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ECB President Draghi highlights risk of market fragmentation resulting from different blockchain approaches

The European Central Bank (ECB) is closely monitoring potential risks from fintech and is also contributing to financial innovation by acting as operators, ECB President Mario Draghi said recently.

Speaking at the ECON committee of the European Parliament, Brussels, on 29 May 2017, Draghi discussed at length about the relevance of financial innovation for the ECB and the euro area.

“[F]intech – the application of new technologies to banking and financial services – is a potentially transformative force. We are closely monitoring its development for several reasons: to better understand its impact, to assess the risks and to adjust the regulatory environment and supervisory approaches where needed; and also to adapt as an institution and support innovation where justified”, Draghi said.

He noted that one of the most active fields of fintech innovation is blockchain or distributed ledger technology (DLT). He underscored the need to constantly monitor and assess potential and existing risks resulting from blockchain application in areas including payment and clearing and settlement, particularly in the wake of rapid pace of development in this field.

“One such possible risk is an increase in market fragmentation if different DLT approaches were to become firmly established in parallel in different Member States. Moreover, the Eurosystem oversight framework has to remain effective if we are to discharge our responsibility in this new environment. And the Eurosystem will of course continue to act in accordance with its mandate to promote the smooth operation of payment systems”, Draghi added.

He also pointed out cybersecurity concerns stemming from the use of new technologies, and said:

“As financial market infrastructure overseer, we also need to ensure that individual systems, as well as the network as a whole, are operationally resilient to cybercrime.”

Draghi said that while fintech has the potential to improve efficiency in the financial sector, create better products and push prices down for consumers, it also brings potential risks and regulatory questions with it. Moreover, as fintech involves the entire financial sector, it calls for different regulatory responses. He concluded saying:

“If we want to make sure that our Economic and Monetary Union (EMU) thrives, we need to upgrade its institutional framework. This means that we should be ready to foster innovation wherever necessary, including in the functioning of EMU.”

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