The European Securities and Markets Authority (ESMA) turned today to the public asking for feedback on the application of blockchain technology (or distributed ledger as ESMA prefers to refer to it) with regard to securities markets. The regulator published a discussion paper listing various possible benefits, shortcomings, challenges and risks that it identified with the technology.
The paper also identifies major EU regulations which would be relevant to a securities blockchain solution. These include the European Market Infrastructure Regulation (EMIR), the Securities Finality Directive (SFD), and the Central Securities Depositories Regulation (CSDR). ESMA hopes stakeholders’ feedback will help it decide if a specific regulatory response to the use of blockchain in securities markets is needed.
Among the potential benefits of blockchain technology to the securities markets that the EU regulator identifies are better oversight, easier reporting, more efficient collateral management, reduced counterparty risk, greater security, higher efficiency in clearing and settlement and lower costs.
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The key risks the discussion paper finds are related to cyber attacks, fraud, money laundering, volatility, operational risks and threats for fair competition and orderly markets. One example given is that ‘supporters’ of a blockchain could prevent new participants from joining or impose conditions making it not economically viable for new members to join the network as a monopoly-like situation could emerge.
Most challenges identified are either related to the technology itself, such as the scalability of it and its lack of compatibility with the currently established systems, or related to the existing legal governance framework, privacy and regulatory issues. Specifically noteworthy is that ESMA fears margin finance and short-selling will not be possible if assets are traded on a securities blockchain. This is due to the fact that the possession of assets is a pre-requisite necessity for transacting on a relevant blockchain.