The European market regulatory agency has revealed it believes regulating blockchain technology at this time would be premature. The institution has been researching distributed ledger technology (DLT) for quite some time in order to craft regulatory framework. Then in November, ESMA executive Patrick Armstrong told attendees at a blockchain conference the technology could be banned. However, the report issued by the institution on February 7 is quite different than Armstrong’s approach.
“At this stage, ESMA believes that it is premature to fully appreciate the changes that the technology could bring and the regulatory response that may be needed, given that the technology is still evolving and practical applications are limited both in number and scope,” explains the ESMA’s recent report.
Distributed Ledger Technology May Not Be Excluded From Regulation
The report states the ESMA believes digital currency solutions and DLT innovation can bring numerous benefits to financial markets. This includes “more efficient post-trade services, enhanced reporting capabilities, and reduced costs. The institution expects the early applications of DLT to focus on optimizing processes using the current market structure,” says the EU’s regulatory agency.
However, the institution believes there are significant regulatory challenges ahead for DLTs. Issues include interoperability with other frameworks, privacy problems, and investment risks. The agency says that even though these technologies are innovative, they are not excluded from current regulations and laws. The ESMA report explains:
The development of a new technology, such as DLT, does not liberate users from complying with the existing regulatory framework, which provides important safeguards to ensure the stability and proper functioning of financial markets.
For now, at this stage, the ESMA is unable to fully assess the regulatory response needed to deal with blockchain technology. It is “premature” to apply regulations to a “technology still evolving, and practical applications are limited both in number and scope,” the ESMA adds.
Going forward the ESMA details it will continue to monitor blockchain market development and assess when a regulatory response is needed. The European agency calls for “active engagement” from existing regulators in regards to DLT frameworks.
“Active engagement from regulators and coordination at EU and international level are paramount in ESMA’s view to ensure both that DLT does not create unintended risks and that its benefits are not hindered by undue obstacles,” details the EU regulatory committee. “Meanwhile, ESMA believes that the industry should work towards solutions to address the challenges posed by the technology.”
