Fintech

The UK FCA has published a Feedback Statement on its Discussion Paper (DP 17/03)
on Distributed Ledger Technology (DLT). The FCA strikes a careful balance between
innovation and regulation and flags key legal and regulatory risks in relation to digital
currencies, smart contracts and ICOs.

In the Feedback Statement, the FCA highlights

the following:
Digital currencies
>> Digital currencies themselves are not >> The FCA has highlighted reports from
currently regulated by the FCA (or the the BoE and ECB to the effect that
BoE), but may form part of a regulated there is no clear evidence currently of
product or service, such as derivatives financial stability or systemic risks. The
(CFDs, futures, options) or ETFs. FCA is, however, closely monitoring
developments and has highlighted
>> Retail investors gaining exposures
potential consumer protection and
to digital currencies via CFDs is
market integrity issues.
of particular concern to the FCA
(which notes the vulnerability to
manipulation of the value of the
underlying digital currency).
FT Innovative Lawyer
award 2017

Proud partner of FinTech50 and

Singapore FinTech Association
ICOs
>> The FCA has provided a detailed
analysis of regulatory considerations
applicable to ICOs. This analysis
highlights that anyone involved in offering
or distributing tokens (or carrying out
related activities) should carefully
consider whether the tokens constitute
a transferable security (for the purposes
of the prospectus regime), fall within the
regulatory perimeter, or come within the
UK rules on financial promotion.
>> The FCA intends to gather evidence on
market developments and determine
whether regulatory action is needed in
relation to ICOs.
>> Each token offering (or related activity)
must be assessed on a case-by-case
basis. The FCA encourages firms, if
unclear, to obtain independent legal
advice before engaging in activities
relating to tokens.
Smart contracts and digital assets
>> DLT holds promise for the securities
markets, particularly in relation to
post-trade infrastructure. In the
context of settlement, the FCA noted
that the use of a central bank digital
currency could enable real-time
“delivery-versus-payment”.
>> However, according to the FCA, it is
currently premature to fully appreciate
that potential. In particular, there
are legal uncertainties, notably in
relation to the enforceability of smart
contracts and the legal status of digital
assets (see the whitepaper on Smart
Contracts and DLT co-authored by
Linklaters and ISDA here).
Key contacts
Harry Eddis
Global Co-head of Fintech
Partner, Financial Regulation
Tel: +44 20 7456 3724
harry.eddis@linklaters.com
Richard Hay
UK Head of Fintech
Capital Markets
Tel: +44 20 7456 2684
richard.hay@linklaters.com
linklaters.com
© Linklaters LLP. All Rights reserved 2017
Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority.
The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent
standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications
is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
>> From a practical perspective, there Other regulatory considerations
are also risks relating to faulty code,
>> The FCA re-emphasised that its
malicious actors (such as oracles) and
regulatory philosophy is to be
erroneous (yet immutable) executions.
“technology-neutral” (to the extent
compatible with its objectives), which it
Financial crime
reports has been positively received.
>> The FCA’s view is that using DLT does
>> Respondents to the Discussion Paper
not automatically introduce or increase
requested greater legal certainty
the risk of financial crime. The FCA
around the application of the regulatory
therefore does not believe a company
regime to DLT. However, the FCA
deploying DLT should necessarily be
notes that whether a DLT product falls
denied access to traditional banking
within the regulatory perimeter remains
services, a trend it has seen evidence of.
a complex question for which legal
>> However, the FCA is “alive to” the advice is encouraged to be sought.
money laundering risks identified by
>> The FCA is of the view that DLT is
respondents to its April Discussion
not inherently incompatible with the
Paper. It has flagged the recent
General Data Protection Regulation.
proposal in 5AMLD to expand the
Instead, compliance will need to be
scope of AML regulation to certain
determined on a case-by-case basis.
digital currency services.
>> Permissionless and public DL networks
Operational risk are compatible with the FCA’s
regulatory regime and will not always
>> Both permissioned and
amount to an outsourcing (despite
permissionless DLT networks may
concerns raised by the industry in
have a positive impact on operational
response to its discussion paper).
soundness. The FCA’s key concern,
regardless of the technology used,
is that operational risks are properly
identified and managed.
>> The management of operational
risks for (particularly permissionless The FCA strikes
DLT networks) may require clearly
setting out responsibilities under the
a careful balance
Senior Managers and Certification between innovation
Regime, undertaking appropriate due
diligence from the outset, and taking
and regulation.
appropriate ongoing steps to mitigate
operational risk.
Paul Lewis
Global Co-head of Innovation
Partner, Capital Markets
Tel: +44 20 7456 4658
paul.lewis@linklaters.com
William Findlay
Associate, Financial Regulation
Tel: +44 20 7456 3915
william.findlay@linklaters.com
8083_2PP_FL002_F/12.17