Does the EU have the power to ban blockchain? See what this senior official says

On January 1, 2018, the European Securities and Markets Authority (ESMA) will have the power to ban the use of blockchain or distributed ledger technology (DLT).

Senior risk assessment officer Patrick Armstrong spoke about the challenges and opportunities of blockchain technology at the “Blockchain: The Future of Financial Services” conference in London last week. Armstrong is part of the innovation and product team at ESMA, the Paris-based financial regulator of the European Union that aims to improve the laws and regulations of European financial markets.

At this blockchain conference, Armstrong publicly demonstrated ESMA's understanding of blockchain technology.

He said:

ESMA began research into the virtual currency Bitcoin as early as 2013, when it became a widely known payment option. ESMA has also evaluated investment products based on virtual currencies.

At that time, there were only a few related investment products. Gradually, the market focus shifted from virtual currencies such as Bitcoin to its underlying technology - blockchain.

Soon after, ESMA established a "DLT Working Group", and the European Commission (EC) and the European Central Bank (ECB) also participated in it. In the proposal, the European Commission suggested the establishment of a centralized database to record the information of all Bitcoin users; the ECB has always been skeptical about digital currencies. Recently, the ECB has also drafted a guiding document, arguing that virtual currencies do not qualify as currencies.

choose

Armstrong stressed that the advent of blockchain technology and the regulatory response to this innovation is “a critically important issue” for markets and regulators.

He further stated that the key challenge lies in when ESMA should "intervene".

This is the so-called regulatory 'threshold' - the line between 'not a problem' and 'cannot be ignored'.

When discussing three ways regulators can respond to emerging technologies, Armstrong said:

First, the new EU Financial Markets Directive (MiFID II) and the Financial Markets Regulation (MiFIR) will come into effect on January 1, 2018. By then, ESMA and EU member states will have the absolute right to issue warnings and prohibit the use of this technology if they find any harm related to this technology. We have set similar precedents before.

MiFID is the basis for the EU to regulate the financial markets of its member states. In October 2011, the advent of a new round of financial crisis prompted the European Commission to revise the regulation. They hope to improve the efficiency, transparency and resilience of financial markets in this way. MiFID II and MiFIR will further authorize ESMA to draft technical regulatory standards (RTS) and technical deployment standards (ITS). Ultimately, these new regulations will lead to "a large number of over-the-counter (OTC) platforms being regulated."

Armstrong added that the second approach is to “wait and see”, which is adopted by regulators in most countries, including ESMA. The third approach is for ESMA to introduce favorable regulatory policies for a product or technology due to its economic potential and social benefits.

Still holding a "wait-and-see" attitude

Most regulators have discussed and implemented the above three methods, and Armstrong confirmed that ESMA has chosen to continue to take a "wait-and-see" attitude towards blockchain technology, temporarily ruling out any possibility of issuing a ban.

He said:

We have three principles to work with: stability, market protection, and authenticity. Since DLT does not currently violate any of these principles, we will not ban the technology for now.

For regulators, it’s a balance between regulation and technology. Armstrong said ESMA will regularly reassess its policy on the technology in order to ensure efficiency and relevance.