The French financial regulator AMF wants the EU to allow the digitization of financial instruments on blockchain. It hopes to remove any legal impediments to tokenization and also enable stable coins for interbank settlements. It says that blockchain can “significantly increase the efficiency of the financial markets.” The AMF even questions the current financial market infrastructures, including the need for some of the intermediaries.
At the end of January, the Autorité des Marchés Financiers (AMF) issued a working document aimed at encouraging the European Commission to develop a European digital strategy for financial services.
In particular, the AMF views some of the legal requirements to involve intermediaries as outdated in a blockchain world.
If markets rely on blockchains for instant settlement, is there a need for a central securities depository? Additionally, the AMF asks whether it’s necessary to require banks to be used for settlement and questions the role of aftermarket intermediaries such as custodians and brokers.
While most institutional financial blockchains are permissioned, the paper suggests a regulatory framework should remain technologically neutral and not preclude public blockchains.
Potential tokenization benefits
The regulator highlights the need to allow legal clarity over the use of blockchain to gain substantial cost efficiencies. Both the enduring low interest rates and the higher post-crisis compliance cost are pressuring bank margins. One obvious way to save money is to reduce the billions that banks spend reconciling their trading ledgers by using shared ledgers instead.
The first benefits it sees is that blockchain can reduce the costs of transfers, offers to the public and other operations. Additionally, by using self executing smart contracts, post-trade processes can be automated. These include delivery versus payment settlement, automating cash flows for securities and repurchase agreements, margin calls for derivatives and others.
The AMF also touts the usual list of advantages such as the speed of execution, targeting a global market, enhancing security through distributed registries, and potentially increasing the liquidity of some asset classes. Ultimately it envisions the region gaining a competitive advantage from the appropriate regulatory environment.
The paper emphasizes: “tokenization of finance is a major trend, which should not be fought but rather supported by a framework that allows it to develop in a secure environment.”
The specific regulatory issues that need addressing
Turning to the current obstacles, the AMF highlighted three.
Firstly, legislation usually identifies a manager that runs the settlement system. That’s a challenge on a decentralized platform, particularly on a public blockchain.
Secondly, to access the settlement system, regulations require an intermediary to be used, such as an institution or investment firm. Whereas with blockchain, there is direct access to settlement.
And the third one relates to the medium of exchange for settlement which is cash, central bank or commercial bank funds. It needs to enable tokenized cash.
Changes could be made by amending existing laws or creating new tailor-made legislation, for example, governing legal title on a blockchain. However, the current lack of maturity makes it hard to formulate rules at this stage. Additionally, there could be European-wide experimentation spaces or sandboxes where certain obligations are waived.
In the coming weeks, the AMF plans to publish a more comprehensive document.