Leaders at agencies including the US Securities and Exchange Commission (see here), UK Financial Conduct Authority (see here) and Hong Kong’s Securities and Futures Commission (see here) have called this year for exploring ways to improve markets with blockchain ledgers.
Authorities still need more assurance of its safety before accepting everyday use of the technology, which records transactions by appending them to strings of widely shared computer code, market executives told an industry conference* earlier this month in Cartagena, Colombia.
“Regulators start with a very simple proposition: They don't want anything to get screwed up,” said Sandy Frucher, vice chairman of Nasdaq, the market operator that launched a platform for use of distributed ledgers this year.
“We are probably the most regulated industry in the world,” Frucher said, “and we are going to have to make [the case] to regulators, who by definition start off any conversation with a two-letter word: 'No.’”
While the technology has been hailed for the prospect of cheaply replacing existing market infrastructure, the executives said adoption will be no more than incremental over the next few years.
“Regulation won’t be changed overnight,” said Thorsten Peisl, chief executive of RISE Financial Technologies, a London-based developer for companies seeking to set up distributed ledgers. He said that blockchain — which was designed to avoid the regulated financial system — must be adapted for use within existing rules.
Incumbent banks and market infrastructure, trusted as regulated industries, can make a case that the technology can address rising concerns such as cybersecurity, he said.
“If one of us gets hacked, the system continues to exist and is not being threatened,” an improvement over more centralized transaction registers and other systems now in use, Peisl said.
Regulated market infrastructures, like clearinghouses and clearing brokers, won’t be wiped out, because rules depend on them to keep markets safe, said Raymond Kahn, an adviser on financial technology and former head of clearing services at Barclays.
But service providers also will have to assure asset managers that payments will remain secure.
“It’s not just the regulators which the industry has to appease,” Kahn said, “it’s really the buy-side also.”
* WFE General Assembly & Annual Meeting, held by the World Federation of Exchanges in Cartagena, Colombia, Nov. 3 and 4, 2016