Distributed ledger technology (DLT), better known as Blockchain, has garnered significant interest in the securities industry, with many market participants indicating a desire for increased regulatory engagement as they explore the technology and its possible applications.
In response, the Financial Industry Regulatory Authority (FINRA) today issued a report that discusses the use and implications of DLT in the securities industry. The paper also seeks comments as part of an effort to obtain feedback on any challenges associated with the use and implementation of DLT.
“Over the past couple of years, FINRA has actively engaged with market participants to monitor developments related to DLT and its potential impact in the securities industry,” says the report, from FINRA’s Office of Emerging Regulatory Issues. FINRA believes this early collaboration “will allow the industry to reap the benefits of the technology, while ensuring protection of investors and maintenance of market integrity.”
The paper, which is intended to be FINRA’s initial contribution to an ongoing dialogue with market participants about the use of DLT, provides an overview of the technology, highlights key applications and discusses implementation and regulatory considerations for broker-dealers. Among the applications addressed are those being used or tested in the equity, debt and derivatives markets, as well as shared utilities.
More from the report:
As the securities industry continues to explore and adopt DLT, many market participants have indicated the impending changes are more than just those associated with the automation of a process or adoption of a new technology system, but instead represent the potential to create a paradigm shift for several traditional processes in the securities industry through the development of new business models and new practices.
As a result, there has been a great desire among industry participants to have increased regulatory engagement, as they explore the technology and its possible applications. FINRA welcomes an open dialogue with market participants to help proactively identify and address any potential risks or hurdles in order to tap into the full potential of DLT, while maintaining the core principles of investor protection and market integrity.
Technological innovations in the industry, operating in accordance with these core principles, have the potential to provide investors with greater access to services and enhanced experiences, offer firms increased operational efficiencies and enhanced risk management, and enable further transparency in the marketplace. This paper is intended to be an initial contribution to an ongoing dialogue with market participants about the use of DLT in the securities industry.
Accordingly, FINRA is requesting comments from all interested parties regarding all of the areas covered by this paper. FINRA also requests comments on any related matters for which it would be appropriate to consider additional guidance, consistent with the principles of investor protection and market integrity, based on DLT applications and their implications for FINRA rules.
FINRA, the Financial Industry Regulatory Authority, regulates all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.