The UK Financial Services Authority Sandbox Mechanism: Opening the Door to the Future of Blockchain

Baozou Commentary : Loopholes in the financial system always give financial crises an opportunity to take advantage, especially in today's globalized world, where financial crises have dealt a heavy blow to the world economy. It has been eight years since the last financial crisis, and although regulators have made various fixes, they still cannot achieve the ideal state. Fortunately, the emergence of blockchain technology has brought hope for solving these inherent defects. However, the current technology development of start-ups faces obstacles set by regulators in various countries, especially in countries like the United States where laws vary from state to state, making it difficult to implement the technology. The regulator sandbox of the UK Financial Conduct Authority provides a feasible solution to this problem, and we hope it can be promoted globally.

Translation: Annie_Xu

Can the blockchain technology that underlies bitcoin, a currency popularized by anarchists and drug dealers, make the world more resilient to financial catastrophe?

Although unexpected, the answer is yes.

It has been eight years since the last financial crisis, and although regulators have strengthened the global financial system, it has not yet achieved the desired results. In principle, new technologies such as blockchain can make up for these weaknesses and are worthy of attention.

What are the weaknesses in the system? Most of the deficiencies in key functions such as payments and trading are concentrated in large, undercapitalized banks or other central hubs; despite efforts by regulators to improve conditions, losses in these institutions still have broad economic impacts. Worse, the powers that be don’t recognize what’s happening in financial markets or where the risk is concentrated. Blockchain can solve both problems.

Finance is about trust; financial institutions began to facilitate transactions between strangers; centralized middlemen solved these problems, tracking who owns what and who owes whom; but middlemen also introduced system vulnerabilities. So regulators are constantly struggling with these still inevitable dilemmas.

Blockchain brings a new trust mechanism, creating a so-called distributed ledger that fully preserves the transaction history, with computers around the world participating in the verification and recording of transaction records. There is no need to trust a single source of information anymore, and records are kept in so many places that they cannot be lost or tampered with.

Imagine all financial transactions on a public distributed ledger. Everyone, including regulators, can clearly see potential risks. If a large bank encounters problems, the authorities don't have to worry about critical payment or ledger systems. Governments no longer have to worry about the failure of large financial institutions, making financial supervision and the restoration of market order much simpler.

Technically speaking, this utopian future is within reach; the question is how to achieve it.

Large banks and exchanges are involved in building private blockchain systems, including processing transactions such as credit derivatives and private company equity. Although this closed architecture innovation is welcome, it is not revolutionary in itself. It is called the "training wheels" of blockchain.

Independent startups are developing public blockchain applications with greater impact, but existing financial regulators are putting up various obstacles. For example, any company that transfers money must be registered in the country where it operates and comply with its own policies and regulations. In the United States, each state has different regulatory policies, which makes the cost of experimentation unreasonably high. This will stifle, or at least delay the development of this technology with global application prospects.

The Financial Conduct Authority of the United Kingdom has found a more decent solution - the regulator sandbox, which allows companies to be free from the heavy burden of laws and regulations and freely conduct concept tests. This solution should be adopted by the whole world, and different judicial systems should jointly allow cross-border blockchain application trials. If the United States can take the lead, other countries will also rush to it for fear of falling behind.

Blockchain can indeed change the world, reducing the harm of financial crises and global trade frictions. It may also enter the hazy area of ​​narrow technological innovation. Blockchain technology should be explored reasonably, and regulators can leave more room for it to develop and improve.