Italian Banking Group: Bitcoin’s Advantage is its Network Effect


The European Securities and Markets Authority has published a number of responses stemming from a request for information on the topic of virtual currency.

The ESMA, which regulates securities activity in the European Union, first sought submissions from the finance and digital currency industries in April. The agency published 14 responses from participants such as German megabank Deutsche Bank, Italian banking group Intesa Sanpaolo, regional trade group European Central Securities Depositories Association (ECSDA) and interbank messaging network SWIFT, among others.

The submissions offer varied perspectives on how European regulators should approach overseeing activity on the continent. At the same time, the documents show how some of these organizations are adapting to the technology as it evolves.

Intesa Sanpaolo, like a growing number of banks worldwide, has gone as far as to establish an internal working group called an “Innovation Area” focused on cryptocurrencies as part of a broader effort to innovate on the technology side.

The letter noted:

“This Area is performing in depth research on virtual currencies and blockchain technologies. Through its dedicated task force, Intesa Sanpaolo is also implementing cryptofinance projects [and] integrating them with its strategic vision about the evolution of the financial services industry.”

The bank did not immediately respond to a request for further comment.

Bitcoin as potential ‘global standard’

Intesa Sanpaolo noted that among its possible use cases, bitcoin could function as a network for rights management, writing that “[the bitcoin protocol’s] potential is far from being fully explored especially as a means to transfer rights and value in a very secure way”.

The bank went on to suggest that ESMA avoid using the phrase “virtual currencies”, offering alternatives such as “distributed ledger technology”, “limited supply digital entitlement”, “digital scarce asset” and “mathematical commodity”.

At the same time, Intesa Sanpaolo wrote that among both implemented and envisioned distributed ledgers, bitcoin itself remains “the first and the most important of Internet of Value protocol”, citing the adoption of TCIP-IP over alternatives as possible precedent.

The bank wrote:

“There are high chances that it can establish itself as a global standard, as it leverages at least four powerful network effects: [the] bitcoin network has by far the largest hashing power (and so the greatest security), the higher capitalization, the largest user (and merchant) adoption, the best and largest developing and maintenance effort around it.”

The bank further argued that alternative algorithms, including proof-of-stake, are “still not validated from both a theoretical and an empirical point of view”, stating that NXT and other networks depend “on some kind of centralization in validation checkpoints”.

Call for dual oversight

The ECSDA, which represents 41 central securities depositories in Europe, said that it supports a regulatory regime for digital currencies, adding that such a framework “needs to be developed to avoid … disturbances to financial stability”.

Perhaps echoing a divergence to come as banks look at implementing bitcoin’s underlying blockchain for use as permissioned database instead of currency networks, it added:

“Looking at technological developments in conjunction with, but also separately from, virtual currencies and virtual currency investments, could enable securities regulators to find the right balance between promoting innovation and mitigating the related risks.”

On the other hand, the group said that its members from within the securities depositories industry are actively exploring the technology for use as a settlement mechanism but are not ready to disclose specific findings.

“Most of the work at CSD level however remains exploratory at this stage, and ECSDA is not yet able to share any conclusions,” it wrote.

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