The European Securities and Markets Authority (ESMA) has stepped into industry discussion on the pros and cons of distributed ledger – or blockchain – technology (DLT) and concluded that regulatory action is premature at this stage, but may not be in the longer term.
The authority issued a report this week, The Distributed Ledger Technology Applied to Securities Markets, that is based on responses to a discussion paper issued in June 2016 and sets out ESMA’s views on DLT, its potential applications, benefits, risks and how it maps to existing EU regulation.
The report anticipates that early applications of DLT will focus on optimising processes under the current market structure, particularly less automated processes in low volume market segments. Longer term, and based on industry responses to the discussion paper, it notes the potential of the technology to support clearing and settlement activities.
Possible benefits of DLT in securities markets include more efficient post-trade processes, enhanced reporting and supervisory functions, greater security and availability, and reduced counterparty risk and enhanced collateral management, all of which should lead to cost reductions for financial service providers and their users.
The challenges of DLT discussed in the report include the need for a critical mass of market participants in a segment to adopt the technology, interoperability, governance and privacy issues, and scaling. Potential risks outlined in the report include cyber attacks, fraudulent activity, operational risk if errors are disseminated, fair competition issues, and market volatility.
Taking a stance on regulation and DLT, the report concludes: “ESMA’s understanding is that the current EU regulatory framework does not represent an obstacle to the emergence of DLT in the short term. Meanwhile, some existing requirements may become less relevant through time. New requirements might on the contrary be needed to address emerging risks. Also, a number of concepts or principles, for example the legal certainty attached to DLT records or settlement finality, may require clarification as DLT develops.”