TL;DR The Cryptoasset market is growing and needs a global rule set. Securities tokens are coming, and they need a clear rule set too. The advantage of this new tech is that it’s global, so we need a global “code of conduct” which is an industry led way to set and manage rules in an unclear regulatory space. Today GDF announces and launches it’s “GDF Code” and public support from Messari, ConenSys, Circle, R3, Hyperledger and over 170 organisations and professionals for the ongoing development of a professional Code of Conduct for Cryptoassets and Tokens.
The Need for Change
Two themes are driving opportunity in financial and crypto markets.
- Tokenising existing payments or financial agreements
- The maturing and increasingly sophisticated cryptoasset markets
1) Tokenising Known Assets for Efficiency
At the highest level, the financial industry has three types of asset
- Listed market instruments
- Alternative assets.
All three of these are managed with varying degrees of “digitisation” throughout the industry. Since the financial crisis in 2008, regulators have pushed for increasing transparency. But with so many different actors in the market, intermediaries and jurisdictions, the complexity of understanding who owns an asset and coming to agreement (or consensus) about a set of facts is increasingly challenging.
For cash, the major problem isn’t the messaging standards (e.g. SWIFT) but the different processes inside it’s member organisations and getting everyone to consensus.
Listed Instruments & Alternatives
Similarly with listed instruments (bonds, stocks and derivatives) and alternative assets (private equity, real estate, art, wine etc) buying or selling an asset often takes weeks. And requires many organisations, in many jurisdictions using many different processes to come to agreement.
What is new about the advent of the token (e.g. Bitcoin) is that everyone in the network came to agreement about where that Bitcoin was. It’s digitally unique. If one wallet has a bitcoin, another does not. There’s a lot of nuance missing here, but imagine this for existing and known assets. Therefore many institutions are becoming excited by tokens.
Solving this challenge even partially has significant benefits. In theory, if other asset classes worked like cryptoassets (sometimes tokens or crypto tokens) in which everyone came to agreement about who owned the asset, and what (if any) lifecycle events need to happen next (e.g. Alice sold to Bob, now tell Rita and Sue too).
2) Managing the Cryptoasset and Token Markets
Against the backdrop of the excitement around financial asset tokens and payment tokens the cryptoasset market in the H2 2017 saw tremendous growth. Whether driven by speculation or real investor appetite, in the past 12 months the industry has seen a migration from being retail investor led to institutional trading desks and institutional grade trading venues.
This has not been a rise without challenge; regulators and governments are concerned with the potential for money laundering and terrorist financing. There is also no clear global framework, despite the assets themselves being global in nature. The rise of the Initial Coin Offering (ICO) means the mass market are exposed to “investments” that do not carry the protections you might expect in mature financial markets.
Global formation of capital // Next generation private placement.
The reality is that the ICO market is dwindling since regulatory scrutiny has increased. The ICO has been replaced by a new form of capital raise for companies large and small. This new capital raise (sometimes called a securities token offering or STO) is a way to attract global investment using the same underlying tech many used for the ICOs but in a more compliant manner.
Attracting a global investor means companies and ventures have a broader pool of liquidity and possibly higher likelihood of receiving investment. The entire process is digital and transparent from the outset, with some companies claiming a reduction in end-to-end process time for a private placement from 6 weeks to 6 days.
Why a Global Code of Conduct?
The idea of a code of conduct has been around for some time in financial services. In recent years global standards bodies and industry convened the “FX Code” to manage conduct in the FX industry. Other examples include the UK crowdfunding and P2P lending industries.
A code of conduct is a starting point for industry to have a shared rulebook. Typically, industry has a nuanced understanding of its market dynamics and can forge principles likely to be adopted and to be effective. The FX Code is an interesting example because like the cryptoasset industry, the FX industry is global and had no clear regulatory authority.
Global Digital Finance can stand on the shoulders of work by regional organisations such as Cryptovalley, the Brooklyn Project, Token Alliance, and almost too many to name here. All these projects are taken as inputs for Global Digital Finance and synthesised into the work now being done.
What is GDF and the GDF Code?
Global Digital Finance is an open community which already counts key organisations such as Circle, Consensys, Hyperledger, R3, Coinshares, Indiegogo and many more behind the scenes as contributors.
Today we’re publishing the Code of Conduct for Cryptoassets (and a supporting Taxonomy). Organisations can publicly support and adopt these principles. This is a public consultation which will run for 60 days. You can find the documents HERE and give us your feedback HERE. You can also sign up to publicly back GDF through this FORM.
Benefits to Financial Markets and YOU
The space is still early, but we believe the adoption of the GDF Code will lead to:
- Efficient, fair, and transparent markets
- Take private placements from 6 weeks to 6 seconds
- Title 2 Jobs act and crowdfunding for financial inclusion for the masses
- Protect investors using the tools this new tech brings us
- Increased liquidity pool for entrepreneurs and a new route to capital
What Happens Next?
From today more than 140 organisations and professionals have contributed to this code. You too can contribute and publicly support the Code. The consultation closes on 30th August 2018. At which point the GDF Community and working groups will reconvene to build in key feedback on the next version of the Code.
The community is also starting work on additional principles for actors in the marketplace. If you’d like to learn more about the Global Digital Finance Community, visit the website at GDF.io