ESMA takes ‘wait and see’ regulatory approach to blockchain

Senior risk analysis officer at ESMA tells conference blockchain has not reached a point where regulators should step in.

The European Securities and Market Authority (ESMA) has stated blockchain technology has not reached a point where regulatory action is needed, so has taken a ‘wait and see’ approach towards it.

Speaking at the Oslo Børs ASA: stock exchange and securities conference this week, senior risk analysis officer, Patrick Armstrong, explained the approach should not be considered as passive, but instead “one in which we actively try to learn more about the innovation.”

“By waiting to see how the innovation develops we do not risk stifling a potentially socially or economically useful product or process,” he said.

Armstrong added ESMA does not think blockchain technology poses a risk to its three objectives, which he listed as being stability, protection and integrity.

Looking at blockchain’s application to the asset management industry, ESMA’s view is that is could bring a number of benefits, not exclusively to post-trade.

Although, a number of challenges need to be addressed before these benefits materialise, Armstrong told delegates.

“ESMA realises that while distributed ledger technology (DLT) may at once reduce or mitigate certain risks, it may also create or exacerbate others,” he said.

A report published by the Financial Industry Regualtory Authority  (FINRA) earlier this month, warned unsuccessful governance of blockchain could increase vulnerability in markets.

A key principle of blockchain is that no single party is responsible for, or empowered with, governing and operating the network. 

FINRA recognised this could offer certain advantages - such as providing a decentralised system not dependent on any specific party to operate –but mismanagement could see severe consequences.

The regulatory authority is seeking comment on the issue of blockchain governance and is asking market participants whether multiple firms or a single entity should shape its governance.

Armstrong concluded ESMA will continue to monitor market developments around blockchain to assess whether a regulatory response is needed