A new report by Euroclear has looked at the regulatory and legal aspects of the use of blockchain technology in post-trade settlement in a European context.
The report, Blockchain Settlement: Regulation, Innovation, and Application [PDF], with support from Slaughter and May, found that central securities depositories (CSDs) would play an important role in a blockchain-based settlement system.
It also stated that regulators should not fear the use of smart contracts and distributed ledger technology any more than any other automated computer-based process prevalent throughout the settlement industry.
CSDs could have an important role to play in a blockchain-based settlement system.
It added that as ‘custodians of the code,’ CSDs could exercise oversight of, and take responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts.
The Use of DLT to Enhance Cybersecurity
The authors of the report stated that a key selling point of distributed ledger technology over more traditional databases is the enhanced resistance to cybersecurity.
This derives from the redundancy built into the blockchain and the fact that in order to alter the ledger, any cybercriminal would need to control greater than a certain threshold number of nodes first.
The report said that ‘both of these attributes should be attractive to regulators.’ However, it notes that points of failure could appear in a blockchain technology environment such as a fully decentralized environment or a cyberattack destroying private keys leaving the investor with no possibility of recovering its assets.
Despite this, though, the authors believe that a blockchain-based settlement system would not present a weaker cybersecurity proposition than any present system, which is not immune to cybersecurity.
CSDs Are Trusted Central Entities
While the Euroclear report states that CSDs are trusted central entities that facilitate the settlement process, it is believed that the distributed ledger technology system would be a natural evolution of this facilitation role.
CSDs will continue to perform an important role as trusted, centralised FMIs, providing gatekeeping services and oversight of the relevant blockchain.
Radical Overhaul Not Required
What’s important to note, however, is that with the implementation of a DLT-based settlement process there is no need to change the existing regulatory architecture.
However, by allowing regulators to participate as a node in the blockchain system, they could have complete oversight of all the transactions occurring within the settlement system and receive transparent transaction data in real time.
This could, subsequently, represent a significant improvement in data provision to regulators than is presently possible and may allow them to exercise tighter and more granular supervision of activities in the securities market.
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