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Market participants in the securities industry are contemplating various applications of Distributed Ledger Technology (DLT), aka Blockchain technology, but its adoption can cause several potential implications, according to a report by the US securities authority, the Financial Industry Regulatory Authority (FINRA) on the use and implication of such technology in the securities markets industry.
Blockchain technology has the potential to revolutionize the operations of the securities industry, but in the meantime any changes resulting from its use are likely to be incremental and take many years to develop, according to FINRA.
Industry participants have expressed desire for increased regulatory engagement with Blockchain. In relation to this, the regulator seeks comments from market participants regarding their views on the use and implementation of DLT.
According to the FINRA, there are many factors to consider prior to adopting Blockchain technology. Some of the challenges are in the implementation process itself (including governance principles, the operational structure of adoptees’ network, network security), while others have to do with regulation (on protection of customer funds, net capital requirements, books and record requirements, clearance and settlement, customer data privacy, anti-money laundering, etc.).
Many regulatory rules are potentially implicated by various Blockchain applications. Such application can, depending on their nature, affect the rules related to carrying agreements and books, records requirements, trade and order reporting requirements, financial condition, verification of assets, anti-money laundering, supervision and surveillance, fees and commissions, payment to unregistered persons, customer confirmations, materiality impact on business operations, and business continuity plans.
“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,” the FINRA said in the report.
FINRA is an independent entity that acts as a SRO. It regulates all securities firms doing business in the US in every aspect of business – from registering industry participants to examining them, writing and enforcing rules, and informing and educating the public. In addition, the association provides surveillance and other regulatory services for equities and options markets. It also takes on other responsibilities, such as administering the largest dispute resolution forum for investors and firms.
To view the full FINRA report, follow this link.