The European Banking Authority Reports on Risks that DLT Brings

The European Banking Authority Reports on Risks that DLT Brings

The European Banking Authority (EBA) has published a report on July 3, in which analyzes the benefits and prudential risks that newborn Financial Technologies (FinTech) bring to institutions. In the lengthy introduction, EBA informs that the present report is aimed at raising awareness within the community. EBA lists 7 use cases of FinTech, while in only 2 of them speaks about Distributed Ledger Technology (DLT): smart contracts for trade finance and streamline Customer Due Diligence (CDD) processes.

According to the report, the majority of risks referred to smart contracts is due to the “immaturity of these technologies, while others relate to the legal and regulatory uncertainties or the difficulties entailed in designing the governance of such a model," “It is essential to establish the applicable jurisdiction, in case of conflict, and the dispute mechanisms, when a dispute arises,” – concludes EBA.

 Although streamline CDD use case hasn’t been implemented yet, EBA mentioned possible prudential issues that can take place when "institutions rely on previous CDD processes performed by others, as there is the risk of trusting invalid or incomplete CDD verifications and therefore facing compliance issues for not fulfilling their AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism).” 

In the conclusion, EBA states that very few institutions trust innovative financial technologies, which, in its turn, inhibits the progress. 

#aml #eu #smartcontracts #dlt #distributedledgertechnology #eba #fintech