As the digital asset sector matures and policy makers design new rules to oversee this market, compliance has become a strategic battleground for market participants. Regulations that prescribe controls over ‘who trades what’ are being drafted and will include many check boxes for the transaction lifecycle. The great news is that TradFI has developed RegTech capabilities which can lower the barriers to entry to regulated markets. Smart contracts can now come with ‘compliance inside’, making this asset class the first to go digitally-native.
JWG convened a panel of experts to discuss this transition. Brian Yeoh, ADGM, Rudolf Siebel, BVI, Charles Kerrigan, CMS and Phil Langton, Securrency debated the top digital asset risks from a consumer perspective and tackled the role of RegTech in mitigating them. They also give a sneak preview of what they will be talking about at JWG’s 5 April seminar which will be accessible for 6 months.
The rise of Digital Asset compliance
Markets promote financial innovation while keeping to strict rules of conduct. With US, EU, DE, UK and other regulatory regimes now addressing the way in which digital assets are regulated, compliance is becoming ever more critical.
Market experts observed that as the size of the Digital Asset marketplace has grown to $3 trillion, that certain safety guidelines have been found missing. After FS market players spent decades investing billions in tight market controls, fraud, market abuse, greenwashing and other suspect behaviours in digital asset classes have taken some by surprise.
This means that the markets are going to get regulated and need to mature quickly. Simple control infrastructure will be introduced, like a golden source of reliable crypto a digital market data trading venues and brokers which is accepted by supervisory authorities.
Moreover, firms that aren’t willing to become compliant will face a very tough time maintaining their business models because of the types of fundamental regulation headed their way.
The digital advantage
As our experts pointed out: the benefit of having a token is that the entirely manual, paper process of issuing the asset can be fully automated and made transparent. The token itself is not the issue. The question which digital asset purveyors need to ask is: can a bad actor then use the assets to circumvent financial controls?
To know this, policies to control ‘who trades what, where’ must reside ‘inside’ the code. For example:
- Does the customer’s best execution policy permit the way it is acquired?
- Are pre-trade transparency guidelines for the asset being followed?
- Have ESG investment mandates been satisfied?
- Do sanctions rules prevent a transaction with a counterparty in that jurisdiction?
- Are any trigger suspicious activity report to the regulator?
Panellist were keen to point out that digitally native asset providers have an innate understanding of the need to think differently about how value is exchanged on new digital platforms. This is great news as the rise of RegTech over the past decade has provided plenty of new technologies and tooling that can help in their compliance journey.
RegTech lessons from TradFi rails
The days of open outcry and runners are long gone for most markets and the exchange’s trading floors have much fewer people, and far more computers. The great news for Digital assets is that RegTech tooling has evolved to offer solutions.
It may seem obvious, but digital assets need digitally native compliance. This means that the smart contracts need to automate the compliance policies and enforce the controls. These policies need to be linked to the global, single version of the regulatory truth.
The use of industry protocols and standards needs to be interoperable across asset classes, customer types and jurisdictions. Perhaps most importantly, it needs to be collaborative and enable law firms, service providers, standards bodies, trade associations and regulators to play a part.
Over the past decade, the industry had been developing RegTech tooling to support the trade lifecycle including:
- Golden-source libraries of regulatory obligations (e.g., JWG’s RegDelta)
- Industry protocols for interpreting requirements (e.g, eligibility, DRR)
- Common domain models to digitize the trade lifecycle (e.g., OTC, Securities)
- Standard messages (e.g,. FIX, ISO 20022)
- AML, sanctions and market surveillance tools
This tooling can be deployed enforce controls which are relevant for the nexus of the trade (e.g., Dodd-Frank, MiFID III for a US-EU transaction).
Armies of expensive lawyers, accountants, tax advisers and compliance professionals can now codify their advice and deploy it in a digital manner. Gone are the days of slaving over control spreadsheets and attempting to map in the updated regulatory standards to the controls.
For digital assets, this means that a very high barrier for entry to the markets just got a lot lower. Experts look forward to expanding on their insight about how digital asset firms can leverage RegTech for digitally-native compliance.
The bottom line is that the race to regulating this asset class and delivering good outcomes is on. RegTech will play a key role in helping the sector get up to speed with a more efficient and effective approach to compliance.
Come find the bit that matters to you at our 5 April conference which will be online for 6 months.
To listen to Season 2 Episode 5: ‘Protecting Digital Asset Investors’ click TBD
To listen to Season 2 Episode 4: ‘Managing Digital Asset Risk’ click here.
For more information on the US Presidential Order for Digital Assets, click here
For more information on the RegTech and Digital Asset agendas see here
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