Bitcoin and Kin: The View from Europe

stonesThe European Securities and Markets Authority has issued a “call for evidence” on virtual currency and distributed ledger technology. For the uninitiated, that means they want to know what stakeholders think about bitcoins, other cryptocurrencies, and the use of block chains.

Brief Value History

Some of our readers may be wondering what has been happening to bitcoins of late. They were all the rage at the end of 2013 and the start of 2014. Has the whole industry gone radio silent?

No. As a matter of value, there was o course a great falling-off after the peak of November ’13. A bitcoin reached a value close to $980 before the fever broke. By May 2014 its value was down to $442. But in this year, 2015, the signature asset of the “virtual currency” a/k/a cryptocurrency world seems to have reached a (boring) equilibrium. Its price charts present a mostly horizontal line, waving between $220 and $240. It is worthwhile observing the pile of stones portrayed here. They are in equilibrium too, at the moment, but it seems a fragile one. Things could get volatile with nothing more than a decent wind.

In the paradigmatic bitcoin system, every proposed transaction involves the broadcast of a message to nodes, and it asks the nodes to add the latest transaction to the universal ledger, which is updated on the basis of such broadcasts (and on the basis of the ability of the computers involved to solve difficult mathematical problems) every ten minutes. For other analogous systems, the particulars – including that ten-minute interval – are somewhat different. But each link in the chain, each new page in the ledger, includes a block number, a time stamp, an identifier of the previous block for reference, the particular transactions performed during the specific chronological interval to which the link corresponds, and a difficulty statement.

What ESMA Wants

That said: back to Europe! The comment period for the new ESMA request ends July 21st. To get things started, of course, ESMA has expressed its own analysis, after “monitoring and analyzing virtual currency investment over the past 6 months to understand developments in the market…and to support the functioning of the EU single market.”

The authority especially wants evidence on these three matters: investment products that have a virtual currency as an underlying; or those that involve traditional financial assets which have been “issued and traded using [VC] distributed ledger technology;” or the use of block chains (excuse me, distributed ledger technologies) in other ways that don’t involve virtual currencies at all. As an example of these other ways, ESMA refers to the recording of offers and the transfers of ownership or other rights in traditional securities.

Under the first of those headings (investment products), ESMA is interested for example in collective investment schemes (CIS) and in the exchange platforms that offer crypto-currency derivatives. The Authority knows of twelve CISs’ in this space thus far, and the largest of them has assets under management of €116 million (about $130 million). Under this heading, too, ESMA wants to ask interested persons/institutions whether they have information about other VC investment products or platforms distributing the same, their location, or their outstanding volume? Or about the profile of investors with such products in their portfolios?

Turning to other uses of block chains, the Authority wants to know whatever its commenters know about how ledger technology is being used or is “likely to be used in relation to the issuance, distribution, trading, recording of transactions and ownership of ‘traditional’ securities or investment products and why?”

Also, it wants to know the extent to which the use of such technology is the context of traditional securities or products is in fact separate from any associated crypto currency.

Elsewhere in Europe

The Swedish Financial Supervisory Authority has decided that any service provider that assists Swedes with buying and selling through crypto-currencies must register as a financial institution, in accord with that country’s Certain Financial Operations Act of 1996. That registration in turn will require these entities to comply with the Act on Measures against Money Laundering. In the first twelve days of June 2015, ten companies registered with the SFSA under this ruling. But the SFSA is said to believe there are a lot of still unregistered entities engaged in bitcoin and exchange-related services out and about.

Sweden’s Tax Agency, meanwhile, has decided to treat cryptocurrencies as an asset, and thus as subject to the capital gains tax.

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