Analyzing the Regulatory Response: Cryptoassets and Digital Assets

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Keith Bear. Source: CCAF

Keith Bear is a fellow at the Cambridge Center for Alternative Finance, portion of the Judge Business School Bee Cambridge University. Previously, he was like IBM Fintech Head.

Over the past 2 years, we’ve witnessed multiple trends in the world of digital assets, with the rise and fall of ICOs, the Cryptoasset pricing rollercoaster, the rise of decentralized finance and the announcement of Libra. Not surprisingly, regulators’ response is fragmented and slow to respond by crypto world standards – although perhaps relatively quickly by traditional financial services standards.

To examine the current state of affairs and future prospects, it is probably helpful to first clarify the distinction between Cryptoassets and digital assets. At the Cambridge Center for Alternative Digital Finance (CCAF) (as discussed in our 2019 Cryptoasset Regulatory Landscape Study) we consider Cryptoassets as a subset of digital assets – tied to an open / permissionless network where their presence is a fundamental part of the network’s operation and for which there is no formal issuer, as shown below.

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Digital assets: A digital unit of data in a shared system that is jointly maintained and updated by multiple parties and that (i) can be directly managed by the holder of the asset via cryptographic keys, and (ii) represent a range of rights.
Digital assets are: (i) expressive, (ii) controllable via cryptographic keys, and (iii) compatible.
Cryptoasset: A digital token that (i) does not have a formal publisher, (ii) is issued and transferred exclusively through open, consent-free distributed ledger technology (DLT) systems, and (iii) plays an indispensable role in the economic stimulus design of the underlying distributed ledger or application such that separating the asset from the underlying network would harm the system as a whole.

So, given the onslaught of innovation, change and some outrageous practices, how have regulators around the world responded?

The response so far

The regulatory response is varied to say the least. Regulatory clarity has been influenced by both a lack of consistent terminology and a tendency to confuse the nature of an asset (bond, equity, etc.) and the form it takes (whether token , a ledger entry or a physical certificate).

That said, we’ve seen several regulator responses around the world, which can be divided into four categories:

  1. Use existing regulations (such as Korea’s Financial Investment and Capital Markets Act)
  2. Development of a new tailor-made regulatory framework (such as Thailand’s emergency decree)
  3. Adaptation of existing regulations (such as in Japan, Switzerland and Estonia)
  4. Developing a broader tailored regulatory regime covering cryptoassets and other activities (such as in Mexico).
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It is interesting to note that adjusting current regulations is a much more likely path in those jurisdictions with a high level of Cryptoasset business (just under half do this in our 2019 survey).

Look forward to something

Clearly, the significance and impact of digital assets is increasingly recognized by regulators around the world, if only by the wake-up moment facilitated by FacebookLibra announcement.

So, what can we see in the coming years? Will the variety of regulatory responses observed so far consolidate into a smaller number of approaches focusing on international cooperation and best practices? While it is too early to say in many ways, there are a number of developments that should give us hope:

1. Anecdotally, consistency in definitions and treatments should gradually emerge. In our experience, many regulators take note of the pioneers in digital asset regulation, such as Liechtenstein, Wyoming, Switzerland and the efforts of the UK Justice Task Force; to ensure that they learn from these initiatives and apply relevant elements in their own jurisdictions.

In addition, the number of international DLT and digital asset collaborations (BoJ/ECBIs Project Stella, Bank of Thailand/HKMAIs Lionrock-Inthanon, MAS/Bank of CanadaUBIN / Jasper) also point to a more consistent future with greater clarity in the role that digital assets can play in the wider economy.

2. Emerging Standards: Examples like the Token Taxonomy Initiative with some big names (including Accenture, Microsoft, R3 and IBM) given hope for standards that promote interoperability between token-based networks.

3. And of course work in promoting collaboration and best practice across the industry, led by organizations such as Worldwide digital financing.

In summary, from a position of fragmented and inconsistent responses from regulators around the world, it seems that we are ignoring the importance of the role that Cryptoassets and more generally digital assets will play in the wider economy. The indicators of industry initiatives, cooperation between regulators and central banks, and the lessons learned from breakthrough regulatory systems all point to a more homogeneous approach to regulating the growing role of digital assets.

This article first appeared in the annual report from Global Digital Finance.

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