The European Central Securities Depositories Association (ECSDA) has issued a short think piece on the growing popularity of virtual currencies such as bitcoin and how this is impacting securities markets through the emergence of new forms of virtual currency-based investments. Transactions in these products typically make use of blockchain technology, a process allowing for speed and efficiency, but presenting new challenges in terms of financial stability and investor protection.
In its response to the European Securities Market Association (ESMA)'s call for evidence of April 22, ECSDA outlines a number of considerations from a CSD perspective.
First, given the inherently global nature of bitcoin and other virtual currencies, international co-operation among financial regulators will be especially important to allow market players to benefit from the opportunities brought about by blockchain technology while ensuring that the potential risks posed by the virtual currency environment to the financial system are properly monitored and, where necessary, addressed.
Second, virtual currency investments pose new challenges in terms of investor protection, and addressing these challenges is likely to require new types of supervisory standards. As long as activity in the virtual currency environment remain largely unregulated, there is a risk of regulatory arbitrage and competitive distortions, which might lead some investors, issuers and/or intermediaries to shift their investments to the virtual currency space to benefit from lower costs and fewer regulatory constraints, notes ECSDA.
That said, the existing supervisory framework for securities infrastructures is not directly applicable to virtual currency players, and regulators will very likely have to develop new standards to address the specific challenges posed by virtual currency investments. These include for instance the integrity of the mining process and the verification of the identity of the trading counterparties/beneficial owners in the absence of a central register and “notary” service.
Finally, regulators should consider blockchain and other distributed ledger technologies in conjunction with, but also separately from, virtual currencies. Indeed, these technological solutions could very well be used outside the virtual currency environment in the future. While they present interesting opportunities for achieving speedy and cost-efficient transactions, there are still many obstacles and limitations to overcome before they can be considered for widespread use in “traditional” securities markets.
