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Upon Initial Review EU Watchdog Says Blockchain Needs Further Review

June 2, 2016, 12:33 PM UTC
This May 1, 2014 photo taken in Washington, DC shows a bitcoin medal. Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. AFP PHOTO / Karen BLEIER (Photo credit should read KAREN BLEIER/AFP/Getty Images)
Photograph by Karen Bleier — AFP/Getty Images

The European Union’s markets watchdog will study blockchain in more depth after an initial analysis showed it was too early to say whether the technology poses any threat to financial markets.

Blockchain, or distributed ledger technology (DLT), currently underpins the virtual currency bitcoin.

Blockchain’s proponents say it has the potential to disrupt financial markets by making payments and the settling of securities transactions, in particular, far cheaper.

The European Securities and Markets Authority (ESMA) said on Thursday it had looked at whether blockchain could meet technical, governance, legal, and regulatory requirements to keep securities markets safe.

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“It is too early at this stage to form a definite opinion on whether DLT (blockchain) will be able to address these issues in an efficient way,” the watchdog said in a statement.

“ESMA stresses that firms willing to use DLT (blockchain) should be mindful of the existing regulatory framework.”

The watchdog also published a discussion paper asking for more views on blockchain’s risks and benefits to help it decide whether new rules are needed for securities markets.

“ESMA believes that the DLT will need to overcome a number of possible challenges and shortcomings before its benefits can be reaped,” the watchdog said.

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“Some of these challenges are related to the technology itself. Others are mainly related to possible governance, privacy, and regulatory issues.”

Regulators are trying to work out what is really new about blockchain in case it takes off.

Meanwhile a race is on among financial technology or “fintech” companies to show how they can apply blockchain at a time when banks are keen to cut the cost of doing business.

British financial startup SETL said on Wednesday it has launched what it called the world’s first commercial platform using blockchain technology to register and settle securities transactions.

ESMA said targeted uses of blockchain are being introduced, but none is on the large scale needed to reap benefits such as cutting costs.

“The capacity of the DLT to fit into the existing regulatory framework may limit its deployment,” ESMA said.