Distributed Ledger Technology (DLT) is becoming more popular in the financial services sector. Due to the specifics of the technology, FINRA outlines Blockchain Risks. Are new regulations necessary?
20 January, AtoZForex – The Financial Industry Regulatory Authority (FINRA) overseeing all securities operating in the US has released a report on the implications of Distributed Ledger Technology (DLT) or Blockchain.
FINRA outlines Blockchain Risks
The report was published due to the growing popularity of the technology. According to the World Economic Forum, which FINRA refers to, during the past three years over $1.4 billion has been invested in DLT to study and adopt its uses in the financial services sector.
The FINRA emphasizes that DLT impact various sides of the securities market. It includes market efficiency, transparency, post-trade processes and operational risk. Considering that the technology involves sharing information via the network, it induces security-related risks. Therefore, the regulator advises participants to think about introducing security programs related to risks arising from both internal and external sources. In addition, FINRA suggests implementing governance, operational structure and network security. Here some of measures to consider are presented.
Broker-dealer net capital and anti-money laundering
Firstly, if a broker-dealer holds crypto-securities, digital currency or other cash-backed token holdings, it should think how these would impact its net-capital estimation under Exchange Act Rule 15c3-1. The rule “requires broker-dealers to maintain a minimum level of net capital (consisting of highly liquid assets) at all times”.
Then the regulator advises firms to consider implementing various anti-money laundering (AML) and and customer identification related regulatory obligations.For example, the Bank Secrecy Act of 1970 (BSA) orders all broker-dealers to introduce compliance programs for detecting and averting money laundering. While according to FINRA Rule 3310, broker-dealers should develop and maintain a written AML program to adhere to the requirements of the BSA.
Customer Data Privacy
In a DLT network, all parties on the network can share customer data and transaction information. Therefore, undesired parties on the network could access this data. Regulation S-P asks broker-dealers to have written policies in place to safeguard customer information and records. Additionally, companies have to provide initial and annual privacy notices to clients. In notifications they would explain information sharing policies and inform customers of their rights.
All in all, bitcoin and blockchain will continue being major topics under discussion in the FinTech sector this year.
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