Euroclear, with support from fintech lawyers at Slaughter and May, has released a new paper that examines in detail the regulatory and legal aspects of utilising blockchain or distributed ledger technology (DLT) in a post-trade environment.

Securities settlement activities in Europe are governed by the Central Securities Depositories Regulation (CSDR) and the Settlement Finality Directive (SFD). Titled “Blockchain settlement: Regulation, innovation and application”, the paper said that central securities depositories (CSDs) would have an important role to play in a blockchain-based settlement system.

The authors said that CSDs would serve as ‘custodians of the code,’ thereby exercising oversight of, and taking responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts. Speaking of this evolving role of CSDs, the paper said that the need for CSD services could be more limited than today or could even be removed altogether, which would depend on the precise implementation of the DLT system.

“While a CSD is a natural actor to perform the gatekeeping and oversight roles, we nevertheless believe that such infrastructure roles could technically also be performed by other entities”, it said.

The paper also said that the use of DLT by a CSD should not by itself trigger any specific regulatory approvals.

“It is the CSD as an institution which is authorised, not its choice of technology platform. We therefore see no need for specific new DLT legislation or regulation in this field”, it added.

The use of DLT in securities settlement may entail significant simplification of the settlement process and cost savings, the paper said. However, it emphasized that the adoption of DLT in a settlement context should not require a radical overhaul of the existing regulatory architecture. In fact, the paper says that a DLT system in securities settlement would present regulators with a new and more effective method of exercising supervision.

“Our view is that regulators should not fear the use of smart contracts and DLT any more than any other automated computer-based process prevalent throughout the settlement industry (all of which are vulnerable to mistakes in the underlying coding architecture)”, it said.