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    The European Central Bank (ECB) reaffirmed the need to make sure it follows through on initiatives to ensure regulations do not undermine the development of blockchain or distributed ledger technologies (DLTs) in its Capital Markets Union mid-term review.

    The bank noted that the Eurosystem, of which it is a part, has a statutory task to support efficient payment and settlement systems. One aspect of this is to make sure technology enables faster, safer and less costly domestic and cross-border transactions while ensuring that innovation based on disparate standards in different national markets does not obstruct integration.

    The Eurosystem is a collective comprising the ECB and the central banks of all member states who wield the Euro as the state currency.

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    Blockchain Draws Interest

    Blockchain technology has attracted interest from both the financial industry and public authorities in their roles as supervisors and regulators, the review noted. The adoption of DLT by market participants could require bringing technological innovation into the current legal framework.

    There is also the need to examine the legal characteristics of virtual currencies and digital financial assets; the need to define interoperability standards among market participants; and the need to comprehend technological innovation for existing institutions as well as for financial oversight.

    The ECB proposed that existing initiatives develop harmonious and principle-based regulation be reinforced. The purpose is to make sure market participants creating new technologies will not be constrained by different national laws or by the risks of unanticipated regulations.

    Regulation should be developed that is long lasting, the review noted. The bank should constantly interact with developers to prevent situations where regulations directed at specific innovations are overlooked until the innovations are ready for adoption by market participants.

    EC Proposes Pilot Project

    The European Commission, an institution of the European Union responsible for proposing legislation and implementing decisions, in February proposed a pilot project on blockchain technology with the goal of improving its regulation. A draft of the proposal addressed to the ECB and other groups said a pilot project would be aimed at reinforcing the capacity and technical expertise of national regulators regarding blockchain technology.

    The draft noted that a major challenge in the following years will be to “create an environment in which financial innovation for the benefit of consumers can thrive.”

    Also read: European Commission proposes blockchain pilot project to improve regulation

    ECB Envisions Need For DLT

    The ECB reported last year that it was looking toward new innovations such as blockchain or DLT to help run payment and settlement systems.

    A project called Target2-Securities, implemented in June 2015 as a single settlement platform across the Eurosystem, is having issues. The timetable employed by the platform to rein in Europe’s largest clearing and settlement providers isn’t going well after significant technical concerns.

    DLT has the potential to revolutionize the settlement and post-trade industries. When fully realized, the technology could facilitate instant settlement of trades in an efficient and cheaper way.

    Featured image of European Central Bank from Shutterstock.

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