FCA Testing Blockchain Technology In Pilot Program
The Financial Conduct Authority (FCA), a regulatory body of financial services and markets in the UK, is hosting a regulatory sandbox for innovative companies. The project will function as a ‘safe space’ for businesses to test innovative products, services, and business models in a live environment. Regarding the project, Christopher Woolard, director of strategy and competition at the FCA, said:
“The FCA’s regulatory sandbox was a first for regulators worldwide and underlines our deep commitment to innovation and our willingness to think outside the usual regulatory parameters.”
The regulatory sandbox consists of two cohorts. Each cohort includes a test-design period that’s anticipated to take roughly 10 weeks. After the test-design period is complete, the firms submit their Proof-of-Concept (PoC) for the testing phase. This period lasts for up to six months. Cohort one began in May 2016 and received 69 applications. However, of those 69, only 24 companies were accepted and nine are blockchain-based. The FCA has not released details on the companies partaking in cohort two, but the application period ended on January 19, 2017. The nine blockchain-based companies included in the first cohort are:
• Tradle: a company that is using the blockchain to build a Know Your Customer (KYC) network to link banks with external financial networks.
• Nivaura: a blockchain startup that offers “modular digital platform solutions” for commercial and investment banking.
• Epiphyte: a blockchain-based Software as a Service (SaaS) that delivers instant settlement and Delivery Versus Payment (DVP) for global financial trades and transactions.
• Billion: an e-money platform that utilizes the blockchain to securely transfer and hold funds using a smart phone at zero cost.
• Luno: formerly known as BitX, Luno is a safe and secure Bitcoin wallet and trading platform.
• DISC Holdings Limited is a technology provider that has partnered with the UK’s Department of Work and Pensions to create a blockchain-based platform to disperse emergency payments in ways other than cash.
• Otonomos: a platform that enables private companies to manage shareholdings and conduct bookbuilding on the blockchain.
• Tramonex: Registered as a Small Electronic Money Institution (EMI) with the FCA in February 2017, Tramonex enables businesses to become authorized electronic money institutions that can use digital currencies in their day-to-day operations. This is the first case of a blockchain technology company receiving EMI authorization from the FCA.
In order to participate in the regulatory sandbox and engage in regulated activity, i.e. money transfers, all firms had to register with and be authorized by the FCA. Subsequently, all approved firms will have to apply for relevant authorization and/or registrations in order to engage in public business. Woolard addressed authorization at the Innovate Finance Global Summit on April 11, 2016:
“We are setting up a tailored authorisation process, which means that sandbox firms will first be authorised with restrictions, allowing them to test their ideas but no more. They still need to apply for authorisation and meet threshold conditions, but critically only for the limited purposes of the sandbox test.”
“So the authorisation tests should be easier to meet and the costs and time to get the test up-and-running reduced.”
“If, after sandbox testing, the firm wants to launch itself into full activity on the wider market, it can do so if it satisfies the threshold conditions for that wider activity.”
The EMI registration of Tramonex and approval of nine blockchain startups to enter the regulatory sandbox shows that the UK is taking a more progressive attitude toward blockchain technology. Such a move by a major economic power could potentially influence other countries to push toward similar programs that bolster global blockchain innovation in the fintech industry and other sectors as well.