October 12, 2017
by Howard L. Kramer

Early this year FINRA released a thoughtful white paper (or concept release) on distributed ledger technology (“DLT”), also referred to as blockchain, and its implications for securities regulation.  The white paper provided an overview of DLT and its securities industry applications and potential impact.  It also described the factors to consider when implementing DLT and the attendant regulatory considerations.  The regulatory considerations touched upon customer funds and securities, broker-dealer net capital, books and records, anti-money laundering, customer data privacy, trade reporting, supervision, fees, customer confirmations and account statements, and business continuity.  FINRA requested comments on the white paper, with the comment period ending March 31, 2017.

To date, FINRA has received 13 comment letters on the white paper, including letters from SIFMA, Fidelity Investments, Overstock.com, Nasdaq, the Managed Funds Association, the Wall Street Blockchain Alliance, and the Chamber of Digital Commerce, among others.  The comment letters covered a variety of topics, but some themes were common to a majority of the letters.  First, most commenters emphasized a support for innovation and a recommendation that regulators not stifle the development of this promising technology.  Second, many commenters suggested that regulators not be in a rush to impose rules and regulations but instead follow a flexible approach so that the technology could continue to develop.  Third, the letters often focused on the part of the white paper that dealt with regulatory considerations.  Commenters provided suggestions for areas such as DLT governance, competition among DLT providers and non-DLT providers of similar securities services, transparency, and cyber security, among other issues.

In July FINRA held a Blockchain Symposium at the Park Central Hotel in New York to bring regulators and the industry together to discuss blockchain and “related opportunities and challenges” in the financial industry, particularly the potential market and regulatory implications of the use of Blockchain.  My sense is that FINRA is still sorting through the issues raised in the white paper and discussed further at the Symposium and that it welcomes continued input from the industry on this topic.  I do not think that the end of the comment period on the white paper should deter interested parties from offering their views to FINRA on the issues raised in the white paper.  In addition, the interest by FINRA indicates that it, in addition to the SEC and CFTC, will be active in determining how to regulate blockchain securities activities.