The European Securities and Markets Authority (ESMA) will have the power to ban or restrict products or processes based on blockchain or distributed ledger technologies (DLTs), starting 01 January 2018.

This was revealed by Patrick Armstrong, Senior Risk Analysis Officer, at a blockchain conference last week in London. He said that that the ESMA has taken a wait-and-see approach towards DLT and emphasized on the collective need to better understand the technology and its potential applications in the financial market.

“By waiting to see how the innovation develops we do not risk stifling a potentially socially or economically useful product or process. The innovation has not reached a ‘tipping point’ where active regulatory participation is needed”, Armstrong said.

He added that the regulator will actively facilitate and regulate blockchain-based product or process when it believes that an innovation has matured or become too large to ignore; that is, a tipping point has been reached.

“Banning, is a power that ESMA and the MSs will have once MiFID II/MiFIR becomes effective on 1 January 2018. Until then, if we believe a harmful ‘tipping point’ has been reached, we can take measures such as issuing warnings as we have done against ‘contracts for differences’ in 2013, and reinforced this past year, or the Statement we issued in 2014 on the risks to investing in Contingent Convertibles, in which we outlined that these instruments should only be purchased by sophisticated investors and are not appropriate for retail”, he added.

Armstrong said that ESMA believes that DLT could bring a number of benefits to securities markets, including but not exclusively to post-trade processes. The regulator anticipates that the early applications of DLT will focus on optimising existing processes under the current market structure.

“ESMA realises that while DLT may at once reduce or mitigate certain risks, it may also create or exacerbate others”, he added.

ESMA will continue to closely monitor market developments around DLT to assess whether a regulatory response may be needed, Armstrong said. He emphasized that regulators must actively engage with market players to ensure both that the technology does not create unintended risks and that its benefits are not hindered by undue obstacles.