The European Securities and Markets Authority (ESMA) has issued a distribution paper and public consultation on the potential usefulness of distributed ledger, or blockchain, technology in securities markets.
The paper assessed the potential benefits and risks that broader use of blockchain could have on the industry, and highlighted potential regulations that could be applicable to uses of the technology, including the European Market Infrastructure Regulation, the Securities Finality Directive and the Central Securities Depository Regulation.
According to ESMA, the consultation is partly intended to help the authority assess challenges and benefits of the technology from a regulatory perspective, allowing them to consider whether a regulatory response is required.
In the report, ESMA stressed that firms starting to create distributed ledger technologies should remain mindful of the existing regulatory framework.
Benefits highlighted included the potential for improved security of the technology, compared to existing systems, although this has not yet been properly tested. Distributed ledger technology could also improve record-keeping, reporting and oversight, and could potentially lead to reduced counterparty risk.
However ESMA also highlighted some legal and technical challenges. Technical issues included the possibility that the perceived benefits of the technology may not be replicable on a larger scale – another point that has yet to be tested.
There is also concern around interoperability with other systems and networks, the lack of netting capabilities, and the adverse effect that the technology could have of market finance and short-selling, which relies on trading with assets financed externally.
The report identified potential risks of cyber crime, fraud and money laundering, as well as operational risks and the threat of market volatility.
Finally, ESMA asked for feedback on potential problems around governance and privacy within blockchain technology, and questioned the capacity of the technology to fit in to the existing regulatory framework.
The authority acknowledged that the technology is still in its early days, and that no operating system in securities markets is currently using the technology on any significant scale. The means that currently, it is difficult to properly assess the effect that widespread use of blockchain would have on securities markets, market participants or infrastructures.
The deadline for responses to the discussion paper must be submitted by 2 September.
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