Integrating distributed ledger technology (DLT) can be “a real challenge” for financial institutions and regulators, Luxembourg’s financial regulator the CSSF (Commission de Surveillance du Secteur Financier) said last Friday in a white paper on distributed ledger technology (DLT), also known as blockchain (a type of DLT, the CSSF noted).
DLT/Blockchain’s “integration to a constant-moving environment constitutes a real challenge, and not only for the institutions. Integration of evolving technology-based innovation in financial services and markets is a continuous challenge for regulators such as the CSSF,” the regulator wrote.
The CSSF white paper is “aimed at guiding interested professionals in the conduct of their due diligence process related to the DLT and its use in the provision of services in the Luxembourg financial sector.”
The CSSF noted that the DLT is widely seen as “the next step towards the digital transformation and may have a significant impact on the financial sector in the decade to come.” There are also voices which dispute this.
Appeals for clarity
The document follows appeals to the CSSF from financial industry players for its views on the technology.
“Over the past few years, the CSSF has been increasingly solicited by financial and non-financial institutions, incumbents and start-ups, wishing to present a large diversity of applications and use-cases of DLT, in various sectors,” the CSSF wrote.
Benefits and risks
Reminding readers that it has said that it is neutral on technology, the regulator “acknowledges that innovative processes and technologies can contribute to the improvement of the provision of financial services.” However, it noted that there are both benefits and risks.
“When properly used, a DLT, like other technologies, can provide benefits for the financial sector,” the CSSF wrote. “At the same time, the DLT entails specific risks that must be understood, mitigated and monitored.”
The CSSF white paper starts by reviewing the key common characteristics and different types of DLTs, then presents the main actors and roles of a DLT project, along with use-case examples. The main part of the document “emphasises some of the main risks related to the DLT, both in terms of governance and technical risks, by proposing key questions and recommendations for professionals to consider when performing their risk analysis and due diligence processes.”