EU securities watchdog ESMA is trying to work out whether or not new rules need to be put in place around distributed ledger technology, also known as blockchain. 

The regulator's latest paper looks at the potential benefits and risks of applying a distributed ledger system to the securities markets and has invited feedback from market participants on its findings.

Early on in the study, EMSA notes that the ledger model used for financial services would differ from the blockchain platform designed for bitcoins in a number of ways.

In particular, the bitcoin blockchain is an open 'permissionless' system where all can contribute to the validation process.

The tech likely to be used in financial markets would be a permissioned-based system with authorised participants only. 

Even so, ESMA says that the clearing and settlement of financial transactions could be quickened and made more efficient thanks to blockchain.

The technology could also facilitate the collection of data for reporting and risk management purposes by ensuring access to a large body of information from a single source.

In addition, a distributed ledger model might also be used to improve the processing of collateral movements across market participants.

“This is an early step in accommodating potentially revolutionary new trading and ownership systems into the existing EU framework” said Monica Gogna, partner at law firm Ropes & Gray, responding to the paper.

ESMA also refers to a number of key challenges, such as allowing for position netting and corrections to mistaken entries on the ledger.

In the paper, the regulator said it is aware that the possible benefits and risks depend on how the technology is applied to securities markets.

"The more changes the ledger would bring to the functioning of securities markets, the more likely it would raise regulatory challenges.

ESMA officials are seeking feedback on the discussion paper to develop a position on the use of blockchain securities markets.

The watchdog will then assess whether a regulatory response may be needed.