Final EBF draft response to the ESMA Discussion Paper
on the Distributed Ledger Technology
Applied to Securities Markets

Publication date: 16 September 2016

Introduction

The EBF is interested to investigate Blockchain / DLTs as a smart way of boosting innovative solutions for multiple use cases in different business lines and with several purposes, both for new revenues enhancement and processes streamlining.

However, it is fair to mention that the usage of these technologies is premature for massive adoption and before setting into production we need to be sure that the DLTs-of-choice are bank-grade, scalable and able to resolve both privacy and security issues.

We are also in agreement that opportunities and potential risks have to be thoroughly analysed. However we feel that the DLT will offer a number of benefits once the vital prerequisites have been met. We believe that the DLT can have a considerable impact on existing banking industry infrastructures, roles and functions of financial intermediaries, back office related securities processes, communication, interoperability and competition.

The main business lines where we find more applications for the blockchain are International Payments, Global Transactional Banking (mainly Cash Management / Cash Pooling and Supply Chain Finance) and also Capital Markets using smart contract and redesigning cash products.

In a more infrastructural angle we are interested in projects like cash on ledger for micropayments, settlement coins to get rid of cryptocurrency usage in different blockchains and smart payments applied to payrolls, unbanked/remittances/government bonifications, etc. We believe there are some guiding principles which are helpful to keep in mind when assessing the legal and regulatory considerations relating to DLT. These are set out as follows:

1. A flexible and pragmatic approach – As noted above, DLT is at an early stage of development and deployment. Therefore, it is important that any regulatory approach to DLT does not implicitly limit or constrain firms’ ability to test and develop DLT solutions. Any specific regulatory response to DLT should be fully considered and highly informed, formulated in collaboration with the industry, demonstrably necessary based on evidence, and proportionate to the consideration being addressed. Furthermore, if a situation arises where the use of DLT could pose a challenge to compliance with a certain regulation, we would advocate that policymakers are pragmatic in resolving such situations; the possibility of DLT not fitting within existing regulation should not necessarily be viewed negatively, given that the current regulatory framework has been constructed without taking account of the development of DLT.

2. Regulate the specific application and not DLT – In principle, DLT should be recognised as a technology which can be used as a platform on which financial services activities can be undertaken, rather than as an activity in and of itself. As a consequence, while there may be aspects of the regulatory framework relevant to DLT as a technology platform, this is distinct from applying a regulatory framework to the regulated financial activity which utilises DLT.

3. Furthermore, the potential uses for DLT are numerous and diverse. The regulatory framework needs to be sufficiently cognisant of the diverse potential applications of DLT that are adaptable to operating across multiple activities and services. Consequently, the adoption of a “one size fits all” regulatory framework for DLT is unlikely to be effective or proportionate.

4. Equally, it is important that unregulated functions do not become regulated solely as a result of the deployment of DLT. While it may be the case that DLT could be used to perform an unregulated function in an inappropriate manner, any regulatory action in such cases should be determined on a case-by-case basis, and the use of DLT per se should not be the principal driver of any such regulatory action.

5. Harmonised international approach – DLT by its nature is distributed. Existing public blockchain networks can be seen operating across many jurisdictions, as the technology is not limited by geographic boundaries or a single legal and regulatory regime. In order to provide an effective regulatory framework in response to DLT developments, that framework should be based on harmonised international standards rather than on local or regional requirements.

6. To the extent that DLT forms the basis for a market infrastructure, for example, ESMA should be mindful of existing global standards and bodies, such as the CPSSIOSCO Principles for Financial Market Infrastructures (PFMIs), which may provide a useful supra-national framework for determining the appropriate regulatory construct.

However, it remains essential that in any case potential adaptation of current regulatory framework does not contradict the underlying principles, nor weakens financial stability.