The securities industry and its regulators will have to address some fundamental compliance questions before digital assets and blockchain systems can be more fully adopted by the traditional securities sector, says a new paper.
U.S. industry trade group the Securities Industry and Financial Markets Association (SIFMA) has issued a white paper with PricewaterhouseCoopers LLP (PwC) that examines the operational and regulatory challenges posed by adopting distributed ledger technology (DLT) and digital assets within the securities industry.
SIFMA said that efforts to develop digital assets and the underlying blockchain technology could generate cost savings in settlement, increase the speed and security of issuance and settlements, and boost market transparency, among various other potential benefits.
However, SIFMA also noted that several key issues need to be addressed before the market can fully develop.
In particular, while many of the traditional regulatory frameworks and concepts that currently govern securities markets could theoretically be extended to digital assets, “many of the legal issues are still yet to be resolved, as market participants, regulators and legislators continue to learn about and understand the use case for security tokens and DLT,” SIFMA said.
These issues include whether blockchain technology can meet firms’ regulatory books and records requirements; whether broker-dealers can comply with their asset control requirements when using blockchain-based systems; and whether firms involved in the clearing and settlement of digital asset transactions need to be registered.
“As the industry moves forward with the broader adoption of these assets and their supporting technology, SIFMA believes further dialogue between industry participants and regulators will help support the further growth of the markets for the security tokens and the adoption of the technology that supports them,” SIFMA said.
“Security tokens and related DLT are a prime example of emerging technologies which may have the ability to offer new and cost-efficient methods of capital formation,” said Kenneth Bentsen, Jr., president and CEO of SIFMA, in a release.