Digital Asset Regulation – Part 1

Introduction

Our focus in this series is to look at the latest regulations in the crypto space, and to discuss the impacts they may have on digital assets and what lessons the industry can learn from traditional financial services institutions.

We will be:

• evaluating and discussing how the latest regulations bring treatment of digital assets into line with the more accepted level of control that we have seen within traditional financial services.  This aligns with the Bank of England’s “same risk, same regulatory outcome” approach to digital asset oversight
• discussing stablecoins and how the recent collapse of Terra (LUNA) may sway regulators
• looking at the traditional space for KYC and financial crime control and how those obligations may map into the crypto space

With decades of combined experience, the guys are well placed to facilitate and provide some useful insights into these topics.  We hope you find these blog posts thought provoking.

Part 1 

Digital assets are here to stay. The asset class has demonstrated the overwhelming benefits and potential for opportunities of blockchain and distributed ledger technology.

The evolution of this technology has been met with some opposition from policy makers, regulators, central banks, and many incumbent financial institutions.  When you consider the adoption of digital assets by the latter, the industry has grown exponentially over the past couple of years, achieving a top market cap of USD3 trillion in November 2021 and fallen more than 70% to USD900 million at press time. By comparison, the value of UK bank notes in circulation is about £82 billion. The relevance of a market that is still almost 10x larger than the value of UK bank notes in circulation cannot be discounted.

As a result, we see policy makers across multiple jurisdictions scrambling to draft legislation to regulate the industry. This is a step that is very much welcomed by many participants as the industry would certainly benefit from clarity and transparency when it comes to the rules of engagement. The question is whether the new regulatory framework will stifle innovation and invalidate solutions to the real-life problems that digital assets currently offer.

We now find ourselves in a bit of an arms race between various jurisdictions to be the first to come up with meaningful legislation that will lead to adequate oversight of digital assets and their service providers.

• In the US, President Biden has issued an executive order calling for the regulation of the asset class.  This EO was followed up by multiple reports which outline a framework to regulate the space.
• The EU has provisionally approved the main topics of the Markets in Crypto Assets legislative proposal (MiCA). They have also approved the Transfer of Funds Regulation (ToFR).
• The UK is making inroads as well, in July 2022 stating, “The Government has announced its intention to legislate in the current session of Parliament to update the powers of the Bank of England and the Financial Conduct Authority to regulate and supervise stablecoins. We hope to issue a consultation document on the regulatory policy framework later this year. Taken as a whole, the UK authorities have made clear that they are prepared to see stablecoins – issued by either banks or non-banks – operate in the UK, provided they are properly regulated and supervised”

In the next post, the contributors will extol the benefits of digital assets and how they think those benefits may be impacted by the aforementioned regulatory efforts.

As these various pieces of proposed legislation take shape, we at GDFM will maintain a keen interest as many of our clients have requested we keep them apprised and to develop ways to help them navigate the digital asset regulatory terrain.