Blockchain could trigger regulatory convergence - EU, Turkey lawyers

Source: Heren


LONDON (ICIS)--Regulations related to wholesale trading and peer-to-peer transactions at distribution level could converge as the emerging Blockchain technology is now blurring the historical distinction between the two, senior European and Turkish lawyers told ICIS in an interview.

Deger Boden, founding partner of the Istanbul-based Boden Law and Jan Haizmann, managing director of the Brussels-based Correggio Consulting, said the technology was moving at a speed where regulators were struggling to keep pace.

Speaking after a round table meeting on new trends in energy trading held by Boden Academy in Istanbul on Friday, Boden said decentralised transaction models were affecting a multitude of legal aspects including codes of obligations, commercial codes, procedural laws, as well as energy and capital markets’ regulations.

She quoted the example of tokenisation, an intrinsic part of the Blockchain technology used for infrastructure platform identification and accessibility, which would have implications in terms of civil codes. More precisely, the implications would relate to the classification of assets and the accompanying results such as transfers of titles and transfers of possessions

‘It is clear that Blockchain will radically change the energy trading industry as we know it,’ Haizmann said, warning that the technology could attract new risk scenarios which had been identified and listed by the legal committee and fintech working groups of the European Federation of Energy Traders (EFET).

‘Legal issues turn around questions on data protection, contractual liability for malfunctioning and the question whether a Blockchain transaction is able to evidence the legal transfer of title in a trading context. Project participants have been looking at the consequence of system failure, a challenging task in the decentralised Blockchain. An analysis is complex because there are no laws providing for Blockchain,” Haizmann who is also chairman of EFET’s legal committee explained.

Although Boden and Haizmann agree that system failure and data protection may bring risks, neither believes that automation would make trading a less secure environment.

‘Automation is a sign of liquidity and maturity of markets,’ Haizmann said.

Boden added that regulators would also have to consider whether and how decentralised transaction models would fall within EMIR, REMIT and MiFID regulations, a set of rules designed to bring more transparency into all asset classes.

Blockchain in Europe and Turkey

Boden, who has deep experience of the Turkish energy sector, said the technology, which is rapidly spreading in Europe could also expand in Turkey, largely through European companies active in the country, which would be keen to pioneer the decentralised trading model.

‘Turkey may ultimately follow the digital trading developments taking place in Europe, but it may not be as fast. The high transaction costs and operational costs in Europe support the fast movement of digital trading in Europe, [but] in Turkey such costs are relatively lower, with the exception of collateral requirements,’ she said.

She stressed, however, that the uptake of digital trading may become less urgent in Turkey because both electricity and gas markets remain underdeveloped .

Turkey’s energy sector risks

Speaking specifically about the development of Turkey’s energy markets, Haizmann acknowledged that the sector was facing credit risks, but added that problems were linked to a lack of transparency.

He said the Turkish insolvency law would also have to be changed, because under its current format, the law does not recognise close-out netting as credit risk mitigation tools. Close-out netting is a netting method that reduces pre-settlement credit risk and applies to transactions between parties when there is a default.

‘This is why companies trading in Turkey will have to pay higher collateral to underpin their trades. High collateral requirements make trading expensive and hinder the development of liquidity,’ Haizmann said.

‘A statutory recognition of close-out netting could give liquidity in the Turkish wholesale market a boost,’ he added.

Both Boden and Haizmann agreed that a reform of the insolvency law to enable close-out netting would help to speed up the development of the Turkish electricity and gas markets.

However, Haizmann added that Turkey should also seek to minimise the divergence of regulations with the EU and strive for closer integration with European markets.

‘Turkey should implement further market reforms in the wholesale electricity and gas markets and finally create the transparency required to allow a traded market beyond spot products to emerge.

‘We hope that Turkey will become a fully transparent and non-discriminatory wholesale market, but there is quite some work left if this is the ultimate goal for the Turkish Government,” he added.