Data and securities laws could hold back blockchain adoption for CSDs

Europe’s data protection laws and the incoming CSD Regulation could prevent implementation of the technology in the post-trade area.

By Joe Parsons

Adoption of blockchain technology by post-trade market infrastructures could be held back by data protection and securities law, according to new research by Deutsche Bank.

There is a broad consensus amongst the post-trade industry that blockchain technology will revolutionise the custody and clearing world and could radically change how assets are maintained and stored by custodians and central securities depositories (CSDs).

However, a new white paper from Deutsche Bank highlighted that Europe’s data protection laws and the incoming CSD Regulation (CSDR) could prevent implementation of the technology in the post-trade area.

“CSDR mandates that the ultimate record of ownership of securities is to be maintained by a CSD. Only allowing CSDs to issue or process securities transactions clearing restricts the use of blockchain for this purpose,” Polina Evstifeeva, head of regulatory strategy, GTB chief digital office, Deutsche Bank told Global Custodian.

The core value of blockchain is that it is decentralised and transparent, but the white paper outlines these values could also conflict with data protection laws, which focus on the importance of allowing personal data to be removed or edited.

“Different jurisdictions define data, its use and the necessary means of protection in markedly different ways,” adds Evstifeeva. “In practice, this restricts the free flow of data across borders and makes it challenging for one single solution to be employed in all markets.”

“The issue of determining what jurisdiction and law should apply is a challenging one when different blockchain nodes may be in different jurisdictions.

“This may result in different blockchain ecosystems being created or, perhaps worse, we may end up with multiple copies of shared ledgers operating on different technology platforms with different database environments, leading to time-consuming and expensive reconciliation – exactly what the technology is looking to circumvent.”

However, the white paper does not rule out the implementation of blockchain by CSDs, and rather suggests the technology can be implemented through a hybrid model in which the CSD can either operate a blockchain platform itself to perform the book entry role, or it can continue to perform this role off-chain, with the third-party blockchain platform accessing those records held by the CSD via an API (application programme interface).

CSDs have so far eyed blockchain technology for proxy voting and corporate actions as a starting point, but have yet to expand adoption of DLT for services such as securities issuing and settlement.

Deutsche Bank’s Evstifeeva explains cross-border regulation and industry-wide standards on blockchain will help encourage CSDs to utilise the full benefits of the technology.

“As with all regulation pertaining to technology, we stress the need for technology-neutrality – regulating the applications and outcomes of blockchain, rather than the technology itself,” she adds.