Distributed Ledge Technology, or DLT can have many benefits over any sort of centralized recordkeeping system, due to the immutability of data.  While most think of the benefits in the financial world related to digital currency trading and streamlining payments processes, as well as more efficient investment trading, settling and recording, there are actually many other uses for the DLT technology within financial services.  Uses to better record, control, oversee and audit processes is one of the many DLT benefits, although it is likely the current open and anonymous DLT network will likely give way to permissioned models connecting a limited population such as banks or broker-dealers/clearinghouses.  Some uses:

• DLT may have a use in maintaining a virtual record of a potential clients’ digital identity, providing a single course of authentication for compliance oversight on AML, KYC or validation of accredited investor status.
• Recording any sort of transfer of assets, including real estate, vehicles and assets with any sort of special provenance (such as certified antiques, artwork, etc.)
• Once securities settlement processes are built into a DLT, firms could track the trading of employees by identifying their accounts on the ledger, and could match activity to that of the firm. You could even build in controls to not allow an employee to trade at the same time a security that a firm is trading.  This would make it much easier to monitor employee accounts that were held at other institutions that were also on the DLT.
• DLT could be used to keep track of required regulatory steps and automate regulatory reporting and auditing.
• Smart Contracts built on DLT technology. They are self-executing agreements between parties, which track external data and events, according to rules in the contract and can automatically execute when all contract terms are met.

No…But regulators warn investors to approach any Initial Coin Offering “ICO” or Cryptocurrency related investment product with extreme caution

The question of fulfilling a regulatory obligation of due diligence on a cryptocurrency (not to be confused with an equity) is a webinar unto itself, but it surely goes beyond having a whitepaper. A top 10 list for most firms would likely include:

1. What is the depth and breadth of experience and reputation of the management team and development team associated with this product?
2. What are the unique characteristics that may give this product a competitive advantage or create risks?
3. What is the speed/time to clear a block?
4. Is there a track record for this product/how long has the product existed and have there been any significant issues yet?
5. If there is a track record, what is the level of acceptance (exchange volume, retailer acceptance, significant partnerships, etc.)?
6. How is the code/platform as it relates to security and reliability?
7. What are the analysts/experts saying?
8. What are the non-analysts/non-experts saying (too much hype?)
9. What is the level of scarcity in the design? Is it hard to mine, and what is the expense of mining compared to the market price?
10. Is there any pending litigation/regulatory actions that would materially impact the product?

Once that information is obtained, then ask if you have enough clients that have the risk tolerance and resources to speculate in or diversify a portfolio with a cryptocurrency. Do you have the controls in place to make sure this product is only recommended to those type of clients? Does the firm understand the scenarios where the product will perform well and the ones where it could crater? Do you have a training program/product certification process to make sure that the reps engaging in this business have a full understanding of the products features, benefits, and risks? Can they explain it in a way that your clients will fully understand?

If you would like us to conduct another webinar on this topic, please let us know! Contact libby.hall@oysterllc.com or call (804) 965-5400.

Fintech companies involved in blockchain or digital assets are still seen by many banks, especially large global banks, as too high a risk. However we have seen smaller banks like Silvergate Bank and Metropolitan Commercial Bank in the US offering banking services. Specialist banks are also forming like Blockchain Factory, part of Solarisbank in Germany for example. Some Jurisdictions, like Bermuda, are also considering offering special licenses to establish banks that will provide services to local fintech and blockchain organizations.

So yes, Banking for fintech and blockchain firms is currently difficult but we are seeing small and more specialized banks offering their corporate banking services to the industry.