The European Securities and Markets Authority (ESMA) has issued a report on blockchain (or distributed ledger technology DLT as ESMA prefers to refer to it) regarding its applications, benefits, risks and how it fits with existing EU regulation.
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The report says that ESMA believes that DLT could bring a number of benefits to the financial markets, including more efficient post-trade services, enhanced reporting capabilities and reduced costs. ESMA expects the early applications to focus on optimising processes using the current market structure. Likely first areas of use may be less automated processes in low volume market segments and processes with minimum dependency on the existing legal framework.
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The report also points to some challenges for blockchain in terms of interoperability, governance and privacy issues and risk creation. Which it says would require further attention before any large-scale use of the technology across the financial services sector.
It also warns advocates and developers to be aware of the existing rules and their application to blockchain technology. “The development of a new technology, such as DLT, does not liberate users from complying with the existing regulatory framework.”
However, ESMA’s view is that the current EU regulatory framework does not represent an obstacle to the use of blockchain in the short term. Meanwhile, a number of concepts or principles, such as the legal certainty attached to DLT records or settlement finality, may require clarification. In addition, ESMA points out that beyond pure financial regulation, broader legal issues, such as corporate law, contract law, insolvency law or competition law, may affect the deployment of the technology.
Most importantly, the report concludes that regulatory action is premature at this stage, considering that the technology is still at an early stage. “ESMA will continue to monitor market developments around DLT to assess whether a regulatory response may be needed.”