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The FCA, Project Innovate and Blockchain: business as usual or a new “law of the horse”

  • United Kingdom
  • Financial services - Digital Financial Services


In 1996 at a cyberlaw conference at the University of Chicago, Judge Frank H. Easterbrook of the United States Court of Appeals for the Seventh Circuit compared the concept of creating a “law of cyberspace” as analogous to that of creating “a law for horses”. For him, there was no need to create a law for technologies based on computers, any more than there is a need to have a law dedicated to horses. In other words, the way we do things should not affect existing law. Instead, current rights and obligations should accommodate new developments with no need for special laws for new technologies.

More than 20 years later, regulators are still struggling with this question in dealing with FinTech. In its Discussion Paper on Distributed Ledger Technology (another name for Blockchain), the FCA have re-opened the debate in the UK. The Discussion Paper is available here.

The FCA has done so at the same time as it encourages innovation demonstrated by the recent speech of Christopher Woolard, Executive Director of Strategy and Competition at the FCA. The full text of the speech is available here.

The FCA has also done this in light of the European Securities and Markets Authority’s discussion of blockchain where it suggested that there is not yet any need for a specialist legal regime. ESMA’s report on blockchain is available here.

FCA’s Discussion Paper on distributed ledger technology

The FCA generally takes a “technology neutral” approach to regulation. However, the unique nature of blockchain raises the question of whether a change in approach is necessary.

The FCA recognises that there may be specific areas where blockchain does not fit with the its requirements but still achieves the desired outcomes. It is thus considering whether its rules prevent or restrict sensible development that would benefit consumers and hence whether changes may be needed. Currently, the FCA does not see a clear need to consider changes to the regulatory framework for blockchain solutions to be implemented, but intends to explore emerging business models in terms of:

  • What new risks and opportunities does blockchain present to the FCA’s statutory objectives of market integrity, consumer protection and competition? Can blockchain support more effective competition, financial system integrity and deliver better consumer outcomes? How can regulated firms mitigate any risks?
  • Do any of blockchain’s characteristics make it challenging to fit blockchain solutions into the regulatory framework, despite the FCA’s approach of ‘technology neutrality’?

To navigate these issue, the FCA is seeking to start a dialogue on the potential development of blockchain, to coincide with the expected movement from blockchain applications from the proof of concept to the real-world deployment stage during the second half of this year. The focus will be on what the real benefits and risks of blockchain technology will be, removing the hype surrounding the technology, particularly in the context of the FCA’s objectives. To feed into this discussion, comments need to be submitted to the FCA by 17 July 2017.

Christopher Woolard’s speech: the next phase of Project Innovate

Christopher Woolard’s speech serves as a reminder that the FCA will take a bold, pre-emptive and progressive approach to regulation, and in particular, through Project Innovate, will encourage both innovation and competition. The FCA will measure its success in this respect in terms of outcomes for consumers, and in particular through three questions:

  • Can the FCA see more innovative firms entering the market?
  • Is there greater innovation and competition by and between larger firms?
  • And ultimately are consumers benefiting from that?

In terms of whether these criteria are being met, the FCA is encouraged by the fact that there have been a larger number of sandbox applications than in the previous cohort, and that there are an increasing number of requests for support (despite the recent vote to leave the EU leading to a short term dip). Interestingly, the FCA wants some of what it does in the innovation work to become the norm in how it operates. In addition, the FCA sets out some of its plans for the future, which include:

  • expanding the remit of the Advice Unit, which currently assists firms developing automated advice models, taking in firms within the mortgage, general insurance and debt sectors, as well as firms that want to provide guidance instead of regulated advice.
  • launching an open debate on the risks and benefits of blockchain (on which, see discussion paper below).
  • building stronger international co-operation with other regulators. The FCA have signed co-operation agreements with China, Japan, Canada and Hong Kong, and an agreement with India is under discussion. The FCA believes that by building a common understanding of the principles of good innovation, for example through the G20 and IOSCO, can benefit both stronger international co-operation, and help secure the long-term future of the FinTech industry.
  • encouraging the emergence of more innovative firms, whether home grown or inward investors, in the regions of the UK, by offering a regular presence to give guidance and informal steers. The FCA sees two specific locations where it thinks the FCA can add value to emerging hubs: the Edinburgh-Glasgow corridor and the Leeds-Manchester area.

So, about the horses?

Historically, the FCA’s philosophy has been in line with Judge Easterbrook’s view of technology neutrality. It has not regulated specific technologies but focussed instead on the activities which they facilitate and the firms carrying out these activities.

This approach has many advantages, for example by accommodating innovation yet avoiding arbitrage and unfair competition. It also helps provide stability because firms can fit their business models into an existing legal framework, rather than create a new framework for each new technology.

However, problems with this approach arise where an out of date legal framework hinders new beneficial developments and to this extent it is worth examining whether the current law is actually best suited for its underlying purpose.

In this respect, it is good that UK and EU regulators are taking time to understand new technologies and their implications, rather than rushing in with a “regulatory answer”, which may in fact miss the point entirely. Such an approach does not equate to a “law of the horse”. Instead it shows a deeper understanding of the evolution of markets and the need for regulation to take account of innovation.

In this respect, Woolard’s speech is to be welcomed, as it shows the holistic nature of the FinTech environment, of which blockchain is but one development. To be most effective, there is a need for regulators to understand that which is being regulated, and the FCA is showing its commitment to this through increasing engagement, at both the international and regional levels.

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