The executive director of the European Securities and Markets Authority (ESMA), Verena Ross, has suggested that the agency is focusing its attention on the distributed ledger technology or blockchain.

Speaking at the London Business School/ Bank of England Conference on: ‘How Imminent is the real Fintech Revolution’ in London, Ross said that ESMA is analysing the technology and its potential applications across the securities markets investment life-cycle.

The agency started examining the technology in early 2013, a time when digital currency bitcoin became a widely known alternative payment service. ESMA gradually realized that focus of market participants shifted from virtual currencies to the underlying blockchain technology.

The responses received from the ‘call of evidence’ published by ESMA clearly showed that the technology had many potential uses across the lifecycle of the investment chain and could have significant effects on the status quo, Ross said.

“In particular, the responses emphasized that the DLT could be used as a more efficient lower cost alternative to the existing trading infrastructure. Our initial research finds that the potential benefits sit more squarely in the post-trade environment. We have found that clearing and settlement, collateral management, record of ownership and securities servicing are the areas where the technology is most likely to bring useful changes”, she added. “It does so through the provision of a unique reference database, instantaneous reconciliation across all participants, immutable shared records and transparent real-time data.”

Pointing to the limitations of the technology, she said ESMA questions the ability of the DLT to handle large volumes, to manage privacy issues and to ensure a high level of security. In addition, it also questions its ability to interact with certain systems that must continue to co-exist with the DLT, e.g. trade platforms. In addition, Ross said the interoperability of the different networks could be a challenge if different ledgers were to be used for different types of instruments.

“If the technology is successful in overcoming these hurdles, we can envision significant benefits for financial markets and its participants, both in terms of cost and efficiency”, she added.

As for the benefits, Ross said that DLT transaction has the potential to ensure investor protection as it may serve to reduce counterparty, operational and legal risks. From a financial stability perspective, the technology may reduce the risk of cybercrimes owing to the reduced dependency on a single centralised ledger.

“ESMA will continue its work on the DLT in an effort to determine whether a regulatory response to the deployment of this technology to financial markets is necessary”, she added.