Crypto bros might struggle to see it this way, but digital asset regulation has moved at great pace in a short time. Will it be fit for purpose? With interoperable standards on the way, RegTech has the power to unify digital and TradFi rails. Join an all-star cast on 5 April for our virtual conference to have your say and learn how.
A new digital rail
As gamers in a virtual world go hungry, will they take off the headset and get off the couch? No, in a couple of year they will simply stride down the digital lane to McDonalds, hand over their token, get an NFT for their loyalty and wait 20 minutes.
A recent BIS paper predicts that the De Fi ecosystem will drive exciting protocols for trading, lending and investing, and stable coins, which are crypto assets that facilitate fund transfers and aim to maintain a fixed face value vis-à-vis fiat currencies, mainly the US dollar.
The paper concludes that there is a “decentralisation illusion” in DeFi due to the inescapable need for centralised governance and the tendency of blockchain consensus mechanisms to concentrate power. As much as this may annoy the anarchy-prone crypto bros, they will at least be able to enjoy their burgers.
International financial services rules tend to move in concert and we marvel at just how far the digital asset regulatory agenda has come in the past 12 months. In December and January alone, JWG’s RegRadar picked up 59 relevant documents with 1,764 pages on Digital Assets – 61% of these being published by International and EU sources.
A year ago digital assets were not a top priority on the regulatory radars. Today, US firms face millions of fines for violation of crypto regulations, while clients need to undergo KYC checks in line with full application of the EU AML/CFT rules to the crypto sector EU regulation.
Now we have ESMA consulting on a DLT Pilot for transparency, the UK restricting the marketing of crypto assets, in preparation and over half a dozen major economies having concluded studies on the suitability of CBDC. Germany has paved a path towards the EU’s MiCA with the e-securities act and tokenized fund law.
The US is preparing for an executive order on crypto this week amid concerns that it could be used to avoid sanctions and UK FCA board minutes have let it be known that new rules are on their way.
The RegTech junction
At the heart of the digital asset compliance question lies an equivalence question: have we applied guidelines required that are at least as good? If assets are public, the issuer needs to be public and take responsibility for the information provided and ultimately the seller needs to account for the counterparty which purchased the asset and report it to the market and regulators.
To connect digital assets to the rails of traditional finance (TradFi), the complicated compliance rule sets which dictate who can trade what, and where need to be applied. For institutional investors to be able to fulfil their mandates, lots of digital boxes need to be ticked.
From a policy perspective, AML/KYC, ESG impact, transparency and market abuse remain the primary concerns.
Fortunately, most of these concerns are also shared by large financial institutions as they struggle to digitize their massive IT infrastructures and deploy RegTech which works to new standards.
It is quite possible that the two communities will be able to get synergies from learning how to pre-program a distributed ledger for tricky obligations like digital regulatory reporting.
Digital safety standards
As Digital Assets move into the realm of TradFi, the interoperability, transparency and liquidity of the markets depend on common safety standards and communication protocols within the FS infrastructure.
The great news is that much of the hard work has been done. Counterparty identification is mandated through the Global LEI Foundation, standard product identifiers (e.g., DSB UPI) and standard token identification through the DTI foundation.
As more assets move ‘onto the chain’, TradFi and DeFI compliance trading obligations are able to deploy RegTech tooling which is already in the market to understand their compliance obligations, and put in place the appropriate policies and monitor the controls. Increasingly, this can be done through standardised risk-management frameworks like the common domain model.
This will help assure market participants as to the levelness of the playing field, drive innovation and increase liquidity. A perfect storm of innovation, regulation and standards coming together – who would have thought that this would be just what the market needed in 2022!
5 April Conference
JWG has assembled an all-star cast of speakers from legal, policy, operations, technology and compliance communities to cover
- The state of global digital asset policy: BIS, BVI, CMS
- Protecting investors: ADGM, Former FDIC, GDCA, ING
- Protecting the markets & FMI: B2C2, SWIFT, Zodia Custody
- Managing risk: Credit Suisse, DTIF, Securrency
Read more here but by the time you read this, regulation will have changed. Come catch-up on the latest developments!
Why join JWG conferences: Since 2008, our RegTech Conferences have consistently proved to be the ideal forum for FS market leaders and decision makers, to have comprehensive and constructive discussions with their peers, regulatory bodies and technology innovators.
We want to see how we can get these changes done in a better, faster and smarter way – RegTech can help. Be part of the solution and join us to shape the debate.