An European Union financial regulator has published a report to raise public awareness of the benefits and risks associated with the use of distributed ledger technology (DLT) in finance.
In a report published on Tuesday that discusses the rising trend of financial technology, the European Banking Authority (EBA) highlighted two use cases of blockchain in the market’s banking sector, including cross-border trade finance and ID authentication.
With a detailed explanation of how smart contracts and DLT can be utilized in the case of cross-border transactions, the EBA praises the nascent technology can help solve a variety of issues. The paper wrote:
“A number of opportunities emerge from the use of DLT and smart contracts for trade finance. The most promising are the potential efficiency gains, cost reduction, and lower risk of duplicate financing and loss or manipulation of documents.”
That said, the EBA also noted the emerging technology still faces potential risks as applicable law remains uncertain at the moment. As such, conflict of interests may occur among DLT nodes that are located in different jurisdictions.
The regulator went on, saying:
“For example, a digitally signed contract might not be enforceable in all the jurisdictions. It is essential to establish the applicable jurisdiction, in case of conflict, and the dispute mechanisms, when a dispute arises. “
The EBA’s comment notably comes at a time when a group of European banks just announced they had conducted live cross-border trades using a jointly developed blockchain platform and eyes an expansion to additional markets in Europe.
Elsewhere in the report, the banking regulator also said that DLT can potentially streamline the ID verification process in European banks’ customer due diligence since data can be shared in a distributed network.
However, the EBA said one of the unresolved questions in the application is how to ensure each party on the DLT conducts a comprehensive due diligence process so that incomplete or invalid data will not be shared among different nodes.
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