A report has been published by the European Banking Authority that emphasis on the many opportunities and risks involved when financial institutions get themselves involved in distributed ledger technology (DLT).
This banking regulator in its report analyses the impact that DLT and fintech have on financial institutions and examine the two most common DLT uses in international trade and digital identity. In the report “digital identity” is regarded as “information used to represent an entity in an informational system”.
The EBA clearly states that DLT can be used in international trade transactions and their process of settlement. DLT and smart contracts do provide a broad range of opportunities and as the most promising are mentioned the efficiency gains, conserving on management costs, and lowering the risk of documents manipulation.
The report continues:
“DLT enables a common and almost real-time view of a trade transaction stored in a shared ledger for all participants involved, creating a level playing field for all parties and eliminating their reliance on paper instruments exchanged among them. A shared view could rationalise the manual effort and reconciliation processes, with consequent savings in time, money and resources.”
But there is also a mentioning of the risks of using DLT and smart contracts due to their immaturity and legal and regulatory shortcomings as the report states:
“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 dispute arises.”