Should blockchain be completely decentralized? Euroclear report believes that regulators can serve as nodes (download the full report)

Euroclear, the European bond settlement system, has recently released a blockchain report titled "Blockchain Settlement: Regulation, Innovation and Applications" (download the full report), which studies the use of blockchain in European post-trade settlement from a regulatory and legal perspective.

The report, which was supported by leading UK law firm Slaughter and May, found that central securities depositories (CSDs) will play a key role in blockchain-based settlement systems.

The report also states that regulators should not be afraid to use smart contracts and distributed ledger technology, just as they do with all other automated computer processes prevalent in the settlement industry.

“CSDs should play an important role in blockchain-based settlement systems.”

The report adds that as a ‘code custodian,’ the CSD can exercise oversight and responsibility over the blockchain protocol and any associated smart contracts.

Embracing cybersecurity using distributed ledger technology

The report's authors say a key selling point of distributed ledger technology is its increased resistance to cyberattacks compared to more traditional databases.

This ability comes from the blockchain's built-in redundancy and a special design rule - if any cybercriminal wants to change the contents of the ledger, he needs to control a number of nodes greater than a certain threshold.

‘Both of these attributes of distributed ledgers should be attractive to regulators,’ the report said. However, it noted that certain blockchain environments could fail, such as a fully decentralized environment or a cyberattack that destroyed private keys, which could wipe out investors’ money.

Still, the report’s authors believe a blockchain-based settlement system would be at least more secure than the current system, which has limited immunity to cyberattacks.

CSD is a trusted central entity

While the Euroclear report states that the CSD is a trusted central entity that facilitates the settlement process, it is generally believed that distributed ledger technology systems will be a natural evolution of the CSD's role.

The report states:

“The CSD will continue to play an important role as a trusted and centralized FMI, providing gatekeeping services and regulation for blockchain.

No radical change needed

It is important to point out in the report that even if a DLT-based settlement process is implemented, there is no need to change the existing regulatory framework.

By allowing regulators to participate as a node in the blockchain system, they can have full oversight of all transactions occurring in the settlement system and receive transparent transaction data in real time.

This would provide a significant improvement to regulators’ existing data intake processes, perhaps allowing them to monitor securities market activities with greater rigor and detail.