ESMA has launched a Discussion paper on distributed ledger technology in the securities market inviting comments by 2 September 2016. (see press release). ESMA plans to use the feedback to the discussion paper to develop a position on the use of the DLT in securities markets and in particular to assess whether a regulatory response may be needed.
ESMA has stressed that entities or groups of entities willing to use the DLT should be mindful of the existing regulatory framework. In addition, they should be mindful of a number of principles, which underpin the current market infrastructures, in particular the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs).
It also notes that the capacity of the DLT to fit into the existing regulatory framework may limit its deployment and provides a stock-take of key regulations which would be applicable to DLT in post-trading activities including European Market Infrastructure Regulation (EMIR), the Securities Finality Directive (SFD), and the Central Securities Depositories Regulation (CSDR).
In the paper, ESMA makes clear its belief 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. These issues are discussed in the report.
Those hoping to benefit from developing or using blockchain/DLT technology in relation to the securities market should consider making a submission to ESMA to help shape the regulatory environment it would operate in.