ESMA Director: Blockchain Could Enhance Securities Trading Process

The executive director of the European Securities and Markets Authority (ESMA), the European Union’s top securities watchdog, has said that the agency believes blockchain technology could enhance the post-trade process.

ESMA has spent more than a year investigating the impact of digital currencies like bitcoin on the investment landscape in the EU, and in April, issued a call for more information on the technology.

Executive director Verena Ross spoke earlier this month at an event in the UK organized by the Bank of England and the London Business School. In remarks, Ross indicated that, while the process is still ongoing, ESMA believes the distributed ledgers may see broad usage in the post-trade environment – echoing comments made in January.

Ross stated:

“We have found that clearing and settlement, collateral management, record of ownership and securities servicing are the areas where the technology is most likely to bring useful changes. It does so through the provision of a unique reference database, instantaneous reconciliation across all participants, immutable shared records and transparent real-time data.”

Yet, Ross said that ESMA sees risks in these possible applications, particularly in the areas of scalability and security, as well as interoperability with existing financial systems.

“In particular, we question the ability of the [distributed ledger technology] (DLT) to handle large volumes, to manage privacy issues and to ensure a high level of security,” she said. “Furthermore, as we anticipate that the DLT is deployed gradually, it will need to demonstrate its ability to interact with certain systems that must continue to co-exist with the DLT, eg trade platforms.”

Further, she said the use of the technology “may raise fair competition issues if there emerges a monopolistic environment”, arguing that ESMA believes that is a risk that private blockchain systems could result in a loss of transparency for regulators.

“Although the system is meant to provide enhanced transparency, we believe the use of complex encryption techniques may potentially hinder transparency and regulatory oversight,” she said.

Ross went on to add that if the technology is successful in overcoming hurdles, global markets could benefit from lower costs, a reduced risk of cybercrime and overal efficiency gains.

She noted that the agency is still conducting its assessment of the technology.

“ESMA will continue its work on the DLT in an effort to determine whether a regulatory response to the deployment of this technology to financial markets is necessary,” she concluded.

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