Bitcoin, Big Data, blockchains… Technological developments have developed at a rapid pace in the past few years, being dubbed as both disrupter and complement to existing models. We are going to hear more and more about these so for those who feel they are playing catch-up, here’s a quick summary of the technological alternatives.
FinTech is a general term that refers to the development and introduction of technological solutions to address issues facing the finance industry. It can take many different forms and so far much of the innovation has focussed on:
- payment systems – such as digital wallets/mobile banking;
- currency and investment platforms – that cut out the traditional “middle man”; and
- alternative forms of lending – such as crowdfunding.
Although the term is relatively new, RegTech in itself is not a new idea. Advancements in this area have provided solutions to help streamline compliance processes, reduce the costs of compliance and assist businesses in understanding and complying with new regulation and legislation. For example, there are systems that now collate information across a wide variety of available online sources in order to help businesses streamline their anti-money laundering (AML) checks. With the level of regulation ever growing, as criminals get smarter and increasingly tech savvy, new systems that streamline necessary processes can offer huge time savings.
One of the key contributors to this progress is the development of a more advanced form of distributed ledger technology (DLT). In contrast to a standard ledger, where individuals have to communicate with a centralised person or entity to update the ledger, DLT is decentralised and each participant has the ability to update the ledger themselves.
Blockchain technology, as a form of DLT, records data in a series of electronic “blocks” which can be linked together as a “chain”. Perhaps one of the most important aspects is that these “blocks” cannot be retrospectively amended. This means that the “chain” accurately reflects the series of transactions or “blocks” which have been recorded and could not only be used to record payment or other banking transactions, but also, for example, in the pharmaceuticals or precious metals supply chains to help verify goods supplied and received (when goods are received at a specific location the data is added to the chain as an electronic block that then triggers the next step in the process, such as releasing payment, without the need for additional human intervention or time delays).
Currently, much development is also being undertaken to use blockchain technology in “tamperproof” voting systems, as it is seen to be secure and robust.
How are these developments affecting the financial services industry?
DLT and blockchain technology have had a significant impact on what can be achieved in both FinTech and RegTech. Its uses are as varied as recording payment transactions and making the process more efficient across the international banking network, to improving access to de-centralised data to assess it more easily and speed up AML and compliance processes.
It can also be used to in relation to smart contracts. These are contracts which are executed or with terms which are finalised or enforced when the computer assesses a number of conditions are met (these conditions could be linked to things such as shareholder consents or analysis of financial performance of a business). The ability to accurately and securely record transactions and access data across a wide number of entities has led banks and start-ups alike to invest in developing this technology further.
The FCA is taking a particular interest in blockchain technology as part of its wider Innovation mandate. In its recent discussion paper on DLT, it notes the exciting possibilities presented by DLT and, although the regulator usually takes a “technology neutral” approach to regulation (broadly that regulation should apply to all, without giving preference to one system of providing over another), it is now assessing whether it needs to look at DLT on a separate basis. This is to protect consumers and the markets, but also to help promote competition. The FCA’s “Project Innovate” aims to tackle regulatory barriers to allow firms to innovate in the interest of consumers.
In the last 24 months, the FCA has noted a shift from the “proof of concept” stage to “real world” development in the use of DLT and have seen a number of DLT solutions come through the regulatory sandbox and direct support functions they host. The discussion paper, which closes for comment on 17 July 2017, is an attempt to gather views on how best to approach and regulate DLT. What is clear, however, is that, although the FCA views DLT as a real market disrupter, it can also see a wealth of opportunities for its use within the financial services sector and wants to promote this in a safe and secure environment.
 See https://www.fca.org.uk/news/speeches/innovating-future-next-phase-project-innovate and https://www.fca.org.uk/publications/discussion-papers/dp17-3-discussion-paper-distributed-ledger-technology