FINRA argues blockchain has potential to disrupt securities – and asks for comments in report


The Financial Industry Regulatory Authority (FINRA) has released a report assessing the impact of blockchain technologies in the securities industry – and after weighing up the pros and cons argues there could be greater efficiencies as well as ‘novel risks’ around data security and privacy.

The report, which uses the term distributed ledger technology (DLT) throughout, is aimed by the regulatory body to be an ‘initial contribution to an ongoing dialogue’, and leaves the door open for market participants to comment and provide additional guidance going forward.

“As the securities industry continues to explore and adopt DLT, many market participants have indicated the impending changes are more than just those associated with the automation of a process or adoption of a new technology system, but instead represent the potential to create a paradigm shift for several traditional processes in the securities industry through the development of new business models and new practices,” the report notes. “As a result, there has been a great desire among industry participants to have increased regulatory engagement, as they explore the technology and its possible applications.”

The paper runs through a series of applications and use cases for securities, going from equity to debt. One example the body cites, which some market participants are already exploring with a private DLT network, is quicker settling of syndicated loans; the average settlement time for secondary trading of syndicated loans is approximately a month because of the ‘largely manual’ process and the involvement of multiple counterparties.

Increased transparency is another potential option, given the key tenet of blockchain technology to provide a database which contains the complete history of all securities transactions that occurred on the network. Yet there is a caveat. “While DLT may help facilitate transparency from a technological perspective, it would not resolve all questions about transparency from a policy perspective,” the report notes. “The actual desired level of transparency will depend on factors unrelated to the use of DLT, such as the need to safeguard personally identifiable information and trade strategies.”

Ultimately, the report carries a cautious yet optimistic tone. The deadline for comments to be submitted is March 31 – and the report can be read here.


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