The European Securities and Markets Authority (ESMA) will actively facilitate and regulate the blockchain technology and products, once it makes sure it has matured or become too large to ignore. For the time being, however, the pan-European securities markets regulator will maintain the “wait and see” approach, said in a presentation Patrick Armstrong, Senior Risk Analysis Officer, Innovation and Products Team at ESMA.
There is also a third way to approach the distributed ledger technology (DLT) and this is to ban it. But, Armstrong notes, ESMA would have the power to ban only with the coming into effect of the MiFID II/MiFIR regulation on January 1, 2018. Until then ESMA only has the power to issue warnings like it did with the risks to investing in Contingent Convertibles and more recently on CFDs forex and binary options, which it described as speculative products with high risk of loss.
According to Armstrong, the “wait and see” approach ESMA is taking towards DLT now is by no means passive, but rather one in which we actively try to learn more about the innovation, while it is still in development. “At the same time, by waiting to see how the innovation develops we do not risk stifling a potentially socially or economically useful product or process,” Armstrong said and added that the blockchain technology has not yet reached a “tipping point” where active regulatory measures are needed.
He gave as an example the ESMA approach to investment-based crowdfunding, where after extensive research we saw the potential for investor protection harm to arise, if the crowdfunding platform operated outside of MiFID rules. At the same time, the regulator recognized that there existed both EU-wide regulation and local regulation that were potentially serving to inhibit the growth of crowdfunding and drafted advice and recommendations on how the EU should consider regulating crowdfunding.
Armstrong noted that ESMA’s view on DLT is rather positive at this point and finds that it could bring a number of benefits to securities markets, including but not exclusively to post-trade 4 processes. He said most likely the early applications of the blockchain technology will focus on optimising existing processes under the current market structure. Over time, with the advancement and the sophistication of the technology, ESMA expects that DLT might help rethink some of the functions of financial intermediaries.
“ESMA’s role in this context is to make sure that the regulatory framework provides relevant safeguards to investor protection, financial stability and orderly markets at all times,” Armstrong said.