European Financial Regulator Believes DLT Could Benefit Securities Markets

The European Securities Market Authority (ESMA) has publicized its response to the EU Commission’s most recent consultation report on FinTech. In the response, ESMA reveals it will continue to closely monitor EU market developments as they relate to Distributed Ledger Technology (DLT), as well as assess the necessity of regulation related to the technology.

According to the response, ESMA believes that DLT could benefit small-to-medium enterprises (SMEs) by enabling the issuance of securities by the firms. As a result, SMEs could potentially reduce “the cost of access to finance.” In addition, the regulator stated that DLT could potentially remove the need for duplicate records and multiple reconciliations by providing a “record of ownership of unlisted securities.” As per the response:

“ESMA believes that DLT could bring a number of benefits to securities markets, notably more efficient post-trade processes, enhanced reporting and data management capabilities and reduced costs.”

ESMA is expecting that early DLT solutions will focus on optimizing current market conditions, specifically, private share markets which cater to low transaction volumes and have minimum regulation requirements. The regulator also suggests that DLT could permit the re-examination of less successful aspects within the current market structure. However, in order to be ultimately successful, ESMA acknowledges there are obstacles that need to be overcome before the technology can fully benefit the European market.

“These challenges include interoperability and the use of common standards, access to central bank money, governance and privacy issues, and scalability.”

Nevertheless, despite these “challenges,” ESMA is remaining consistent with its previous assessment of DLT and predicts that no major EU regulatory obstructions will hinder short-term DLT adoption by firms. However, ESMA does state that legal uncertainty surrounding DLT records or settlement finality may need to be further clarified. In addition, the regulator also stated that “broader legal issues, such as corporate contract or insolvency laws” could potentially affect DLT deployment in the EU’s Fintech industry.