The European Securities and Markets Authority (ESMA) on Thursday issued a discussion paper for public consultation on distributed ledger technology (DLT).
ESMA is seeking feedback from stakeholders on the possible use of DLT in securities markets, its potential benefits and the risks that such broader use may pose.
DLT underpins the functioning of virtual currencies, such as Bitcoin, using a record keeping network, rather than a centralized entity, to track and validate transactions. It is seen by some as a way to increase transactional efficiency, reduce costs, and pare down clearing and settlement risk in the securities markets.
ESMA says that the consultation will help it assess the opportunities and challenges posed by the technology from a regulatory standpoint. It will also help regulators to develop an opinion on whether a specific regulatory response to the use of this sort of technology in securities markets is needed.
There are a number of legal and technical challenges that need to be overcome before distributed ledger technology could be applied widely to securities markets, ESMA notes.
"Some of these challenges are related to the technology itself such as the scalability of the technology and the interoperability with existing systems. Other challenges are mainly related to the governance framework, privacy and regulatory issues," ESMA says in a statement announcing the discussion paper.
The paper is out for consultation until Sept. 2.