The existing regulatory framework in Europe shouldn't prevent the financial services sector in that continent from implementing blockchain technology, also known as distributed ledger technology (DLT), but there are regulatory challenges that would have to be addressed, according to a new report from the European Securities and Markets Authority (ESMA) published on Tuesday.
The report concludes that it's too soon for any regulatory action at this point given that the technology, which is widely seen as a potential replacement for various back-office processes such as clearing and settlement systems, remains at an early stage.
"At this stage, it is premature to fully assess the changes that the technology could bring and the regulatory response that may be needed, given that the technology is still evolving and practical applications are limited both in number and scope," the ESMA report says.
ESMA believes that blockchain technology could generate benefits for financial markets, including increased efficiency, enhanced reporting capabilities and reduced costs. The regulators also note that they believe that the initial applications of the technology will focus on optimizing current market structure processes, particularly in areas that are currently not very automated.
European regulators see several challenges to the implementation of DLT as well, including concerns about interoperability, governance, privacy, and the threat of novel risks, the report indicates: "These challenges would require further attention before any large-scale use of DLT across the financial services sector."
That said, ESMA's paper also concludes that the existing regulatory framework "does not represent an obstacle to the use of DLT in the short term."
Several principles, such as the legal certainty attached to DLT records, may require clarification, the report says, which also stresses that the industry must still comply with the existing rules.
"The development of a new technology, such as DLT, does not liberate users from complying with the existing regulatory framework, which provides important safeguards to ensure the stability and proper functioning of financial markets," the ESMA report says.
In addition, the regulators say that broader legal issues in areas such as corporate law, contract law, insolvency law, or competition law, may affect the deployment of the technology beyond financial regulation.
For now, the ESMA report concludes that regulators should continue to monitor the technology's development and this should be co-ordinated at the international level "to ensure both that DLT does not create unintended risks and that its benefits are not hindered by undue obstacles."