European financial regulator to have power to ban decentralized ledger technology by January 2018

Rage Review : Once MiFID II / MiFIR takes effect on January 1, 2018, it may trigger potential risks, so the European Securities and Markets Authority (ESMA) and MSs have the power to prohibit the release of harmful products. This preventive approach has been very effective before. In general, European financial regulators encourage innovation, but they will take action to intervene before negative effects occur, thereby minimizing the impact.

Translation: Nicole

In a recent speech, The Future for Financial Services Infrastructure, Patrick Armstrong, Senior Risk Analytics Officer at Blockchain Technology Innovation and Product Team in London, UK, publicly stated that the European Securities and Markets Authority (ESMA) has the power to ban products, or restrict processes, due to potential risks once MiFID II/MiFIR comes into effect on January 1, 2018 (a restrictive approach).

During the speech:

“The issue of distributed ledger technology (DLT) and the regulatory response is a topic of great interest to regulators and market participants. The challenge is to determine when regulators should step in. This is the regulatory ‘tipping point’ – finding the fine line between ‘too small to care’ and ‘too big to ignore’. I would like to share how ESMA is addressing this challenge.”

“When faced with financial innovation, regulators can broadly take one of three approaches, each with its own “active” rather than “reactive” approach.

1. Ban products or restrict processes based on potential risks (restrictive approach).

2. Take a “wait and see” approach (proceed with caution).

3. Actively regulate products and advance processes because of their potential economic and social benefits (promoter or catalyst approach) or because of known threats to our goals.”

“Firstly, once MiFID II/MiFIR comes into force on 1 January 2018, ESMA and the MSs will have the power to prohibit it. Until then, if we believe a ‘tipping point’ has been reached for harmful behaviour, then we can take steps such as our warning on CFDs in 2013, which we improved on over the past year, or our statement on the risks of investing in CFDs in 2014, in which we outlined that these instruments should only be purchased by sophisticated investors and should not be used by retail investors.”

He also said that the “wait and see” approach is largely what ESMA (like most regulators) is taking towards DLT.

“There is a collective need to better understand DLT in financial markets and its potential applications. Now, don’t read this as a passive approach, but rather we are actively trying more innovations that are not yet mature, but we will not put our goals, stability, protection and integrity at risk by not taking action. At the same time, we will not risk stifling potential socially and economically beneficial products or processes while waiting for innovation to develop. This innovation has not yet reached a ‘tipping point’ that requires active regulatory involvement.”