Europe's top financial watchdog has said that it is too early to decide whether blockchain technology needs to be regulated.

In a report published on February 7, the European Securities and Markets Authority, or Esma, said blockchain could bring a number of benefits to securities markets including more efficient post-trade processes, enhanced reporting and data management capabilities and reduced costs.

But the regulator also pointed out that "a number of challenges" will need to be addressed before those benefits will actually be felt - including "interoperability" - or making sure blockchain innovations can work across different institutions' systems - and the use of common standards.

Other challenges include the governance of a decentralised blockchain system, privacy issues and the scalability of any new innovations.

Esma said that despite a number of interesting tests that have been carried out, blockchain is still at an early stage and said "it remains unclear if the technology will overcome all of these challenges".

It warned that blockchain may create or exacerbate some risks but said it is premature to assess the exact nature and level of those risks.

However, the European financial watchdog said that it wants to understand both the benefits and the risks that distributed ledger technology, as blockchain-based systems are known, may introduce to securities markets. It said it will continue to monitor blockchain market developments.

Esma said: "Many market participants are experimenting with the technology and we expect that a number of targeted applications could come to market in 2017", adding that supporters and developers of the technology should be aware of existing regulations when designing blockchain solutions.

ESMA's comments come as a number of groups are developing and or testing blockchain technology. In January, Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and UniCredit said they teamed up develop a new product called Digital Trade Chain, a blockchain-based information system to help small and medium-sized businesses to manage their domestic and international trade transactions.

Swift, the global financial network that is used by banks to send money across the world, also launched a project to test the use of blockchain in the same month, while the Depository Trust & Clearing Corporation also said in January it would carry out a blockchain test to improve its trade information warehouse - which holds data on as much as $11 trillion in credit default swaps.