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.

In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.