November 11, 2015

Test Your Own Blockchain In Regulatory ‘Safe Space’


The Financial Conduct Authority’s (FCA) testing ground for fintech start-ups will boost blockchain development and support disruptive technologies without fear of enforcement, the regulator claims.

In a report released yesterday, it said it hopes to provide a facility for fintech businesses to test and develop innovative products, in a real-world setting but free of potentially-stifling regulatory requirements.

According to the FCA, the initiative is designed to support the UK’s burgeoning fintech industry, which it said generates around £20bn of revenue a year and is home to half of Europe’s promising “disruptive” start-ups.

The FCA outlined the regulatory sandbox in June, to open in 2016, when it approached the industry for input.

Christopher Woolard, the FCA’s director of strategy and competition, revealed further details at this week’s FinanceAsia Annual Compliance Summit in Hong Kong.

“While regulators rightly focus on the risk of bad things happening in the system, we have to be conscious this can be at the cost of stifling the chance of good things emerging,” he said.

One area of focus will be discovering potential use cases for blockchain technology, Woolard said, an issue the financial services industry has yet to resolve.

He added that ways to develop technology that serves a regulatory function — “regtech” — are also being discussed, and the FCA is keen to let fintech “play a part in reducing compliance costs” for businesses.

According to yesterday’s report, the FCA has recommended the establishment of multiple, separate sandboxes as the most effective strategy.

Firms looking to experiment with real-world use cases, or using genuine consumer data, would need to submit proposals which would be considered on a case-by-case basis.

The FCA said that no enforcement action would be taken against anyone using this facility; instead, the regulator would require certain consumer protection controls to be implemented, and ultimately could close a trial if deemed too high-risk.

The initiative, which has its roots in a Government Office for Science report released earlier this year, was generally welcomed by the industry. Daryl Wilkinson, managing partner at Lab12 Innovation and outgoing head of group innovation at Nationwide, said it will provide businesses with much-needed “regulatory clarity”.

“I think the FCA’s investment to better support and encourage the understanding and practical applications of emerging technologies is good news, and a progressive strategy,” he told PaymentsCompliance. “This comes from an organisation that has been unfairly criticised in the past as potentially constraining innovation through regulation, which I’ve never accepted as fact,” said Daryl Wilkinson, managing partner at Lab12 Innovation.

Nick Williamson, chief executive and founder of blockchain technology start-up Credits, said he is interested in making use of the sandboxes once implemented.

“Like everything, you have to walk before you run,” he said.

“We haven’t had any direct involvement yet, but we would like to use it as it comes online.”

Williamson said “regtech” remains a compelling use case, adding that the Isle of Man’s use of Credits technology to establish identity on a blockchain network would be a “perfect fit” for the FCA’s sandbox.

“Obviously a large part of what we’re doing with the Isle of Man is directly in line with that sandbox idea, where we can try out regulatory and technological innovation in a test bed environment, that still allows for real usage and real customers,” he said.

However, David Taylor, a partner at management consultancy OCP, warned against getting carried away.

“I don’t want to damn it out of hand, because it’s well-intentioned, what they’re trying to do,” he told PaymentsCompliance.

“It’s going to be quite a challenge to get all of the various cogs to mesh together; I think it’s a fine ambition but I’d be rather cautious about how much headway it’s going to make.”

Taylor added that businesses using the FCA sandbox will need to question whether they are sacrificing a competitive edge.

“Because this is a competitive game; it’s not about everyone getting together to collaborate when you’re trying to come up with a new proposition that would be distinctive in the market,” he said.

A separate industry-led “virtual” sandbox would also be set up, the FCA said, for businesses wishing to experiment without entering the real market.

However, the FCA did acknowledge that legislative changes may be necessary to implement it, and expressed concern that existing EU-wide requirements may provide a stumbling block.

Certain payment providers and e-money businesses may not be legally eligible to use the sandbox facility, it added, without going into specifics.

The Monetary Authority of Singapore also recently revealed plans to provide a sandbox approach to regulation as part of its widespread pro-innovation initiative.

Jersey government officials said last month they see the island as ripe for blockchain and crypto-currency experimentation because of its regulatory flexibility.