FINRA’s Blockchain Symposium on Distributed Ledger (Blockchain Technology)


I’m attorney Laura Anthony founding partner
of Legal & Compliance, a full service corporate, securities, and business transactions law
firm. Today is the continuation in a LawCast series
talking about distributed ledger technology or blockchain. On July 13, 2017, FINRA held a Blockchain
Symposium to assess the use of distributed ledger technology, DLT, i.e. blockchain, in
the financial industry. The symposium followed FINRA’s January 2017
report on DLT and its implications for the securities industry. In recent years, over $1 billion has been
invested by various market participants to explore the use of DLT in the financial services
industry. Although the level and speed of disruption
to current systems remains debated, it is universally agreed that DLT will be utilized
in the securities industry, and will indeed be disruptive. DLT has the potential to completely change
business models and practices and as such, regulators realize the necessity to be actively
engaged to prepare for the new regime. On a positive note, FINRA views DLT as having
the potential to provide investors with greater access to services and transparency and to
provide firms with increased operational efficiencies and enhanced risk management. Many aspects of FINRA’s rules and areas
of responsibilities can be impacted by DLT, including, for example, clearing arrangements. It is thought that DLT can eliminate middle-market
participants involved in the clearing process, recordkeeping requirements, and trade and
order reporting and processing. In addition, FINRA rules, such as those related
to financial condition, verification of assets, anti-money laundering, know-your-customer,
supervision and surveillance, fees and commissions, payment to unregistered persons, customer
confirmations, materiality impact on business operations, and business continuity plans
also may to be impacted depending on the nature of the DLT application. DLT is already being used in the securities
markets in the form of generally ICOs or Initial Cryptocurrency Offerings, sometimes called
ICOs, and in states that have passed corporate statutes allowing for the use of the technology
to maintain corporate and shareholder records. Many of the top transfer agents are within
months of beta testing blockchain technology for shareholder recordkeeping. On July 25, 2017, the SEC issued a report
on an investigation related to an ICO by the DAO and statements by the Divisions of Corporation
Finance and Enforcement related to the investigative report. Although I will cover the report and statements
separately in the coming weeks, the SEC concluded that the fundamental tenets related to the
definition of a security apply and that cryptocurrencies and tokens that fall within that definition
are securities, subject to SEC regulations, and regardless of the title or form they may
take, the SEC will have jurisdiction. The definition of a security is guided by
the howey test, which I’ve covered in prior LawCast series. FINRA’s report on DLT is broken down into
three sections including an overview of distributed ledger technology, DLT securities industry
applications and potential impacts, and factors to consider when implementing DLT. FINRA also discussed regulatory requirements
and potential changes related to DLT. I will summarize each section with my usual
commentary and input. I’m securities attorney Laura Anthony, founding
partner of Legal & Compliance, and producer of LawCast. Should you have any questions about today’s
topic, please visit SecuritiesLawBlog.com and LawCast.com, or contact me directly. Inquiries of a technical nature are always
encouraged.

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