The European Union’s markets watchdog has released a discussion paper on June 2, 2016 on blockchains and distributed a ledger which is aimed in developing policy positions on the technologies.

The European Securities and Markets Authority (ESMA) released a discussion paper which recognized that the technology offered potential benefits to the region's securities markets; although it noted that there are a number of shortcomings which has to be addressed. This paper will seek stakeholders’ views on the results of its preliminary assessment.

Talking about the risks, the paper explained about cyber risks, fraud, and money laundering; operational risks faced; market volatility and new pocket risks etc. analysis of the EU regulatory framework stressed throughout its new report that it had not developed a concrete opinion on the technology, framing the release as one that constitutes a ‘preliminary analysis’ of blockchain applications to the securities sector.

The paper mentioned that, “ESMA appreciates that the [distributed ledger technology] may have different applications and impacts on financial activities, market participants and market infrastructures, depending on a variety of elements, including its capacity to address a number of technical, governance, legal and regulatory issues. It is too early at this stage to form a definite opinion on whether the DLT will be able to address these issues in an efficient way.”

The ESMA paper analyzed how some existing financial rules would likely apply to distributed ledger networks, including the European Market Infrastructure and Regulation, Settlement Finality Directive and the Central Securities Depositories Regulation.

In the report, the regulator said that, “Different solutions could be envisaged in order to comply with this requirement (for example, agreement with an existing CCP, set up of a new legal entity that would apply for an authorization as a CCP), which could bear different levels of costs, benefits and risks.”

ESMA stresses that firms willing to use DLT (blockchain) should be mindful of the existing regulatory framework. The paper explores which regulatory frameworks within the EU could apply to market applications of blockchain tech. The frameworks include Central Securities Depositories Regulation (CSDR), the European Market Infrastructure Regulation (EMIR) and the Settlement Finality Directive (SFD).