The European Securities and Markets Authority (ESMA) has published a Discussion Paper on “The Distributed Ledger Technology Applied to Securities Markets“.

In April 2015, ESMA published a call for evidence on investments using virtual currencies or distributed ledger technology. Having considered the responses, ESMA reached 2 conclusions: (a) “investments using virtual currencies as underlying [assets] remained marginal“; and (b) distributed ledger technology could be used for other purposes, “with possible disruptive effects“. So, “ESMA decided to analyse the possible impact of the application of [distributed ledger technology] to securities markets“.

In the Discussion Paper, ESMA considers:

  • the possible benefits of using distributed ledger technology in the securities markets – (for example):
    • to make the clearing and settlement processes quicker and more efficient by reducing the number of intermediaries involved in the process;
    • to more quickly record the transfer of assets, and to enable more efficient and more certain safekeeping of those assets before and after transfer;
    • to reduce the counterparty risk of some securities transactions;
    • to reduce the amount of collateral that’s required for some transactions;
    • to reduce the length of time that collateral has to be posted for, in connection with some transactions;
    • to improve the security and resilience of Europe’s securities transfer and other systems;
  • the key challenges and possible shortcomings of distributed ledger technology – for example, ESMA wonders:
    • how scaleable the technology might be;
    • how easily it will operate with and between existing systems and networks;
    • how mistakes will be handled from a technological and governance perspective;
    • how the public nature of the ledger might combine with the need to preserve the anonymity and privacy of some of the information recorded in it;
    • how the technology will fit into the existing regulatory framework, and whether the records kept on the distributed ledger will be sufficiently enforceable;
  • the key risks associated with the technology – for example, cyber-risk, fraud and the risk that the technology will be used to enable or hide money-laundering, especially if public or private keys are lost or stolen.

ESMA has tried to describe the technology, as well as the potential benefits, challenges, shortcomings and risks associated with it, in neutral terms; before carrying out a brief analysis of the applicable European regulatory framework, and raising 24 reasonably detailed questions.

ESMA has asked its readers to comment on all of the matters raised in the paper, and to offer answers to some or all of the 24 questions as well, or instead. It has also given a commitment to consider all comments received by 2 September 2016. Comments and answers should be submitted online, using the facility embedded / hyperlinked within the Discussion Paper.