The European[1] Banking Authority (EBA) has published a report[2], which analyzes the opportunities and risks emerging for financial institutions in using distributed ledger technology[3] (DLT).
In the report released July 3, the banking regulator analyzes the impact of fintech and DLT on financial institutions, examining two DLT use cases in international trade and so called “digital identity.” The EBA defines “digital identity” as the “information used to represent an entity in an informational system.”
The EBA starts with an extensive explanation of the ways DLT can be applied in the field of international trade transactions[4] and streamline the process of their settlement in particular. The report says that DLT and smart contracts provide a range of opportunities, the most promising of which are the potential efficiency gains, conservative management of costs, and lower risk of duplicate financing and manipulation of documents. It explains:
“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.”
The regulator further mentions that currently the use of DLT and smart contracts[5] pose a number of risks due to “immaturity of these technologies” and “legal and regulatory uncertainties.” The report notes a potential conflict of laws if DLT nodes are located in different jurisdictions:
“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.”
When it comes to “digital
