The World Federation of Exchanges is calling for the creation of regulatory sandboxes for distributed ledger technology, to help industry efforts to explore and understand the impact of blockchain-based services in the capital markets.
In a submission to a discussion paper from the European Securites and Market Authority debating the uptake of distributed ledgers by market participants, the WFE calls on regulatory bodies to collaborate with the industry on new developments so as to minimise unintended consequences from any subsequent policy formation.
"This will allow regulators to understand the technology, what the potential future industry models are - and its subsequent impact on financial markets - as well as how it can most effectively perform its regulatory function," says the industry body. "Regulatory sandboxes have been a useful tool for the wider fintech industry in various jurisdictions, so the WFE suggests these should be extended to DLT to ensure that appropriate collaboration and exchange of information occurs between industry and regulators."
While supporting the objective of a co-ordinated European approach to DLT, the WFE points to the global nature of capital markets and the need for cross-jurisdictional consistency based on international guidelines and principles.
In this regard, the body is encouraging Esma to work alongside other international regulatory bodies, such as Iosco and the G-20, to ensure that policy-formation in this area is complementary and does not encourage regulatory arbitrage.
A recently-published poll of 24 WFE members found that 84% of trading venues and clearing counterparties surveyed are either investigating or actively pursuing the applicability of distributed ledger technologies in financial markets.
"We advocate that innovation in fintech generally, and DLT specifically, should be primarily industry driven, and not be unnecessarily impeded by regulatory intervention," states the Federation. "Regulators should also ensure any DLT technical or regulatory standards are consistent with other related rules, for example on cyber security and data protection."
Gavin Hill, head of regulatory affairs, WFE, adds: “Markets are dynamic and continue to innovate. Developments in this space should continue to be market-led and not unnecessarily hampered. However, it is important that stakeholders continue to engage, and as such, the WFE will endeavour to facilitate an open dialogue between regulators and its membership regarding the evolution of the technology, and the sharing of information and best practice.”