The use of “blockchain” technology, which supports crypto currencies such as the bitcoin, is being widely considered and reported, with many pilots and in some cases actual use in flight. The future use of such technology is hotly debated, from those whose view is that they will “change the world” to the opposite, with some varying viewpoints expressed, for example here on CTRMCenter.
Whatever the ultimate outcome, such use presents many questions from a regulatory perspective, several of which were discussed at last November’s Platts Digital Commodities summit (see here), with some sessions being available for viewing (on a free or paid basis). This “launch” post on the topic will set the scene for more to follow over the coming months, and accompanies ETR Advisory’s launch of a practice in this area (see here).
It is possible to divide the relevant activity into three streams:
- Crypto currencies such as Bitcoin
- Use of Initial Coin Offerings (ICOs)
- Other applications of blockchain
Here we will briefly consider each stream and their regulatory implications. Later posts will track news in each area.
The ups and downs of currencies such as the Bitcoin have been well documented, as have the general risks associated with investing in them, as for example stated here by the SEC. The FCA has issued this warning, which also highlights the obligations of firms offering crypto currency based products. This article, also on Reuters, discusses a possible ban by Israel’s ISA of “bitcoin companies” from trading on TASE.
The recent launch of futures with cryptos as underlyings (see here on Reuters) gives rise not only to questions of risk (see this article on the Reuters web site on the CFTC’s concerns) but also more “mainstream” regulatory considerations. For example, this post by Cappitech discusses whether instruments in the EU with cryptos as underlyings are reportable under EMIR. This post on Broadpeak Partner’s blog discusses the issue of position limits on Bitcoin futures.
The Initial Coin Offering has also generated many warnings about possible losses, for example here by the FCA. There are also other factors to consider. This warning by ESMA, issued to potential investors in November 2017, warns of risk. However, at the same time ESMA also issued this warning to firms highlighting the possible regulatory consequences of engaging in an ICO. The warning highlights the fact that in some cases, tokens may be classified as financial instruments. If this is the case, an ICO must bear MiFID II, AIFMD and also the Prospectus Regulation in mind as well as other rules.
Use of blockchain and DLT technology
The use crypto currencies underlying blockchain and Distributed Ledger Technology is being considered for many different applications, in energy and commodity trading. These span initiatives such as Enerchain, which seeks to facilitate trading of wholesale energy between parties (see here), the BTL initiative which seeks to move confirmation matching to blockchain technology (see here) or initiatives in physical commodity trading and finance in other commodities (for example see this article on oilprice.com on an oil trading initiative, or this article on FT.com on an initiative in commodity trade finance ). This article on CTRMCenter considers these in principle.
These initiatives give rise to two sets of questions:
- Regulatory status – The initiatives themselves give rise to regulatory questions, not only of ownership but also of status. for example, are facilities set up to facilitate trading considered to be “venues” under rules such as MiFID II, REMIT etc.
- Uses to support regulations – It is possible that greater use of blockchain and DLT could facilitate compliance with regulations, such as trade reporting. For example this paper from R3 looks at the use of DLT for the reporting of OTC derivatives, although for such initiatives to be successful, standardisation through initiatives such as ISDA’s Common Domain Model (see here) could be of assistance.
The initiatives covered here are the tip of the iceberg. Each day seems to bring news in at least one of the above strand, impacting the sector, often with regulatory implications. This blog will strive to report on relevant news as it occurs.