CSDs and “blockchain” technology
20 July 2015 – The growing popularity of virtual currencies such as bitcoins is having an impact on securities markets with the emergence of new forms of virtual currency-based investments. Transactions in these innovative products typically make use of “blockchain” technology, a process allowing for speed and efficiency, but also presenting new challenges in terms of financial stability and investor protection.
In its response to the ESMA call for evidence of 22 April 2015, ECSDA outlines the following considerations from a CSD perspective:
First, given the inherently global nature of bitcoins and other virtual currencies, international cooperation 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 actors 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. 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, for example as regards 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.
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.