By Kevin Helms,

The European Securities and Markets Authority (ESMA) is responsible for promoting investor protection, orderly markets and financial stability. At a blockchain conference last week in London, Patrick Armstrong, Senior Risk Analysis Officer, detailed ESMA’s approach to blockchain technology. One strategy he noted was to ban blockchain products or processes altogether.

ESMA Has the Power to Ban Blockchain

For both regulators and market participants, the issue of blockchain technology and its regulatory response is “a critical topic,” Armstrong said. “When confronted with a financial innovation, a regulator can roughly take one of three approaches,” he explained.

The first approach, which Armstrong called the “restrictive approach” is to ban or restrict products and processes based on blockchain technology. He said:

The first, banning, is a power that ESMA and the MSs [Member States] 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.

The Markets in Financial Instruments Directive or MiFID is a cornerstone of the EU’s regulation of financial markets. Implemented since 2007, it aims to improve the competitiveness of EU financial markets by creating a single market for investment
services and activities.

In October 2011, the European Commission adopted a legislative proposal to revise MiFID. After more than two years of extensive debate, MiFID II and MiFIR (Markets in Financial Instruments Regulation) were adopted by the European Parliament and the Council of the European Union in 2014.

MiFID II is scheduled to “transposed into national law of Members States” in July 2017. Subsequently, both MiFID II and MiFIR will apply within the Member States in January 2018, according to the ESMA website. MiFID II and MiFIR empower ESMA to develop draft regulatory technical standards and draft implementing technical standards.

However, Armstrong confirmed that ESMA is not considering this first approach. “We can rule out the first restrictive approach,” he said, citing that the authority does not see blockchains posing risk to its three objectives; stability, protection and integrity.

Wait and See: a More Sensible Approach

A more sensible approach for ESMA is the ‘wait and see’ approach, which it has already taken, according to Armstrong. He called this second approach the “watchful approach,” noting that:

The innovation has not reached a ‘tipping point’ where active regulatory participation is needed.

The third approach, which Armstrong called the “facilitative or catalyst approach” was also ruled out for the time being. Using this approach, ESMA would “actively facilitate and regulate the product or process” if there are enough potential economic and social benefits. However, Armstrong indicated that it is too early for this approach. ESMA will take this approach “when we believe an innovation has matured or become too large to ignore; that is, a tipping point has been reached,” he explained.

No matter what approach is taken, Armstrong concluded his speech by emphasizing how regulators need to “strike the right balance between the regulation and the technology.