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Use of blockchain in financial services poses competition risks, says FCA

The use of blockchain in financial services could pose a risk to competition, a senior official at the UK's Financial Conduct Authority (FCA) has said.09 May 2018

Speaking at an event in the Netherlands on Thursday, Mary Starks, director of competition at the regulator, said that while innovation in the use of digital ledger technology (DLT) has the potential to benefit competition, by enabling familiar processes to be carried out "more efficiently" or by revolutionising the market and opening up "a whole new world of possibilities", there are possible risks to competition too. She said the competition risks arising from blockchain are familiar from other contexts.

The use of 'permissioned' blockchain networks, where a "gatekeeper" controls access to the data stored on the network, pose competition risks where those networks "become essential infrastructure (for example in clearing and settlement)", Starks said.

She also said that "an early mover" in the use of blockchain could raise dominance issues in connection with the use of the new technology.

"We will need to understand this technology, its strengths and its vulnerabilities, and its implications for competition, much better before we are comfortable to entrust it with significant swathes of our financial infrastructure," Starks said. "We need to ask ourselves as regulators what we should do so that we are not inhibiting the benefits, nor overlooking the risks."

Blockchain can be likened to a type of database that, using cryptography, can be operated as a digital public or permissioned ledger for recording information, such as the transfer of assets between two or more parties. The technology is synonymous with the digital currency bitcoin, because it records the exchange of assets in bitcoin transactions. However, blockchain has potential application in many contexts across sectors.

Mary Starks also discussed the benefits and risks arising from cryptocurrencies, saying tThere has been a shift from cryptocurrencies as a medium of exchange to being primarily seen as an asset class. The FCA's remit does not currently include cryptocurrencies, however given the FCA's consumer protection objective she said the FCA does want to "understand who is investing and how much, and we want to guard against people losing more money than they can afford to".