The European Securities and Markets Authority (ESMA) has issued a report stating Blockchain technology could help speed up the clearing and settlement of financial transactions, record ownership of assets and support regulatory reporting, among delivering other benefits… But it warned “technological issues” would need to be addressed for the potential of Blockchain in the market to be realised.
ESMA believes that the DLT will need to overcome a number of possible challenges and shortcomings before its benefits can be reaped. Some of these challenges are related to the technology itself. Others are mainly related to possible governance, privacy and regulatory issues.
The capacity of the DLT to fit into the existing regulatory framework may limit its deployment. The key EU regulations likely to apply and how they would reflect in terms of requirements for the participants to the DLT network.
Legal issues, such as the legality and enforceability of the records kept on the DLT, also need to be carefully considered. Differences in securities and company laws across the EU may also interfere with a wide deployment of the DLT in securities markets in the EU. Supervising a DLT ‘network’ might be more complex than supervising central market infrastructures, in particular considering that the different nodes might be established in different jurisdictions and subject to different privacy, insolvency and other requirements.
It seems unlikely that the DLT would be deployed across all market segments and activities simultaneously. In a step-wise scenario, the DLT would need to interoperate with existing market infrastructures and the attendant systems, at least in the short to medium term. In addition, separate ledgers might be used for different asset types and these ledgers will need to interact with one another.
This raises a number of technical challenges. Not all market participants may choose to build interfaces to the new technology and existing market infrastructures might have no immediate benefit in starting interoperating with different ledgers. Also, many of the benefits of the DLT could be reduced, unless it is widely adopted by market participants and market infrastructures.