that there needs to be a distinction between public and private blockchains. "When it comes to the blockchain, completely decentralised blockchains can't be regulated, so where the code has been written and issued to the general public. Private blockchains can be regulated, but we still need to make a distinction between the two," he said.
Current regulatory landscape
Many recognise that the UK's regulators tend to be more open minded when it comes to new technology in the financial services space. For example, an EY report into UK fintech from February 2016 asserted that "the UK has the strongest fintech policy environment, with the most supportive regulatory regime," as benchmarked against other leading fintech hubs.
"The strength of the UK policy environment is due to the supportiveness and accessibility of the Financial Conduct Authority (FCA), effective tax incentives and numerous government programmes designed to promote competition and innovation which indirectly support fintechs," the report concluded. These programmes include the FCA's regulatory sandbox, Project Innovate and the Bank of England's fintech accelerator.
The Bank of England even conducted a successful proof of concept (PoC) of distributed ledger technology with PwC last year. This approach would strongly suggest that the bank will be providing a favourable regulatory environment for anyone wanting to work with the technology, but only once it matures.
Following the PoC the bank's statement read: "While the technology is still relatively immature, it could provide benefits in the future, and also be complementary to existing systems by, for example, removing the single point of failure of a system, considerably increasing its resilience."
Guido Branca is CEO of BaBB (Bank Account Based Blockchain), a fintech looking to provide access to banking services based on the blockchain. The Harvard graduate said that he chose the UK to set up his business, "because of the regulators." He said: "We found the Bank of England taking an open approach, so instead of turning people away they engage."
Experienced compliance officer for the financial services industry Richard Levin agreed, saying: "I know people don't like to talk to regulators but you should. Help the regulators understand this industry, help them understand what you want to do, have a dialogue with them, be forthright and try to do it the right way. They will be much more forgiving if you try to do things that way than hiding from them."
However he did add that these conversations are increasingly vital because, "right now the regulations are completely out of step with the technology."
Salmon from Hogan Lovells was also full of praise for UK regulators: "We went from a regulator that never talked to you and said: 'if you mess it up, you are getting sued'. Now we need to talk to them, educate them and it really is a complete sea change and we shouldn't underestimate how brilliant that is."