How to make the digital asset markets grow – What can governments do to encourage the growth of digital asset markets?

[MAR 2024]

What can governments do to encourage the growth of digital asset markets?

Key Insights from this interview

The time in which regulators observed rather than intervened in digital asset markets is now over, and regulators are starting to work with the private sector to design effective regulations that match the pace of technological development, but progress would be much faster if a single regulator was given responsibility for digital finance.
The reliance of traditional finance on national forms of regulation is ill-suited to the genuinely global and highly mobile digital asset markets, as the constant migration of cryptocurrency exchanges in search of accommodating jurisdictions proved, so a major jurisdiction needs to establish a minimum standard all jurisdictions can support.
The principal benefit of regulatory sandboxes is not to produce Unicorns or drive the reform of existing regulations but to prove that existing regulations are adequate to the task of regulating digital assets, which is of greater value to institutions that are regulated already than to new market entrants whose businesses test existing regulations.
Experience has shown that existing frameworks of law are adaptable to novel conceptions of property such as natively digital assets, but at this nascent stage in the development of the digital asset markets, the flexibility of the law is less important than a clear line between what is acceptable within the law already and what must await the further evolution of the law.
Governments can influence the rate of growth of the digital asset markets directly by encouraging equity investment in smaller companies and issuing government bonds in tokenised form, which would have knock-on effects in encouraging atomic settlement using tokenised central or commercial bank money as the cash leg of the transaction.

Tokenised assets markets, though rich in the promise of cost savings and higher returns on investment, remain disappointingly small. However, the obstacles to the scaling of the digital asset markets are increasingly well-understood, and gradually being cleared. Legacy laws and regulations are proving more workable than expected, and being adapted where they are not. Experiments by regulators, central banks and private sector firms, sometimes in regulatory sandboxes and sometimes at BIS Innovation Centres, may not have bred a new caste of blockchain giants but they have proved that the technology works and legal and regulatory constraints are not fatal. Established intermediaries are losing their scepticism and fear of disintermediation and exploring the opportunities to profit. Whole new infrastructures, such a unified ledger or single programmable platform, are being conceived. Ways of putting central and commercial bank money on blockchain are being found. So it feels like the time is ripe for a business such as Quant, whose founders recognised at the beginning of the Initial Coin Offering (ICO) bubble in 2015-17 that the digital assets industry was creating potentially existential problems for itself in its lack of alignment with existing regulations, its failure to develop regulated forms of digital money on-chain to complete the cash leg of transactions and the determination of competing blockchain protocols to monopolise activity rather than capitalise on the network effects of making digital assets portable between blockchains. Since its foundation in 2015, Quant has focused on adapting blockchain technology to meet the needs of regulated banks, asset managers and insurers, and reassure the regulators and central banks that supervise them, by developing tools that enable blockchain protocols and traditional systems to interoperate successfully. Dominic Hobson, co-founder of Future of Finance, spoke to Gilbert Verdian, CEO of Quant.

A full recording of the interview is available on this page. A transcript of the interview, which follows the questions below, is also available if you click on “Read the Transcript.” If you click on any question you will be taken to the exact point in the recording where the question is asked and answered.

Read the Transcript

What should regulators do to encourage issuance and investment in the digital asset markets?

Is there risk in the possibility that copycat regulation leads to convergence on a single regulatory model for digital assets?

Have regulatory sandboxes outlived their usefulness?

In encouraging digital assets, is it more effective to allow existing laws to adapt to experience (as in the common law tradition) or to write new laws to accommodate new asset classes (as in the civil law tradition)?

Could governments accelerate progress towards digital asset markets by, for example, issuing government bonds in digitally native forms or imposing buy-ins for late settlement of transactions?