The European Securities and Markets Authority (ESMA) has issued a call for evidence on investments using virtual currency or distributed ledger technology. Unsurprisingly, ESMA’s paper focuses in particular on the financial services side of virtual currencies.
ESMA is seeking views on the following topics:
- investment products with virtual currencies as the underlying - a number of products have emerged recently, currently focussed around two different forms: collective investment schemes and exchange platforms that offer different types of virtual currency derivatives. ESMA has identified 12 collective investment schemes and 17 active platforms offering contracts for difference or binary options for Bitcoin and Litecoin;
- investment in virtual currency based assets or securities and the transfer of those assets or securities – ESMA has identified that one way of investing in virtual currencies is to use the technology to buy, sell, transfer and own financial assets and securities. ESMA is keen to understand what else is out there;
- other uses of the distributed ledger in relation to investment – the distributed ledger (a public record of all transactions) also offers alternative uses. ESMA notes that a firm is looking at using the blockchain technology to provide a record of the history of assets, in order to reduce fraudulent claims in the insurance sector. It is also possible that firms may develop ways of using the technology to provide alternative trading and post-trading services in relation to traditional securities.
Given the European Banking Authority’s opinion in July last year, in which it highlighted multiple risks to consumers, it’s great news to see that ESMA is looking into this area and taking it seriously. Due to the media attention, there has been a lot of focus on Bitcoin as a currency, rather than the more interesting side of the underlying technology.
In particular, it’s clear that the distributed ledger offers opportunities beyond virtual currencies – that is, not only from the perspective of the transfer of monetary value securely from person to person, but also it could be used completely outside of virtual currencies. There are potential implications for financial intermediaries, such as regulated exchanges, brokers, central securities depositories and custodians.