Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) or BaFin has explored the concept of blockchain and distributed ledger technologies (DLT) in a latest report.

Authored by Luisa Geiling from BaFin's Department of Securities Supervision in the International Division, the report explains the working of the distributed ledger and studies the potential impact on the financial industry, CHAIN-FINANCE reported. It defined distributed ledger and blockchain as:

“A distributed ledger is a book of accounts that is managed as a public distributed ledger. It is the technological basis for virtual currencies and is used to record user-to-user transactions in the area of digital payments and business operations, without requiring a central point that authorises each individual transaction. The virtual currency Bitcoin is based on the distributed ledger blockchain.”

Speaking of applications of DLT, the report said that it could be applied to saving of trade data, digital payment transactions, interbank trading and more. Geiling pointed out that DLT is already being applied or tested in a number of projects related to trading on the financial market, such as Nasdaq Linq. It also noted the R3 blockchain consortium that seeks to promote cooperation between banks in the area of virtual currencies and DLT.

“Integrating DLT could enable faster and more efficient processing for interbank trading, which is associated with lower labour costs, as there is no central accounting point involved”, it added.

Drawing attention to potential impact on financial industry, Geiling said that while impact or the full-scale deployment of DLT in the financial industry cannot be foreseen, the technology has the potential to establish a “new standard” in the financial market.

“Keeping an eye on the possible risks right from the start is more important than ever. Data protection in transactions must e.g. be guaranteed and systems must also be protected from cyber attacks. Adherence to regulations on anti-money laundering, governance and compliance as well as for clearing and settlement must also be ensured. The lack of a central authority on conduct and regulations could pose problems here in particular”, the report added.

Geiling further said that the BaFin has been focusing on DLT for the past few months as a result of its innovative capacity and is monitoring the latest developments in the FinTech industry. He added that the BaFin is engaged in DLT-related discussions with other supervisory authorities and is actively in contact with experts and market participants for identifying any potential supervisory problems.