Distributed ledger technology could transform the role of
market infrastructure providers but will not eliminate the need
for firms such as clearing houses, according to a new report by
Europe’s main financial regulator.
A majority of respondents to the discussion paper by regulator
the European Securities and Markets Authority said distributed
ledger technology (DLT) will change the operations of market
infrastructure such as central counterparties (CCPs) and
central securities depositories (CSDs).
But the new technology methodology is unlikely to force these
firms out of business, according to respondents cited in the
new Esma paper.
"The European securities regulator has previously said that its
approach to blockchain is "wait and see," commented David
Futter, fintechs partner at law firm Ashurst. "This approach
hasn’t shifted, with the regulator taking a
cautiously supportive attitude throughout today’s
paper on the potential benefits and risks of DLT on the
Futter said the Esma paper does acknowledge that blockchain
could result in the redundancy of some roles or processes in
the longer term. He added: "Clearly, this would necessitate
another raft of changes to European financial regulation if it
does, as well as a fundamental change in market structure."
Widespread adoption is "still some way off", according to the
Esma paper, but DLT challenging current financial market
infrastructures could be just a decade away.
Niche applications and several proof of concepts are
anticipated by respondents in the short-term (in the next one
to three years). Following this, specific internal bank and
fund solutions could emerge.
According to two respondents, DLT and legacy systems will
likely "co-exist" for the next 20 to 30 years "depending on the
degree of acceptance from investors".
Several participants stressed that certain functions performed
by CSDs, such as notary or registration functions, would
"remain necessary in a DLT environment".
It was generally agreed in the report that adoption would start
in "niche, possible unregulated, low volume and relatively
'simple’ markets." The paper read: "Sophistication
would increase over time, once the concept has been
Some expect DLT to be applied to cash or short-term instruments
first, whereas others anticipate that non-cleared derivatives,
including cross currency swaps and non-eligible exotic
products, would adopt the technology before cash
One respondent suggested that it would be easier to leverage on
blockchain for static data (such as securities reference data
or corporate action information from prospectuses), rather than
for transaction processing.
Alternatively, there is potential for the usage of blockchain
in customer identification, and transaction recording and
identification for alternative asset classes such as real
estate and private equity, according to another participant in
German clearing house
Deutsche Boerse announced on January 23 that it had
developed blockchain-based technology to transfer payments via
collateralised tokens. Under the new initiative, commercial
bank money can be transferred via a distributed ledger,
enabling clearing members to exchange payments without credit
A third of investment firms cited potential impending
regulations related to technological innovations such as
blockchain and artificial intelligence as a top priority for
the coming year, according to a new survey by consultancy firm
Synechron, reported by FOW on January 6.