Digital Currency Perspectives
June 7, 2016

European Union: ESMA Blockchain Regulation

On June 2, 2016, the European Securities and Markets Authority (ESMA) issued a discussion paper seeking feedback from Fintech companies and financial institutions on the possible use of blockchain technology in securities markets, including the potential benefits, challenges and risks involved.

The ESMA indicated that the responses will help it assess the opportunities and challenges posed by blockchain technology from a regulatory standpoint and form an opinion on whether a specific regulatory response to the use of this technology in securities markets is needed.

The discussion paper analyzes certain potential benefits of blockchain technology including: increased speed of clearing and settlement of financial transactions, facilitation of recording ownership of securities, safekeeping of assets, facilitation of collecting and reporting data, reduction of counterparty risk, increased availability and security, and reduction in costs.

Also highlighted are key challenges and potential shortcomings: technological issues including interoperability between different systems and lack of recourse mechanisms, governance and privacy issues including the governance framework to be applied and the public nature of the blockchain ledger, and regulatory and legal issues including the ability of the blockchain to fit into existing regulatory frameworks and the enforceability of the records kept on the blockchain.

The ESMA views the key risks as including: (1) cyber risk, fraud and money laundering, (2) operational risks caused by glitches or system failures, (3) market volatility, interconnectedness and new pockets of risks, (4) fair competition and orderly markets, and (5) other risks including increased complexity within the securities markets and uncertainty associated with the new systems.

All comments received by September 2, 2016 will be considered by the ESMA.