UPDATE 1-EU watchdog says too soon for new blockchain rules

(Adds more detail)

LONDON, Feb 7 (Reuters) - No specific European Union rules are needed to regulate blockchain for the time being given the sector’s still limited reach, the bloc’s securities watchdog said on Tuesday.

The conclusion from the European Securities and Markets Authority (ESMA) following a public consultation, is likely to be welcomed by the growing financial technology sector.

“At this stage, it is premature to fully assess the changes that the technology could bring and the regulatory response that may be needed, given that the technology is still evolving and practical applications are limited both in number and scope,” ESMA said in a statement.

New technology does not free up providers from complying with existing rules for safeguarding financial stability and orderly functioning of financial markets, ESMA said.

Regulators across the world have been taking a “softly softly” approach to blockchain, worried about stifling a nascent fintech sector that offers the promise of growth and jobs.

Blockchain, which first emerged as the system underpinning the cryptocurrency bitcoin, provides a shared record of transactions that is maintained by a network of computers, rather than a centralized authority.

Banks and stock exchanges are piling into the sector in the hope that using blockchain can cut costs.

ESMA said it expects the early applications of blockchain, also known as distributed ledger technology or DLT, to focus on improving how existing trading infrastructure works.

“Likely first areas of use may be less automated processes in low volume market segments and processes with minimum dependency on the existing legal framework,” ESMA said.

Blockchain also posed important challenges in terms of linkages across markets, governance, privacy and risk creation.

“These challenges would require further attention before any large-scale use of DLT across the financial services sector,” ESMA said.

Global regulatory bodies are already looking at blockchain, a paramount step, ESMA said.

Reporting by Huw Jones; Editing by Alexander Smith and Louise Heavens