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The objective of ESMA’s work in financial innovation is to achieve a co-ordinated approach to the regulatory and supervisory treatment of new or innovative financial activities, and provide advice to the European Parliament, the Council and the Commission.


According to Article 9(4) of ESMA's founding Regulation, ESMA shall establish a Committee on financial innovation. Within this framework, ESMA’s Financial Innovation team monitors financial activities in general and financial innovation in particular.  The main objectives are to ensure that supervisors, policy makers and market participants are aware of innovations that may undermine investor protection, give rise to financial instability or threaten market integrity. This work is achieved through the Financial Innovation Standing Committee  of ESMA.  

At the same time, a key premise of this work is the realisation that financial innovation has beneficially contributed to some of the key economic pillars through which finance operates and has brought investors and consumers material improvements in their quality of life.

Our work in this area relies on market intelligence from the FISC, its Consultative Working Group, ESMA staff, meetings held with non-EU regulators and market participants and from research undertaken by the department itself.


Crowdfunding is a means of raising finance for projects from ‘the crowd’ often by means of an internet-based platform through which project owners ‘pitch’ their idea to potential backers, who are typically not professional investors. It takes many forms, not all of which involve the potential for a financial return. ESMA’s focus is on crowdfunding which involves investment, as distinct from donation, non-monetary reward or loan agreement.

ESMA’s work on investment-based crowdfunding, which included an article in ESMA Trends, Risks and Vulnerabilities report in September 2014, culminated in the publication of an Opinion to NCAs and Advice to the EU Parliament, Council and Commission in December 2014.

To accompany ESMA’s response to the Commission’s consultation on CMU, which asked questions about crowdfunding, ESMA published our analysis of a survey of the NCAs about regulated investment-based crowdfunding platforms in the EU. ESMA has also published Q&As on money laundering and terrorist financing in relation to investment-based crowdfunding.

Virtual Currencies and Distributed Ledger Technology

ESMA has monitored Virtual Currencies (VCs), such as Bitcoins, since 2013. In April 2015, ESMA published a call for evidence on investments using either VCs or Distributed Ledger Technology (DLT). The results of the call for evidence showed that investments using VCs as underlying remained marginal.

However, the underlying technology has the potential to be used by financial markets outside the space of VCs. This may have possible disruptive effects. In June 2016, ESMA issued a Discussion Paper to seek feedback from the market on the technology. In February 2017, building on the responses to the Discussion Paper, ESMA published a report on DLT. The report sets out ESMA’s analysis of the key benefits and risks of DLT applied to securities markets and looks at how DLT interacts with the existing EU regulatory framework.

Distributed ledgers - sometimes known as ‘Blockchains’ - are essentially records, or ledgers, of electronic transactions, very similar to accounting ledgers. Their uniqueness lies in the fact that they are maintained by a shared or ‘distributed’ network of participants as apposed to a centralised entity.

Another important feature of distributed ledgers is the extensive use of cryptography, i.e. computer-based encryption techniques such as public/private keys and hash functions, to store assets and validate transactions. Until today the most widely known application of DLT is the public ledger of transactions for VCs. More recently, the use of distributed ledgers may be extended to traditional financial services.

Contingent Convertibles

Contingent Convertibles (CoCos) are unsecured bonds with specific features that enable them to be converted or written down at a certain trigger event or at the discretion of the supervising authority. An initial article on CoCos was published in the Trends, Risks and Vulnerabilities report in 2013. In July 2014, ESMA published a Statement to institutional investors to clarify the risks of investing in CoCos.

Loan Participation Funds

Loan Participation funds provide investors with exposure to a diversified portfolio of secured bank loans. ESMA published a background articleon the more mature loan participation fund market in the United States, to describe its features, regulatory performance and risks.

Alternative indices

Alternative index products have grown rapidly since the financial crisis. While they minimize certain weaknesses of traditional market cap indices they expose investors to different potentially risks. For example, in order to construct an index that seeks to minimize risk, index providers may weight securities according to their volatility instead of weighting them according to market capitalization. This can have the side effect of a more concentrated sector exposure which may introduce other risks. While alternative index products are not necessarily more risky than traditional index products, they are frequently more opaque. A low level of transparency around construction methodology and simulation makes it difficult for investors to understand the risk and return profile of alternative indices.

Structured Retail Products

ESMA published an Opinion on Structured Retail Products, providing good practices for product governance arrangements. These good practices that product providers could put in place to improve their ability to deliver on investor protection in particular focus on:

  • the complexity of the structured retail products they manufacture and distribute;
  • the nature and range of investment services and activities undertaken in the course of business; and
  • the type of investors they target.

ESMA expects national competent authorities to embed these good practices in their supervisory approaches to structured retail product providers.

Other activities

  • Financial Innovation Day

The Financial Innovation Day is a primary source of knowledge in helping us monitor innovation. The Day provides us with a unique perspective on developments in the EU financial markets and acts as a forum to share insightful ideas with peers, academics and practitioners. Its audience is composed of regulators from the 28 Member States.

ESMA holds annual Financial Innovation Days. The last day is presented on the Financial Innovation Day 2017page.