As interest in “digital assets” and their potential benefits has grown, so too has the regulatory focus and the variety of use cases being adopted. Technological innovations, such as cryptography and Distributed Ledger Technology (DLT), are also closely associated with digital assets, and many different definitions and terms are being used across the industry today to describe this broad concept.
On November 22nd, five panellists from Europe’s capital markets discussed this important topic for Europe at the AFME’s 2nd Annual Capital Markets Technology & Innovation Conference in Paris.
Richard Hay, Linklater’s UK Head of Fintech, moderated the panel and opened by asking the panellists to help unpick the complexity surrounding the digital assets space.
Teanna Baker-Taylor, Executive Director of Global Digital Finance, started the discussion by describing a digital asset as something that has been tokenised, emphasising that this wide scope encompasses a range of products, from crypto-currencies such as Bitcoin or Ethereum, to traditional securities (e.g. tokenised securities).
When asked about his firm’s journey into the digital assets space, Teunis Brosens, Lead Economist for Digital Finance and Regulation at ING, said that there has been various stages of acceptance and denial in the market. Having a clear separation between the various terms that encompass digital assets was important for ING to increase acceptance of blockchain technology within the firm.
Brosens emphasised that having regulatory clarity and delineation on the different types of digital assets will help market participants reap the benefits of the underlying technology (e.g. DLT) and move discussions beyond Bitcoin.
Regarding the regulatory treatment of digital assets, Adrien Delcroix, a Market Infrastructure Expert at the European Central Bank (ECB), confirmed that digital assets would have to comply with relevant financial regulation. He also underlined that, since the innovative nature of those assets often lies in their built-in transfer arrangement, the application of the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs) needs to be considered in parallel with the regulatory classification of the asset.
In this regard, operational resilience of DLT networks is a key concern. He noted that the distributed nature of DLT arrangements could improve resilience by reducing single points of failure, while increasing the surface of attack from a cyber risk perspective. In his view, fully decentralised systems with no accountable entity are not a desirable feature and such arrangement would not be permitted under current regulation.
Swen Werner, Managing Director and Global Product Manager at State Street, said that overall regulation currently allows for the adoption of new technologies to support digital assets, but specific requirements ought to be reviewed. For instance, he noted the European Central Securities Depository Regulation (CSDR) should be adapted to fit to the transaction lifecycle of digital assets, where it may not be necessary to have a settlement agent or a Central Securities Depository (CSD).
Adding to this, Daniel Heller, Head of Regulatory Affairs at Fnality International, noted that the issuance of regulatory guidance helps market participants get a better understanding of how to apply the current regulatory framework, clarifying or even resolving certain issues with regulatory compliance.
The panel concluded by emphasising the encouraging discussions currently taking place between financial services firms, and regulators, in identifying areas of the current regulatory frameworks which require additional consideration in a DLT environment. Panellists agreed that it will be crucial to maintain an open dialogue across the industry in order to mitigate risks and better realise the benefits that digital assets and DLT can deliver.
In a report published earlier this month, AFME called for greater supervisory convergence in the regulation of crypto-assets in Europe, and provided five recommendations for regulators in delivering this convergence. This included recommending that regulators establish a pan-European taxonomy in order to harmonise the classification of crypto-assets. The report is available to download on our website here.