United States: Recent Blockchain Regulatory Developments

Last Updated: February 9 2017
Article by Derivatives In Review

Blockchain and distributed ledger technology ("DLT") applications outside of the bitcoin context are attracting the attention of financial entities, prompting regulators to become increasingly focused on these possible applications.1 Recently, for example: (i) potential financial and securities applications of DLT were discussed in depth at a "FinTech Forum" held at the Securities and Exchange Commission ("SEC"); (ii) the Federal Reserve Board published a paper titled "Distributed Ledger Technology in Payments, Clearing, and Settlement"; and (iii) the Financial Industry Regulatory Authority ("FINRA") published a paper titled "Distributed Ledger Technology: Implications of Blockchain for the Securities Industry."2 Each of these recent developments is discussed in turn below.

1) DLT Discussion at the SEC FinTech Forum

The DLT portion of the FinTech Forum featured panelists from a financial institution, academia, a major accounting firm, and a software company focused on DLT.

The panelists covered the following topics, among others:

  • DLT may offer an alternative to the varied recordkeeping systems used by various financial intermediaries and, in such capacity, provide enhanced efficiencies and technological capabilities.
  • Smart contract technology may supplant certain middle and back office functions by enabling the transfer of digital assets and automating the steps that trigger the occurrence of particular lifecycle events.3
  • As an example of an early adopter, the Australian Stock Exchange Group is in the process of changing its current clearing and settlement system for equities to incorporate DLT. The technology is expected to reduce costs for both the Exchange and its member firms, primarily by eliminating certain reconciliation-related processes. The incorporation of DLT is also expected to provide increased transparency, which should benefit regulators, among other parties. The Australian Stock Exchange Group is also considering using DLT to change its current T+2 settlement cycle to a more optimal settlement cycle.
  • Another potential early adopter, the Depository Trust & Clearing Corporation, recently tested DLT and smart contract software that would handle data storage and lifecycle processing services for credit default swaps. Again, the technology is expected to reduce costs and eliminate various reconciliation-related processes.
  • Others exploring DLT applications include: participants in the health sector (applications for recordkeeping for clinical trials and other information); state governments (public recordkeeping, including registration of certain assets); energy companies (creation of virtual grids to track distribution of energy); intergovernmental agencies (digital identification of people globally to track availability of resources); industrial companies (tracking cash for specific suppliers and customers); financial services (real-time payments, corporate loans, trade finance, etc.); custodial banks (collateral tracking and usage); and insurance companies (management of claims).

The panelists also discussed opportunities and benefits that DLT may present to regulators and auditors, including the possibility of regulators and auditors themselves acting as "nodes" on a distributed ledger, which would enable them to effectively monitor the market and market participants.4 According to certain panelists, DLT potentially could allow real-time, ongoing auditing, and examining data "as it moves" may offer advantages over the current general auditing practice of examining and providing assurance opinions on the systems and control environments in which relevant data are created and maintained.

2) Federal Reserve Paper

The Federal Reserve paper contains a substantial section on legal considerations relating to DLT applications in payments, clearing, and settlement ("PCS"). This section of the paper emphasizes at the outset that the laws and regulations applicable to PCS may affect the manner, speed, and extent of adoption of DLT for a particular use case, and, therefore, the legal framework should be carefully considered as the PCS industry further develops DLT use cases. The paper then discusses the following issues within the existing legal framework:

  • DLT purportedly allows an auditable record of information that is simultaneously updated and distributed among market participants. However, distributed ledgers should be designed to provide assurances that, under existing laws, information stored on the stored ledgers has a sound legal basis and complies with applicable recordkeeping requirements. Alternatively, existing statutes and rules may need to be modified to accommodate recordkeeping through DLT.
  • Under current legal frameworks, ownership interests in securities, negotiable instruments, and other assets are often represented using physical or book-entry records. Whether the digital representation of ownership interests on a distributed ledger is consistent with these current legal frameworks requires detailed legal analysis, and contractual agreements or new laws and regulations may be needed.
  • The automated nature of "smart contracts" may conflict with various doctrines under contract law, such as voiding unconscionable contracts or amending contracts due to changed circumstances.5 Accordingly, the legal basis and evidentiary status of certain smart contracts is currently unclear.
  • Emergent firms that act as traditional financial intermediaries but incorporate DLT into their business likely will require a charter or license for holding and transferring assets on behalf of households or businesses. Lawmakers and regulators may need to consider whether existing financial institution licenses are sufficient, or whether alternative licenses should be developed, similar to the New York State "BitLicense" in the cryptocurrency space.6
  • As DLT matures, the appropriate governmental agencies likely will need to provide guidance on the application of the Bank Secrecy Act ("BSA") and anti-money-laundering requirements ("AML"), which subject a variety of intermediaries, including banks, money services businesses, and broker-dealers, to various requirements.

3) FINRA Paper

The FINRA paper examines the regulatory implications of broker-dealers issuing and trading securities, facilitating automated actions such as payment of coupons, and maintaining records on distributed ledgers. The paper discusses the following issues, among others:

  • Broker-dealers handling customer funds and securities are subject to various requirements under the securities laws, including the requirement under Rule 15c3-3 to "maintain physical possession or control over customers' fully paid and excess margin securities." These requirements may be implicated as broker-dealers use DLT to hold funds and securities.
  • Broker-dealers are generally required to maintain minimum net capital (consisting of highly liquid securities) at all times. How cryptosecurities, digital currency, or other cash-based token holdings may affect a broker-dealer's net-capital computation remains unclear.
  • SEC and FINRA rules subject broker-dealers to various recordkeeping requirements. Whether such records would satisfy applicable requirements should be taken into account by broker-dealers considering developing and maintaining records on a distributed ledger.
  • Careful analysis may be required to determine whether particular DLT applications fit within the current regulatory framework for clearance and settlement of securities transactions. For example, DLT potentially could blur the distinction between trade execution and settlement. Accordingly, certain uses of DLT may require broker-dealers to be registered as clearing agencies.
  • Various market participants are currently testing centralized identity management functions whereby, once the identity of a customer is verified by an entity on the distributed ledger, that information is made available to all parties on the distributed ledger. Such a function potentially could create efficiencies by eliminating duplicative verification of customer identities by various entities. However, this practice may conflict with the BSA requirement that broker-dealers verify the identities of all parties with which they establish a formal relationship to effect securities transactions.
  • Information maintained or shared on a distributed ledger (even if encrypted) may implicate various customer data privacy requirements applicable to broker-dealers. For example, broker-dealers must maintain written policies and procedures for the protection of customer information and records, provide periodic privacy notices to customers describing information sharing policies and informing customers of their rights, and, in certain cases, develop identity theft prevention programs.
  • Broker-dealers that undergo a material change in business operations are required to file a "Continuing Membership Application" ("CMA") with FINRA prior to implementing the material change. Filing a CMA with FINRA may be necessary where a broker-dealer employs DLT in its business.

The intense interest of regulators and other agencies in DLT applications suggests that DLT and regulation likely will evolve together, each occasionally being tailored to accommodate the other.


1 A previous posting in Derivatives in Review (available here) provides an overview of DLT and also discusses certain Commodity Futures Trading Commission DLT-related developments. As discussed in that posting, all participants in a distributed ledger have their own identical copies of the same ledger, and any changes to the distributed ledger are quickly reflected on all copies. Participants are able to update the distributed ledger with new entries, but cannot retroactively change the distributed ledger. A distributed ledger can include any type of information that can exist in traditional paper form. The security and accuracy of a distributed ledger is ensured through mathematical and computation processes known as cryptology. The "blockchain," the central innovation that makes DLT viable, enables ledger entries to be aggregated into "blocks" that, through cryptology, are added to an ever-expanding "chain." Blockchain technology was invented in 2008 to create and facilitate transactions in bitcoin, a type of peer-to-peer virtual currency. However, being essentially an asset database, a distributed ledger also may be used to record financial, legal, physical, electronic, and other types of assets.

2 Distributed Ledger Technology in Payments, Clearing, and Settlement, Federal Reserve Board Finance and Economics Discussion Series 2016-095 (2016) (available at: https://www.federalreserve.gov/econresdata/feds/2016/files/2016095pap.pdf); Distributed Ledger Technology: Implications of Blockchain for the Securities Industry, a Report from the Financial Industry Regulatory Authority (January 2017) (available at: http://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf).

3 Certain distributed ledgers allow a layer of applications called "smart contracts" to be incorporated into the ledger. Smart contracts automate specified transactional events based on the contractual terms, and self-execute as such events occur. For example, a smart contract might be used to automate coupon payments for a corporate bond.

4 A "node" generally is an entity that is involved in the computational processes that cause a distributed ledger to operate and that has a local copy of the entire distributed ledger.

5 See note 3 above regarding the meaning of "smart contract."

6 Previous postings in Derivatives in Review (available here) have discussed the New York BitLicense.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

10 Oct 2018, Conference, Florida, United States
Julie Totten is Program Chair of this year’s conference, Lynne Hermle is speaking on women in the courtroom, boardroom, and c-suite, and Erin Connell is speaking on pay equity and pay transparency.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions