Reflecting on our UK crypto-asset roundtable discussion
Last week, we hosted a roundtable discussion on the regulation of crypto-assets in the UK, bringing together a group of industry participants. The event was hot on the heels of HM Treasury releasing its consultation paper in February regarding the UK’s financial services regulatory regime for crypto-assets.
The attendees brought a variety of different perspectives to the table, shaped by their experiences working at the FCA, trade bodies, regulated crypto-asset companies and global law firms. I was joined by our co-founder, Michael, and Head of Finance & Risk, Gareth.
The discussion covered a broad range of topics, primarily relating to the regulation of security tokens. No DeFi / Bored Apes here (maybe another time!).
HMT proposals are a step in the right direction
It was widely agreed that DLT has the potential to disrupt existing financial services, creating efficiencies through disintermediation and reduced costs, and that it is incumbent on global legislators and regulators to stay up-to-speed with these technological developments. The overriding sentiment in the room was that the government had made progress in the form of its consultation document and was gradually better familiarising itself with the broader crypto-asset ecosystem. The decision to forego a bespoke regime was acknowledged as being appropriate with regard to the “same activity, same risk, same regulation” principle, but it should be recognised that certain activities, such as custody, may be better served by bespoke regimes. One of the participants, who represented a trade body, highlighted the positive relationship between regulatory clarity and interest in crypto-assets from the member firms that he represents.
Despite the positive sentiment, it’s clear that there is still a long way to go, with our discussion covering the pressing need for industry-wide standards relating to crypto-asset identifiers, token standards and interoperability, for example. In terms of timing, one only needs to look at developments in Europe and the Markets in Crypto-Assets (MiCA) regulation as a proxy for how long it may take to frame an equivalent approach in the UK. The European Commission first came forward with MiCA in 2020, and a final vote is expected in April 2023. Firms in the UK will likely have at least 12–24 months before the precise scope of legislation and regulation becomes clear.
In order to reach the holy grail (i.e., robust regulation that effectively protects the needs of the consumer, however, provides sufficient opportunity for innovation that benefits all participants), the mindset of regulators will also need to shift from risk mitigation to unleashing the potential benefits of DLT. Understandably, the early focus from the regulator has been on mitigating against the bad actors looking to exploit uncertainty. Going forward, however, the regulator will need to embrace a paradigm shift in financial markets regulation and coordinate with the Bank of England and HMT to promote new policies regarding the system as a whole, rather than just parts of the system.
Regulation needs to keep the pace, but so does the law
While we have typically focused on the combination of regulation and technology in lowering the threshold for individuals to access private markets investments, a participant who had previously worked for the FCA for almost 25 years flagged the importance of the interplay between law, regulation and technology to enable the industry to flourish. Each component seems to be moving at a different speed, which isn’t entirely uncommon in a developing ecosystem, but getting this trifecta to combine to shape the planned framework is clearly going to be one of the government’s key challenges.
While the regulator has taken a technology-agnostic approach, legislation is not neutral in that regard and has the potential to create blockages in the system if it ignores technological intricacies. Security tokens traded on a multilateral trading facility (MTF) are a case in point. One avenue for trading security tokens on an MTF involves issuing into a central securities depository (CSD) and then tokenizing the issuance onto an MTF. This process would be significantly different in a potential future scenario, leveraging DLT, whereby CSDs could issue a token as a digitalised version. In the second scenario, new legislative questions would surely arise as to who holds the assets and the true record. The legal framework, unlike the regulatory framework, needs to keep up with the developing technology.
Onwards and upwards
The government has invited stakeholders to provide responses in a window that will close on 30 April 2023. We are eager to see how the industry responds, and we will be tracking developments closely. Needless to say, we’ll also continue to share our learnings from any future roundtable discussions!
