We hear from four financial industry executives about the top regulatory issues related to new technologies, such as distributed ledger technology (DLT), and how to navigate these unchartered waters.
A wave of technological innovations has swept across the landscape of the global financial marketplace, promising to deliver operational improvements as well as to further mitigate risk and reduce post-trade costs. The challenge for policymakers is to determine if existing regulatory safeguards are sufficient to encourage growth and innovation while addressing systemic risk and protecting the interests of the investing public.*
Mark Wetjen, Managing Director and Head of Global Public Policy, DTCC
Regulators globally are reviewing potential risks and opportunities offered by emerging technologies and should continue doing so in close coordination with the industry. However, policymakers are challenged with the formidable task of encouraging safe and secure innovation while at the same time preserving core policy objectives. The industry can help assist the regulatory community in better understanding how innovative technologies may fit within the current regulatory framework or perhaps necessitate rule refinements in support of existing policy goals.
Blythe Masters, CEO, Digital Asset Holdings
New technologies are continually coming to the forefront of financial services, and the practice of how and whether to regulate them is no new undertaking. Regulators have the task of striking a balance between fostering innovation and ensuring new technology does not introduce or exacerbate risk.
Financial market infrastructures (FMIs), which process trillions of dollars of value daily, must necessarily be highly resilient and reliable. Central banks and market regulators, tasked with the public policy objectives of safety and efficiency, are responsible for regulation, supervision and oversight of FMIs. They have evolved an extensive body of principles for their operation (see Principles for Financial Market Infrastructures, CPSS-IOSCO, April 2012). The list of risk dimensions that must be addressed is voluminous: systemic, legal, credit, liquidity, general business, custody and investment and operational. New technology must never exacerbate or introduce such risks.
What is important to remember, however, is that principles-based regulation lays out a pre-existing roadmap against which implementations of new technology may be evaluated. A new roadmap is not required. DLT was once hailed as a great disruptive force for trusted financial intermediaries, but has evolved into an even greater enabler for them. With the right collaboration, regulatory oversight and pragmatism, DLT will result in a better financial system for everyone.
Emmanuel Aidoo, Head of Blockchain and Distributed Ledger Strategy, Credit Suisse
In order to implement new technologies, including blockchain and artificial intelligence, certain regulatory, legal and compliance issues will need to be clarified. With respect to blockchain, there are some specific areas that regulators will likely need to address:
• The issue of settlement finality, which defines asset ownership and transfer between parties on a shared ledger.
• The role of custodians, transfer agents, correspondent banks, clearing houses and asset servicers, to name a few, will all be impacted by DLT.
• Regulators will need to opine on specific rules, obligations and laws with respect to each, and will play a pivotal role in how the industry evolves.
• Enforcement of computer code as legal contracts is an area that will undoubtedly require regulatory and legal scrutiny. The creating and trading of financial contracts backed not by legal prose but by code is unchartered territory.
• Data retention rules, client data propagation and banks cybersecurity responsibilities will all require debate, clarification and guidance.
To overcome these concerns, the financial industry has to work closely with regulators, compliance and audit. Collaboration with information security experts and academics whilst engaging in proof of concepts is essential to guarantee success. Regulators in the industry must identify and update rules that limit the technology needlessly and replace them with technology principles that are not implementation specific so that they can evolve as technology improves.
Andrew Douglas, Managing Director, Government Relations, DTCC & CEO, DTCC’s European Trade Repository
By experience, regulation tends to be retrospective – regulators examine the cause of a problem and set rules to ensure the same issue is avoided in the future. By definition, regulation around new technology will need to be forward-looking to avoid future problems, but in reality, it will be devised post ‘event'.
Other than implementing a solution quickly, getting fast feedback to determine the viability of the solution and redesigning it based on that feedback (aka, fail fast and redesign), it would be beneficial to incorporate more ‘regulatory sandboxes’ where regulators set up test environments for tech players to try out their solutions in a controlled manner. The Financial Conduct Authority and Monetary Authority of Singapore effectively are already doing this.
* This article was first published here.