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Too Early for Blockchain Regulation, Says EU Watchdog

Last Updated March 4, 2021 4:54 PM
Samburaj Das
Last Updated March 4, 2021 4:54 PM

Regulatory action for blockchain technology at this ‘early-stage’ is ‘premature’, said the European Securities and Markets Authority (ESMA) in a report today. Furthermore, the ESMA deems it “unlikely” that blockchain technology would eliminate financial market infrastructures such as Central Securities Depositories (CSDs) and Central Counterparties (CCPs).

The ESMA, Europe’s chief securities watchdog and regulator, has stated in a new report that the current regulatory framework in effect does not pose a hurdle for the adoption and development of blockchain or distributed ledger technology in the short term.

The authority began looking into the topic of the innovation in early 2013 after bitcoin, the most well-known and application of blockchain technology, came into the mainstream consciousness as a payment offer.

It wasn’t long before Paris-based ESMA helped in the setting up of a “task force” to further study distributed ledger technology. This task force also saw participation from the European Central Bank and the European Commission.

Today, the EU securities regulator published a report following a public consultation. The report acknowledges the benefits of adopting blockchain before notably adding that blockchain applications are still at a nascent stage and, as such, do not require regulation.

Expanding further, an excerpt from the report  [PDF], reads:

At this stage, ESMA believes that it is premature to fully appreciate 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.

No Easy Street

Unlike some Fintech-forward initiatives around the world – notable examples include the likes of Switzerland and Indonesia where blockchain development is encouraged with relaxed rules – the ESMA adds that the presence of blockchain technology “does not liberate users from complying with the existing regulatory framework, which provides important safeguards for the well-functioning of financial markets.”

‘Unlikely’ to Eliminate Centralized Entities

Curiously, the ESMA also states that it does not see blockchain technology, through its fundamental core concept of decentralization, post a threat to central financial market infrastructures.

A summary from the report states:

ESMA sees as unlikely for DLT to eliminate the need for financial market infrastructures, such as Central Counterparties (‘CCPs’) and Central Securities Depositories (‘CSDs’).

Still, the watchdog says it “realizes” that blockchain technology may render some traditional processes redundant, or affect and “change the role of some intermediaries through time”

The ESMA adds that it will continue to monitor developments in the Fintech space, to assess if blockchain technology requires a regulatory response.

Calling the Shots

At a recent London conference, aptly titled “Blockchain Technology: The Future for Financial Services”, senior risk analysis officer at the ESMA Patrick Armstrong spoke about three different approaches that the watchdog could take when it comes to regulating the innovation.

The first, he revealed, was an outright ban on blockchain technology. The second, a “wait and see” approach which has now been taken and finally, a regulatory approach, which the authority now says it will continue to assess.

Images from Shutterstock and ESMA.