The European Central Bank (ECB) has recommended reinforcing principle-based Blockchain regulation to foster innovation in its recent paper titled “ECB contribution to the European Commission’s consultation on Capital Markets Union mid-term review 2017”.
The Eurosystem has the statutory task of promoting the smooth operation of payment and settlement systems.12 The Eurosystem also fulfils carries out its tasks by acting as a catalyst for change and fostering the harmonisation of market standards, as well as by encouraging the removal of barriers to financial market integration. The impact of technological innovation as applied to financial markets (fintech) is, therefore, relevant for central banks, which need to ensure that innovation can be an enabler of safer, faster, and cheaper domestic and cross-border financial transactions, while at the same time avoiding a situation where the adoption of innovation based on diverging standards in different national markets constitutes a barrier to integration.
Among recent fintech innovations, distributed ledger technologies (DLTs) have attracted much interest from the financial industry as well as from public authorities in their different capacities as regulators, catalysts and supervisors. The potential adoption of DLTs by market participants would entail the need to (1) bring various aspects of technological innovation within the current legal framework, reconciling them with the basic principles of contract, property and securities law; (2) explore the legal nature of virtual currencies and digital financial assets in general, and the finality of book-entries and their updates in a distributed ledger; (3) foster the definition of interoperability standards among novel market infrastructures and with incumbents, across geographies and asset classes; and (4) understand the implications of technological innovation for incumbent institutions, for the overall architecture of financial markets as we know them today, and for financial supervision and oversight.
The ECB suggests that the current efforts towards the development of harmonised and principle-based regulation and legislation across Member States be reinforced. This would ensure that market participants developing new services and technologies are not limited by different national legislations and by the risk of unexpected regulatory changes. Regulation should be designed to be long-lasting, to the extent possible, and constant interaction with developers of new services should be promoted to avoid a situation where changes in regulation warranted by specific innovations are overlooked until the latter are ready for adoption by market participants.
See PDF report in full here.