October 16, 2021

Volume XI, Number 289


October 15, 2021

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October 14, 2021

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FCA Publishes Feedback Statement on Distributed Ledger Technology

On December 15, the UK Financial Conduct Authority (FCA) published a feedback statement (Feedback Statement) on its April 2017 discussion paper (Discussion Paper) on distributed ledger technology (DLT).

The purpose of the Discussion Paper was to encourage dialogue in the UK on the regulatory implications of current and potential developments of DLT in the financial markets. The Feedback Statement summarizes and is a response to the feedback received on the FCA’s Discussion Paper. It also sets out the FCA’s views on recent developments in the DLT market and the FCA’s next steps.

Highlights in the Feedback Statement include the following:

  • Respondents to the FCA’s Discussion Paper were supportive of the FCA’s “technology-neutral” approach to regulation. They welcomed the FCA’s open and proactive approach to new technology, including its “regulatory sandbox” (a live market environment where businesses can test innovative products, services and business models), its regulatory technology initiatives and its practical engagement with innovators. Feedback from respondents indicated that the FCA’s current rules were sufficiently flexible to deal with DLT without requiring any specific rule changes.
  • Although all respondents suggested numerous benefits and risks associated with using permissionless and permissioned DLT networks in financial services, some doubted the compatibility of permissionless networks with the FCA’s regulatory regime because, for example, they lack governance and tend not to identify participants. However, nearly all respondents generally agreed with the FCA that there are no substantial barriers to adopting DLT under the FCA’s rules.
  • Respondents who commented on initial coin offerings (ICOs) agreed with the FCA’s view on the risks to consumers and that the legal and regulatory position of each ICO proposition has to be considered on a case-by-case basis.
  • Most respondents were interested in the use of DLT in capital markets, for example by using smart contracts. However, they pointed out that they would need greater clarity on issues such as the legal status of digital assets and the enforceability of smart contracts before they considered using such solutions at scale.
  • All respondents highlighted the global nature of DLT and urged the FCA to collaborate even more proactively with other national and international regulatory bodies and industry associations to make a globally harmonized approach to DLT possible.

Next steps proposed or actioned by the FCA include:

  • Gathering further evidence on the ICO market and conducting a deeper examination of its developments to determine whether there is a need for further regulatory action in this area, beyond the consumer warning it issued in September 2017 (Consumer Warning on ICOs). The FCA has also already highlighted how an ICO-related business proposition needs to be designed so that it would satisfy the “consumer benefit” criterion when gaining access to the FCA’s Innovation Hub (Innovation Hub), where new and innovative businesses are supported by the FCA when trying to launch new products on the market.
  • Continuing to monitor DLT-related market developments and reviewing the FCA’s rules and guidance in light of those developments.
  • Working closely with national and international regulatory bodies to shape regulatory developments and standards.
  • Engaging further with other regulatory authorities at a UK level, to ensure a coordinated approach in the UK.
  • Continuing its close engagement with DLT use cases and industry stakeholders through its Innovation Hub.

The FCA’s Feedback Statement is available here.

The FCA’s Discussion Paper is available here.

The FCA’s Consumer Warning on ICOs is available here.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VIII, Number 5

About this Author

Carolyn Passen, copyright, trademark, patent infringement, Katten law firm

Carolyn M. Passen concentrates her practice in the area of intellectual property litigation and counseling. She has represented clients in a variety of complex intellectual property disputes involving claims of copyright, trademark and patent infringement, trade secret misappropriation, false advertising and unfair competition in courts throughout the country. Carolyn has also represented clients in proceedings before the US Patent and Trademark Office Trademark Trial and Appeal Board and before the US International Trade Commission. She is experienced in trademark...

Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...