Next month, I’ll be taking to the stage at Sibos to chair a panel about the topic of tokenisation with a view to uncovering why it is taking so long for digital assets (beyond the infamous cryptocurrencies) to take off. Representatives from banks and market infrastructures from all the major regions will be joining me and discussing how their local environments have fostered an appetite for digital experimentation, or not, as the case may be.
Firebrand has been researching the topic of tokenisation and the lessons learned thus far by the industry, including the ever-evolving regulatory agenda, over the last few months. Unsurprisingly, the most hostile regulatory environment to digital assets of all kinds is perceived to be the US market, largely due to the high number of enforcement actions taken by the Securities and Exchange Commission (SEC) over the last three years. The Commodity Futures Trading Commission (CFTC) has also been active on the enforcement front, but trails behind the SEC in terms of the volume of actions.
In 2021, the SEC took 17 enforcement actions alone and in 2022, the combined number for both agencies was 41. The next highest number for 2022 globally was three enforcement actions taken by the Bank of Thailand. The Australian Securities and Investments Commission (ASIC) took two actions and the Dutch, Japanese and Singaporean regulators all took one action in 2022. It’s fairly clear to see why the US is viewed as a challenging regulatory environment for digital assets and that doesn’t include this year’s slew of lawsuits.
Fear of regulatory action is something that commonly holds back firms from engaging in new initiatives and though tokenised assets are an adjacent and different space to cryptocurrencies, the lack of clarity around regulation of the whole market is a deterrent. It is hard to build a new infrastructure or new custody offering when you are unsure about how such an asset will be treated from a regulatory standpoint. Thankfully, some markets have introduced guidelines, registration processes and defined rules for tokenised assets such as France, Switzerland and to some extent, Luxembourg. It is in these markets that much of the experimentation has taken place from a European standpoint.
But what have firms learned? It takes a lot longer to get to grips with things like know your client (KYC) processes when the asset is digital but the identification and approval process isn’t. Digital identity is set to be a big talking point in the space. The legal obligations of various counterparties also aren’t as easy to navigate as most firms assumed when they went into these projects. Some firms have struggled with the concept of settlement finality on a public blockchain. Some have been internally debating the merit of a private versus public blockchain. Asset managers are still concerned about the sustainability credentials of the blockchain and what that means for their assets from an ESG perspective. Many are worried about the viability of the cash leg ever being solved with a central bank digital currency.
A lot of questions have been asked and not a lot of answers have been available. There’s been a lot of discussion and experimentation by certain markets and their domestic players but progress remains slow at an industry level. Has your firm missed the boat by being slow to engage? Don’t worry about it. Much like a teenager’s boasts about their prowess with the object of their affection, don’t believe the hype.
Don’t forget to come to our session if you’re in Toronto for Sibos next month – it’s 2.30pm on Tuesday!