The European Securities and Markets Authority (ESMA) has published a Call for Evidence (2015/532) on investments using virtual currency or distributed ledger technology. ESMA has “been monitoring and analysing virtual currency investment over the last 6 months, to understand developments in the market, potential benefits or risks for investors, market integrity or financial stability, and to support the functioning of the EU single market.”  The Call for Evidence summarises ESMA’s findings, and its understanding of what it’s found, before raising a series of questions which it hopes you will help it answer.

ESMA notes that numerous virtual currency (VC) investment products have emerged recently, including collective investment schemes (CIS), contracts for difference (CFDs), and binary options. In total, ESMA has identified 12 CISs and 17 active platforms that offer CFDs or binary options for Bitcoins or litecoins. ESMA notes that “while some platforms and funds have sought regulatory approval, there are a number of cases where the location and other relevant information are not available” – perhaps because regulatory approval is not required in the relevant jurisdiction … although other explanations may clearly also exist. 

ESMA’s understanding is that, with the exception of certain smaller funds, only “accredited investors” are usually accepted as investors in VC CISs; whilst platforms offering CFDs and binary options tend to make them available to retail investors as well.

ESMA seeks to distinguish between (a) VC investment products, which are distributed in the same way as other financial instruments; and (b) VC based financial assets, that are distributed and traded using VCs and the associated block chain technology. This seems like an odd and incomplete distinction to draw; it may therefore suggest that ESMA doesn’t understand the territory as well as it might after 6 months’ work. Be that as it may….

ESMA goes on to describe its understanding of (a) how VC decentralised ledgers work; (b) how transfers of VC-based assets and securities work;  and (c) the differences and commonalities with the traditional process of investing in financial assets and securities. Having done so it admits (quite correctly) that “there is no reliable information on who owns VC based financial assets” today. Towards the end of the Call for Evidence, ESMA gives a very brief description of some of the other ways in which block chain technology is being, or might be, used for purposes other than recording the ownership of VCs or VC based assets

ESMA concludes by asking for information about, for example:

  • “[VC] investment products i.e. collective investment schemes or derivatives …that have virtual currencies (VCs) as an underlying [sic] or invest in VC related businesses and infrastructure;” [You did read that correctly – we think the reference is “underlying” is to the underlying assets in which the investment has been made, or (eg) the underlying indices to which the investment is linked]
  • “[VC] based assets/securities and asset transfers…such as shares, funds etc. that are exclusively traded using virtual currency distributed ledgers (…block chains)”;
  • “The application of the distributed ledger technology to securities/investments, whether inside or outside a virtual currency environment”;
  • …other VC investment product[s]” and “platform[s] distributing VC investment products“;
  • …the profile of investors investing in VC investment products“;
  • Other “VC based financial assets” that may exist;
  • how widespread ownership of VC based financial assets and securities is
  • the benefits and risks of VC based financial assets/securities
  • The use of distributed ledger technology for “issuance, distribution, trading, recording of transactions and ownership of ‘traditional’ securities or investment products”.

The Call for Evidence is aimed at the following categories of persons:

  • In relation to “Investment products with [VC] underlying”, those who offer or invest in VC investment products or those who provide advisory services to them.
  • In relation to “Financial assets/securities issued in [VCs]”, those who issue or invest in such assets/securities; “anyone providing infrastructure related to the issuance, trading, custody or for the recording of transactions or ownership of such assets/securities”, and those who provide advisory services to them.
  • In relation to “Distributed ledger technology”, those who use or advise on the use of such technology in relation to transactions in securities, whether or not the securities or transactions require use of a VC.

Anyone with an interest in this area who would like to see it being sensibly and proportionately regulated should consider responding to this call for evidence, if only because the odd distinctions that ESMA makes and its use of language (underlying!) may betray a lack of understanding on its part; and that could generate an unwelcome regulatory response in the medium and longer term.

The Call for Evidence closes on: 21 July 2015. All contributions should be submitted on line, using the ESMA tools provided for the purpose.