EU Regulator: DLT In Trade Finance Still Faces Legal Uncertainty

An EU banking regulator has published a new report exploring the benefits and risks associated with the use of distributed ledger technology (DLT) in finance.

In a report published on Tuesday that discusses the rising trend of financial technology, the European Banking Authority (EBA) highlighted two banking-related use cases of blockchain: cross-border trade finance and identity authentication.

With a detailed explanation of how smart contracts and DLT can be utilized in the case of cross-border transactions, the EBA says the nascent technology can help solve a variety of issues. The paper's authors wrote:

"A number of opportunities emerge from the use of DLT and smart contracts for trade finance. The most promising are the potential efficiency gains, cost reduction, and lower risk of duplicate financing and loss or manipulation of documents."

That said, the EBA also noted the emerging technology still faces potential risks as applicable law remains uncertain at the moment. As such, conflict of interests may occur among DLT nodes that are located in different jurisdictions.

The EBA went on to explain:

"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. "

The EBA's comment notably follows news that a group of European banks has conducted a series of live cross-border trades using a jointly-developed blockchain platform. Those firms have said they want to expand the platform to elsewhere in the region.

Elsewhere in the report, the banking regulator also said that DLT can potentially streamline the ID verification process in European banks' customer due diligence since data can be shared in a distributed network.

However, the EBA said one of the unresolved questions in the application is how to ensure each party on a DLT network conducts a comprehensive due diligence process so that incomplete or invalid data will not be shared among different nodes.

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