European Securities and Markets Authority Releases Blockchain Discussion Paper

The European Securities and Markets Authority (ESMA) has released a 34-page discussion paper on distributed ledgers that goes over the numerous implications of implementing the technology in securities markets.

The paper is aimed mainly at academics and industry experts with an understand of the technology. The ESMA has not yet formed an opinion on the viability of blockchains in the financial industry, however, the agency is hoping to receive plenty of feedback on the ideas  presented in the paper.

ESMA outlines several sectors of the securities industry where the technology could make significant improvements; clearing and settlement; asset ownership tracking; reporting and oversight; counterparty risk; cost reductions in securities transaction fees.

Regardless of the enumerated benefits in the paper, the ESMA believes that the technology can be implemented, only if certain risks are eliminated or reduced by a significant margin:

“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.”

Besides governance, privacy and regulatory issues, along with scalability and interoperability complications, the ESMA is most concerned with risks such as hacking, fraud and money laundering.

The report states:

“Indeed, if someone was to break into the system, he/she might have access not only to the information stored at the point of attack but to the full breadth of information recorded on the ledgers. This could have extensive negative consequences on the confidentiality of information and the integrity of data. Furthermore, if the technology itself (e.g., the encryption techniques) was hacked, the risk of contagion could extend beyond the single DLT network under attack, as the protocols used by different DLT networks tend to be similar.”

Furthermore, the ESMA also looks at how distributed ledgers fit into current web of EU financial regulations. Experts who wish to have their say on the report have until September 2, 2016, to submit their commentary and suggestions.

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