The European Securities and Markets Authority ("ESMA") has recently released a report on Distributed Ledger Technology ("DLT", also known as blockchain). The report outlines ESMA’s view on DLT, its possible applications, benefits, risks and how it maps existing EU regulation. ESMA’s position is that regulatory action is premature at this level, considering that the technology is still at an early stage.

ESMA believes that DLT could generate benefits for financial markets, including increased efficiency, enhanced reporting capabilities and reduced costs. ESMA stated that it expects the initial applications of DLT to focus on improving the work of existing trading infrastructure. ESMA added that the likely initial areas of use might consist of the less automated processes in low volume market segments and processes, having minimum dependency on the existing legal framework.

Additionally, ESMA points out several challenges to the implementation of DLT, including concerns regarding interoperability, governance and privacy issues, and risks creation. The European regulator notes that these challenges will require further attention before any large-scale use of DLT across the financial services sector will be initiated.

ESMA also emphasizes that the development of a new technology, such as DLT, does not free up providers from complying with the existing regulatory framework, which provides important safeguards to ensure the stability and orderly functioning of the financial markets.

Finally, ESMA concludes that regulators should continue to monitor the DLT's development and that this should be coordinated at an international level in order to ensure that DLT does not create unintended risks and that its benefits are not hindered by undue obstacles.