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Why the case for regulating cryptocurrencies is becoming unanswerable – Transcript

The transcript of the webinar of May 26 2022 entitled Why the case for regulating cryptocurrencies is becoming unanswerable.

TRANSCRIPT

What is the case for regulating cryptocurrencies?

0.25 Dominic Hobson: Hello everybody. I am Dominic Hobson, co-founder of Future of Finance.  Welcome to our webinar, ` Why the case for regulating cryptocurrencies is becoming unanswerable.’ 

The original description of the original cryptocurrency (Bitcoin) by Satoshi Nakamoto envisaged a trustless, unintermediated method of transferring value. Ironically, it may now be the case that the survival and growth of the “cryptocurrency” markets depends on the trust created by regulators, by regulations and (worst of all) regulated intermediaries. Indeed, regulations – and especially the Travel Rule – are already stamping out the immortal part of Bitcoin and the foundation of its early success – namely, anonymity. Yet the case for regulating cryptocurrencies is becoming harder to resist by the day. Cryptocurrency thefts, scams and hacks leading to investor money being stolen seem never to end: an average of 66 a year since the first major hack at Mt Gox way back in 2014. The cryptocurrency markets are clearly being manipulated, with mounting evidence of “pump and dump” schemes, in which organisers synchronise purchases of a chosen cryptocurrency to inflate its price, generate interest from other investors, and then offload the cryptocurrency for a profit. It is also increasingly obvious that the profits from cryptocurrency trading are accruing to professional traders while the losses accrue to retail investors. Cryptocurrency is being used to evade tax too, especially in emerging economies, where cryptocurrencies have also become an important route around capital controls as well as taxes. Then there is the sheer mounting toll of financial crime. The extension to cryptocurrencies of the Financial Action Taskforce (FATF) Recommendations on anti-money laundering (AML) and countering the financing of terrorism (CFT) – at what seems an age ago, back in October 2018 – signified official concern even at that early stage that cryptocurrencies are being used to launder money and fund terrorism. Now, nearly four years on, FATF and the European Union (EU) are asking more insistently what exactly the industry is actually doing about it. As the cryptocurrency markets increased in size – and indeed as they have more recently decreased in size – concern has risen about their links to conventional markets, and the increased the risk of negative spillover effects in the traditional financial markets. The market infrastructures that support cryptocurrency trading and investment have long since proved inadequate, with unconscionable delays in settlement and indefensible surges in settlement fees, creating concern that the system might actually fail altogether, and so create instability through a backlog of unsettled transactions comparable with that which occurred in the conventional equity markets in the late 1980s. More positively, there is a growing conviction that the failure to regulate cryptocurrencies has stymied the growth of the (regulated) security token markets because potential issuers and investors are struggling to distinguish between the two types of instrument and the two types of market. There is I think a realisation, even within the cryptocurrency industry itself, that the growth of the market now depends on institutional money, and that institutional money at scale demands regulated status. Certainly, investors are calling for regulatory clarity. Even the more speculative investors are doing that. Everybody needs to know which “digital assets” are inside the regulatory perimeter and which are outside it, so they can proceed with confidence rather than simply taking legal advice on a case-by-case basis. Certain of the more respectable cryptocurrency exchanges and digital asset custodians have read the writing on the wall: they are moving towards regulated status. So our subject today is both topical and urgent. And to help us find our way around it we are joined by Barney Reynolds, who is Global Head of Shearman & Sterling’s Financial Services Industry Group, which advises financial institutions and infrastructures, governments and public bodies, including on financial markets regulation. Oliver Linch, CEO of Bittrex Global, the first digital asset exchange to be regulated in Liechtenstein, where its head office is located, though the company has additional offices in Zurich, from where the majority of its operations are run, and Bermuda, where it is regulated and licensed by the Bermuda Monetary Authority. Siân Jones is senior Partner at XReg Consulting, a policy and regulatory affairs consulting firm specialising in crypto assets. And Wilf Odgers is an Associate at Shearman & Sterling’s Financial Institutions Advisory & Financial Regulatory Practice.  In addition to our panellists, we as always also have you – our audience. And all five of us encourage everybody watching or listening to submit questions and comments throughout this webinar using the Q&A functionality at the bottom of your Zoom screens.  I won’t be saving those questions and comments up to the end but will endeavour to address them as we go along. So, as usual, you can be an integral part of this discussion right from the outset. I’d like to begin by asking Wilf to share with us his presentation on the present state and likely prospects of crypto-currency regulation in five jurisdictions. Wilf, over to you.

5.28: What are the major jurisdictions doing to regulate cryptocurrencies?

5.28 Wilf Odgers: Thanks very much, Dominic. And thank you, everyone, again for joining. And before we jump into the panel session, we thought it might be useful to do a whistlestop tour of how crypto is regulated in six key crypto jurisdictions, being the UK, the US, EU, Singapore, Switzerland and, in honour of Ollie Lynch and Bittrex Global, Liechtenstein. The table on screen is very much intended to be only a summary and there are of course many nuances hiding beneath the words in each cell. But a glance at the slide is enough to show you that it’s fair to say that cryptocurrency regulation is anything but harmonised globally. Each jurisdiction is plotting its own route, some by working out whether cryptocurrencies can be shoehorned into their existing financial services regimes, others by attempting to develop brand new frameworks to govern them. Additionally, at the asset level, the overarching message we are seeing is that there is no one-size-fits-all approach, and the regulatory status of each cryptocurrency will necessarily depend on the facts. So how market participants should view cryptocurrencies from a regulatory perspective differs from jurisdiction to jurisdiction, and then in some cases on the characteristics and use-cases of the cryptocurrency in question. Some jurisdictions are bringing in detailed laws to regulate each type of cryptocurrency for example the EU’s Markets in Crypto Assets Regulation (MiCA). This will regulate crypto asset service providers and introduce a disclosure regime for the issuance, offering and admission to trading of crypto assets, including Stablecoins. The marketing of crypto assets will also be regulated under MiCA and cryptocurrency derivatives are already subject to regulation under the [second iteration of the] Markets in Financial Instruments Directive (MiFID II). Meanwhile, the UK has adopted a more wait-and-see approach, but has announced some regulatory changes and further consultations are scheduled. It seems to be introducing regulation bit by bit, focusing first on marketing and finance promotions, although of course, cryptocurrency derivatives are regulated and their sale to retail clients is banned. We’re expecting a further consultation from the Treasury later this year on regulating a wider set of crypto activities, including trading cryptocurrencies. The regulation of Stablecoins is also imminent, and the issuing or facilitating [of] the use of them as a means of payment will be brought into the UK regulatory perimeter. Marketing of cryptocurrencies is also subject to regulation by the Advertising Standards Authority (ASA), who have been fairly active in cracking down on non-compliant crypto advertising, including on various Instagram influencers who have fallen foul of the rules, often unwittingly. The US regulatory architecture makes it difficult to navigate the regulation of crypto there. There are numerous Federal level regulators each vying for supremacy in the crypto space on top of the various regulators in individual states that are also making their own laws. 

Jurisdiction Comparison Summary









UKUSEUSingaporeSwitzerlandLiechtenstein







CryptocurrenciesUnregulatedRegulatedUnregulatedUnregulatedUnregulatedRegulated
Cryptocurrency derivativesRegulatedRegulatedRegulatedRegulation dependent on structureRegulatedRegulated
Cryptocurrency fundsRegulation dependent on structureRegulatedRegulation dependent on structureRegulatedRegulatedRegulated
MarketingSupervisedSupervision dependent on structureSupervisedSupervisedSupervision dependent on structureSupervised
StablecoinsUnregulatedUnregulatedUnregulatedRegulatedRegulation dependent on structureRegulation dependent on structure
AML DDYesYesYesYesYesYes
Travel RuleNot yetYesNot yetYesYesYes

NB: Green text denotes upcoming changes

So cryptocurrencies are by default commodities, and so therefore regulated by the Commodity Futures Trading Commission (CFTC) unless they’re classified as securities under the so called Howey Test, in which case the Securities and Exchange Commission (SEC) has jurisdiction. The result is something of a land grab between the two regulators and others, resulting in uncertainty. [President] Biden’s Executive Order earlier this year at least showed progress, and it’ll be interesting to see how the regime is developed in the future. Progress is also being made on Stablecoins. A  [President’s] Working Group [on Financial Markets] recommended last year that Congress enact legislation establishing a Federal prudential framework for Stablecoin arrangements. Singapore, so often heralded as a crypto-friendly destination in the past, appears to have recently distanced itself from this label. Its regime is also not as friendly as it portrays [itself]. Rather than having a deliberately welcoming regime, it relies on what appears to be a loophole in its legal drafting to permit certain crypto-related business without regulation. It generally does not regulate major cryptocurrencies, but the picture is murkier for others, and often relies on a case-by-case analysis, legal opinions and/or a blessing by [the Monetary Authority of Singapore] (MAS). The regulation of marketing is tied into how the crypto asset itself is treated. So if it is a security, it’s subject to the same marketing restrictions imposed on securities; if not, and therefore for cryptocurrencies such as Bitcoin, marketing is unregulated. The Swiss are adopting a technology-neutral approach and applying existing laws with regulatory guidance as a top-up. Cryptocurrencies are not yet regulated, and there’s not yet any specific regulation of cryptocurrency derivatives although [the Financial Market Supervisory Authority] (FINMA) has advised that certain Stablecoins may qualify as derivatives in some circumstances, and therefore be regulated, but Stablecoins more generally are not specifically regulated. FINMA’s view is that one-to-one Stablecoins with fiat [currency] are equivalent to deposits under banking law. Likewise, marketing of crypto is largely unregulated. But Switzerland does have a [Distributed Ledger Technology] (DLT) law governing the tokenisation of financial instruments, including registration requirements. Lastly, Liechtenstein perhaps has one of the most developed regimes and that is partly why you see a large exchange such as Bittrex Global operating there. Its  Blockchain Act specifies the nature of digital assets and the requirements for professional services rendered in connection with those assets. While owning or using cryptocurrencies is not restricted, the issuance of tokens and provision of payment services in connection with cryptocurrencies may require a licence. Likewise, issuing Stablecoins may be licensed under existing securities laws. So, despite these differing approaches, there are points of commonality. Most regulators are concerned about consumer protection and have put in place limits and sometimes bans on retail interactions such as the one in the UK I mentioned earlier. Another common regulatory concern is contagion across the financial markets as more and more financial institutions – you know, traditional financial institutions – become more involved in the crypto world, it becomes more of a concern. And as the slide shows the approach to [Anti-Money Laundering] (AML) due diligence is largely harmonised in part, of course, thanks to FATF. In all jurisdictions, crypto exchanges and custodian wallet providers are required to register for AML purposes. There is also the so-called Travel rule of FATF. This requires financial institutions to exchange information on the originator and beneficiary of transfers of crypto assets. This is largely also relevant to exchanges and custodian wallet providers. It’s been applied already in the US, Singapore, Switzerland and Liechtenstein and is on its way in the UK and the EU. Given that many in the crypto and financial industry, as well as regulators, have called for a global approach to regulation, it will certainly be interesting to see whether this comes to pass anytime soon. On which note. [now] seems like a good time to hand back to Dominic for the panel session. If there any questions on this slide or what I’ve just discussed, obviously, we’ll be happy to answer them during that session.

13.07: Is there still an argument for regulators to “wait and see” how the cryptocurrency markets develop further before regulating them? 

13.07 Dominic Hobson:Well, thank you, Wilf, for that admirably succinct summary of six jurisdictions. I’m impressed you’re able to cram quite that much information into so short a time. I’d reiterate my suggestion to the audience that do please send your questions in straight away for Wilf or any of our other panellists as they occur to you. But l’d like to begin by asking Barney, I think, in particular, whether the remark I made at the outset, which is that the more forward-thinking exchanges and the more institutionally-minded custodians are actively seeking regulatory status. And does it make sense for – given what Wilf has said about the fact that there is no harmonisation across these six jurisdictions except on the question of Anti-Money Laundering – does it make sense for any of these regulators to let the situation run and wait for the industry itself to wake up to the fact that actually having regulatory endorsement is a very good idea [because] it will help your business attract different types of clients and grow faster? Or do you think the regulators are now in a situation where they’re actually going to do something?

14.21 Barney Reynolds: I think they are gearing up to doing something. I mean, it’s very difficult intellectually to craft regulations for something so different from what’s been coming before. So that’s why many of them have taken time on this and are still thinking about it, because getting it right involves, you know, navigating this sort of nexus of law, rigor, law including conflicts of laws and whose legal system applies when and how and when and where. Then also, regulation itself – which rules should apply. And the nature of this asset class [is] that it introduces new risks, which are not really dealt with in the regulatory frameworks of the world currently. So those need properly examining, and in order to understand those then you have the third thing to understand, to look at, which is how these … how the technology works, which is itself extremely complicated. There are explanations being put up all the time on the Internet on it and being discussed. That, you know, that’s an evolving understanding, it seems to me of that as well. So I think it’s highly complicated. I do think the regulators are doing … are gearing up – the main ones – are gearing up to doing something quite serious. MiCA obviously is the first sort of cut [or] attempt from a major regulatory jurisdiction. The UK is deep in thought. Obviously, we benefit from the common law system so that we allow things to run, perhaps more by instinct, before stepping in. And I think currently that is the right approach still. But clearly, things will happen. The US is clearly gearing up as well.

16.02: Can cryptocurrency regulation follow the usual regulatory pattern of being technology-agnostic or is cryptocurrency different from traditional financial instruments?

16.02 Dominic Hobson: Let me pick you up before I let you go, Barney, on one of the points you raised there about the technology itself. Because one of the things that is different about cryptocurrencies – and indeed, in due course, will be correct about any type of tokenisation – is that you can’t be technology-agnostic. Wilf mentioned that Switzerland’s adopting a technology-agnostic approach, and, historically, in the UK as well regulations tend to be technology-agnostic. But the technology actually is the thing here. Is it actually possible when people active in these markets are not actually exchanging information or data about assets; they’re actually exchanging the asset itself; the asset is written into the technology; it’s serviced by the technology. So it’s inherent in it  – it is the thing itself. Is that one of the one of the problems that you have in in crafting regulation for this sector? Actually, for once you simply can’t be technology-agnostic.

16.55 Barney Reynolds: To a degree. I mean, so digital assets as a class, from my conversations with the people involved in the technology, you know, there are people who have created what they class as tokens, and those don’t necessarily have a link that’s clear and certain, and always there with the underlying thing. And then there are other people who’ve developed something which they claim can never be separated from the underlying and they don’t like using the word token. So that’s an example. Cryptocurrencies, yes, the electronic, the digital representation is the thing. But I think what Wilf was saying was in relation to the wider discussion – the thinking that’s been developed over decades as to traditional … the way to deal with traditional assets like bonds and equities and so on can be mapped onto this new regime, just adding in any discrepancies between the old and the new arising from the technology. But when you get … come to cryptocurrencies, you’re right, but it is entirely novel. So I think we’re maybe talking about slightly different things when we’re [inaudible] apparent difference on that. And I think that’s what the point is. And in relation to something totally new, like cryptocurrencies, the implications of the use of distributed ledger technology and blockchain are very serious. And it would appear, for instance, from what happened in relation to Tether, that, although things are in some ways distributed and located nowhere, there are people who control them that can then step in and clean things up if they go wrong. And obviously, identifying who those people are, and when they can do that, and how they can be controlled or kept in check, is really the key to it. And the answer to that is in the code itself, which is where the complexity, the main complexity, I think, comes from.

18.50: Should the cryptocurrency industry welcome regulation or will it crush innovation?

18.50 Dominic Hobson: Thanks, Barney. Oliver, could I bring you in at this point? You’re running an exchange. It’s been an interesting ride for you, I imagine, the last nine months or so. What’s the view that you have reached about the right balance between innovation and regulation in the industry?

19.08 Oliver Linch: Hi, everyone from sunny Liechtenstein, thanks for having me on the panel. Bittrex Global has sort of always advocated for high levels of regulation. The reason we are regulated in Liechtenstein is because it was the first European jurisdiction – European Economic Area (EEA) jurisdiction – to actually take an approach at all, and actually one that we think has been developed pretty well. You know, we … Bittrex  was set up in 2013-14. And we’ve been calling for regulation from the get-go. So it’s nice to see regulators, eight years after that event, finally waking up to it. Liechtenstein passed its Blockchain Act in 2018. And MiCA explicitly borrows from it. The token “container” model, that Barney was alluding to, is an innovation of the Liechtenstein Blockchain Act (the Token and Trustworthy Technology Service Providers Act, abbreviated to TVTG in German). So I think that there’s a slight uncertainty on our part, on the part of Bittrex Global as a whole, as to why this discussion seems to have taken everyone a little bit by surprise, because we’ve been having this discussion for years now. We’ve been pushing for regulation – you know, you wouldn’t put your money into an unregulated bank. Why would you trade on an unregulated exchange? And I think not only are the institutional investors of the world that you referred to, Dominic, very alive to that fact, but so are retail customers. You know, retail, everyone, you, me, and anyone that is thinking of getting into cryptocurrencies, wants to know what they’re buying into. And so they want three things. And these are the three things that we advocated from the very beginning. They want a safe and secure environment; a technologically secure environment. And our founders came from the world of technology security. They were at Blackberry, at Amazon and Microsoft, doing this stuff. The second thing that they want his innovation. They want to, you know, really get to grips with what this new technology is, what it can offer, and how it differs from traditional finance and financial products. And the third thing they want is regulation. They want to know that they are playing in an area where they are protected, where they’re not going to be subject to, you know, the worst instincts of bad actors out there, and that they can engage and, you know, frankly, make money from this new technology. So those are the three things that we think people across the board are calling out for. Liechtenstein has actually led the way. But we’ve seen other jurisdictions getting there too. We’re regulated in Bermuda; again, a small jurisdiction, which means it was nimble and quick, operating under the sort of legacy UK frameworks with a common law jurisdiction, which I know will make Barney very happy, but showing that there are lots of different models for doing these things. What I think regulators can’t afford to do is let the world take them by storm. The technology is too exciting and too quick for people to just sit back and try and ride the wave whilst not really engaging in a way that I think too many jurisdictions have been doing at the moment.

22.20: Is it possible that events have overtaken regulation of the cryptocurrency markets, in the sense that they are now exposed as a self-correcting hunt-for-yield investment mania of the kind typical of periods of low real rates of interest? 

22.20 Dominic Hobson: They’re starting to  … Thanks, Oliver. Another question for you in a second. We’re starting to get questions in now from members of the audience, one about whether the UK will follow the EU example and create a British version of MiCA. The second one [is] an important question on cross-border trading of crypto. Before we come to those and before I involve Sian in this discussion – who has been waiting very patiently – could I ask you, Oliver, this question. Do you – and it’s prompted by an observation made by Henry Raschen here – which is that “there’s a view that cryptocurrencies are a byproduct of long-term low interest rates, creating volatile vehicles for those seeking potentially higher returns instead of getting 0.01 per cent on their cash at the bank. Historic and historical crashes like Tulips, the South Sea Bubble, Mississippi land and many others occurred during periods of low real yields on money. Perhaps this will be the fate of cryptocurrencies too in which case those holding them may end up as end-of-pier stuffees of a Ponzi. In other words, if that occurs before cryptocurrency regulations are in place, further attempts at regulation will be redundant or a waste of time because the targets of the rules will have vanished in a puff of smoke.” Do you ever worry that the combined efforts of the libertarians and the bad actors in cryptocurrency have cast a blight over the whole blockchain area, and from which it may not recover, given the two thirds of the value has evaporated in the last seven months or so?

23.46 Oliver Linch: Well, it won’t surprise you to learn that I don’t agree with the fundamental push of that question, which is that I think that there is something at its core different than other examples that were given in that question, and different from anything we’ve seen before, which is that the blockchain, and understanding what the blockchain truly represents, is a valuable, new and exciting proposition. So, at its core, there is something about crypto as a whole that makes it valuable and makes it different from those examples. Is it the case then, to come to your question, that the sector is blighted by bad actors? Absolutely, of course it is. And it’s something that we as an industry need to get to grips with. We don’t want these people to be tarnishing the reputation of something that we think is actually valuable. Unfortunately, the way of the world is the other actors have not been as robust in their approach as we have. We’ve redoubled our efforts. We spend all day, every day, working out how to ensure that people trading on Bittrex Global know who they’re trading with, how they’re trading, and what they’re trading, so that we can begin and continue our efforts to stamp out these bad actors. So just as you know fraudsters impact on the stock market and impact on every other kind of traditional finance, they impact on digital finance and crypto too, and we absolutely, for that reason, we want to get rid of them. They have no place on Bittrex Global and they also have no place in the sector.

25.18: Are common law or civil law jurisdictions best placed to devise rules for the cryptocurrency markets that strike the right balance between innovation and regulation?

25.18 Dominic Hobson: Excellent. Sian, I’d like to involve you now. And perhaps I could involve you by asking you to address this question we received: `Is the UK going to follow the US example of crypto asset legislation such as MiCA? Or is it more likely to use existing regulation where this is possible?’ And I wondered …  I think it is interesting question, because, as Barney pointed out, the UK is a common law jurisdiction and the EU is a civil law jurisdiction, so the UK is in a better position in some ways to let things evolve. But I’m also … implicit in that question is whether some of the terrible things that have gone on in the cryptocurrency industry – can they be caught not just by existing laws on money or securities, but actually, theft, conspiracy, anti-trust, deception, and so on? I don’t know how much you’ve thought about whether the existing structure of UK law is actually adequate to address the many malignancies which we’ve seen over the last two or three years. Sorry, there is a lot in that question; I’ve thrown a lot at you. And you’re still on mute. And that’s while you’re thinking. 

26.27 Siân Jones:All very good questions. Let’s think about the thing about the UK versus the EU. So yes, the EU just finished the trilogue [between the European Commission, the European Parliament and the Council of Ministers] on MiCA. The reality is that MiCA will almost certainly only start to bite or at least apply from the beginning to end of 2024, depending on whether one’s involved with Stablecoins, any of the forms of Stablecoins [inaudible] involved with everything else, including being an intermediary. That still pushes that regime way out from where we are today. We shouldn’t forget that there are some EU member-states that already have regulations in place. In some cases, limited to AML. Which typically are not … which are mandatory statutory arrangements, and others dealing with prudential matters, that quite typically are voluntary. I’m thinking, for example, [of] the French regime which has been regulating digital assets service providers for a while. Will the UK follow that pattern? Actually, the UK has to make up its mind what it’s going to do. There’ve been a series of consultations of late. Government has for some considerable time been trying to present the UK as being at the forefront of regulation and crypto. But has singularly failed to do so largely because its financial regulator is completely opposed to that notion. So in the UK, the FCA has been put in charge of registering intermediaries, typically exchanges and custodial wallet providers. Effectively, the stuff that flows down from the FATF changes back in 2018. But has been using that regime as an AML-plus regime. So it’s been using a lot of the tools within its armoury to apply almost a quas-prudential regime, and consequently, it’s actually registered very few in the space -[a] very small proportion of those have applied – I mean, probably only 15 per cent something like that, or those who’ve made applications who have been registered for something that is ostensibly just an AML regime. And what I think it reveals is that the regulator is largely opposed to government policy, which has been to encourage this sector. And it kind of exposes the challenge in most countries, of finding that balance that you talked about before, between regulation and innovation. In very few cases, whether you’re looking at FATF’s changes to bring crypto assets, or what it calls virtual assets [within the regulatory perimeter]. And indeed, that itself is a problem – one of taxonomy and vocabulary. But I’ll not go down that rabbit hole for a moment. Where in changing or setting regulatory standards of any sort, there’s been very little work done on the impact. Very little work on impact analysis, to see how these measures may affect innovation. So you have groups of policymakers who are predominantly motivated by encouraging innovation, growth, creating new business opportunities, and so on and so forth, wanting to create an environment that will allow that to happen, versus the more traditional regulators and policymakers whose business it is to prevent bad stuff from happening. And so what has generally happened is not much. In reality, a lot of work could have been done in the policy and regulatory spheres long ago. Some of the risks are the risks that have become all too apparent in the last few months have been identified a long time ago. And very little action has been taken to do anything pre-emptive, to create a safer environment for depositors, investors, consumers, whatever. Like, I absolutely agree with Oliver here. It’s lots of intent to keep the sector free of bad actors. It has been blighted by bad actors. But I would suggest that one of the reasons the sector of crypto has been so blighted, is because regulators have been sitting on their hands and sitting on the fence for far too long. There are notable exceptions. Liechtenstein is one, Bermuda another. One that beat them both to it was my own jurisdiction of Gibraltar, where I was the regulator, where I architected the DLT regime, the very first in Europe, probably one of the first in Europe actually to have statutes regulating this space very successfully, as it happens. There are a few others, of course, but, in the main, the large jurisdictions have been sitting on their hands. They haven’t known what to do about it. And now they’re presented with this real problem of what kind of regulation to put in place [to] regulate things that are not in fact technologically neutral. The very fact you have something called MiCA, the Markets in Crypto Assets Regulation, about to become law, by definition if it’s got crypto assets in its name, it isn’t technologically neutral. Or do they develop entirely new forms of regulation that allow for all these differences that you’ve already heard something of  – the differences between crypto and the traditional space. And, unfortunately, probably as a result of sort of crypto … really the impact of these recent weeks and months – and undoubtedly, they will continue over the coming weeks, months and years – will cause a knee-jerk where everyone suddenly runs for what they’re comfortable with and will start applying regulation that will not necessarily be fit for purpose, in which we will have all manner of unintended consequences. Will Britain follow the MiCA path? Will Britain do something of its own – something lighter weight? I think it actually will do something slightly lighter weight, but probably not as much as it had intended to do three months ago.

34.32 Oliver Linch: And I think that’s a really important final point there, Sian, which is that regulation isn’t an on-off, you know, around the world. It’s not either that you’re regulated or you’re not regulated. And jurisdictions are not equivalent. You know that some jurisdictions have taken it very seriously. And [in] some jurisdictions regulation is a shiny badge that unfortunately actually harms the sector as a whole because it confuses individuals and they have no idea of [whether] what they’re getting is regulated in a meaningful way. So I think some kind of international coordination – and obviously FATF has taken the lead on the Travel Rule side of things – but there are other organisations as well that can distinguish between those jurisdictions taking it seriously and those that are paying lip service and sort of going through the motions.

35.25 Common law jurisdictions cannot simply wait for court cases to define the law and the regulations. Won’t primary legislation be necessary, even in common law jurisdictions, to define novel concepts such as Smart Contracts and DAOs?

35.25 Dominic Hobson: I’d like to stay with that, Barney, that point about crypto trading. And sorry to interrupt you there. But because you had a question on the cross-border trading of crypto. But Barney just one thought that occurred to me as I was listening to Sian. The common law, we praised it for its flexibility, its ability to evolve without the need for statute law. But is it not going to be necessary even in common law jurisdictions to rewrite the law to some extent to take account of new ideas like smart contracts and decentralised autonomous organizations (DAOs)? Or can you just rely on the common law?

36.00 Barney Reynolds: It depends on the topic, I’d say. So, for smart contracts, I think existing concepts can be applied to many of the things that are being written. And I think that the law can float with the technology. The conflicts of law rules – so the rules about what an asset is, and where it is – may need adjustment or the courts may get there. And in fact, we had a similar thing in the 1990s when securities were dematerialised, and there was a massive project that involved getting the main jurisdictions together to have a co-ordinated approach to a conflict of laws, which was based actually outside the US on an English case called Reed Bishopsgate where the common law was getting there, and then the EU adopted an embellished version of that approach, which was not totally different from what had already happened in Article Eight of the Uniform Commercial Code (UCC) in the US. So that’s that topic. And I think the case law might get there. I think in this world, in that context, I’d say that an awful lot … In the context of modern technology, an awful lot of this is reverse solicitation. So I think the conflicts of law problem that we found in the ‘90s with dematerialisation securities, which led to this very complicated international custodian structure for holding securities, may not – I would say probably isn’t – going to be necessary in the event for digitised assets, which can be traded on an arrangement where the English courts are happy to take jurisdiction. And so long as that is the case, then I think the Hague Convention, which recognises choice of our jurisdiction will apply sufficient that other jurisdictions back off, as it were. So that then then you’ve got the … 

38.09 Dominic HobsonThe DAO – DAOs are a source of a lot of the problems that are occurring in the DeFi space with governance issues. You’ve got that 1 per cent of the holders distort what happens in favour of their own interests and so on. That’s leading to very clear issues of governance, which the law needs to address, I’d have thought.

38.27 Barney Reynolds: Well, I think the thing with the DAO is, what is the DAO? What’s underpinning it? What’s the legal structure underneath it? And then whose law applies to that? And is it – and this is not determined yet satisfactorily, but a case could solve it, or a Law Commission paper or whatever – an unincorporated association? Is it a partnership? Or is it some sui generis thing which the courts could develop? But, you know, what is it that we’re talking about?  The DAO, with the code-based sort of governance rules, I think a court can get to grips with once one has established the jurisdiction and what it’s dealing with. And then on regulation itself, I mean I would say, I mean, common law doesn’t deal with regulation. So regulation is dealing with financial risk and restricting activities that are dangerous to the market as a whole or consumers. I mean, there, I take a slightly different view of where we’ve got to. I mean, so the UK has been very tough in restricting access for consumers. And one can agree or disagree about whether that’s correct or not. I would note that Singapore has most recently sort of taken a very similar approach. For the wholesale markets, there clearly does need to be regulation, but it needs to be very thoughtfully conceived. Because if you leave them too early, you can force the market into all sorts of business structures which then create consequential risks without actually seeing what the market wants to do, and then dealing with the risks that arise from that, which is our traditional method. So I do think it’s right to be observing all the time. I do think we need to now step in and regulate. There are regulators around the world who’ve stepped in with rules, but that doesn’t mean they’re good rules. Nor does it mean by the way that any genuine supervision is taking place. And so the risks for those regulators is either the rules turn out to have distorted the market in an unsatisfactory way, creating new risks which is quite possible and/or the lack of thoughtful, proper supervision, particularly on something as complex as computer code, which I very much suspect in relation to some of these assets the regulators are just are not on top of, and they are going to have to get others to help them on. You know, the danger reputationally to the entire edifice and infrastructure of being caught out on that is very significant indeed. So I think we do in the UK need to construct regulation around certain assets thoughtfully, and around the risks that arise. And then we need to follow through once we’re doing that, so the two need to go together. It’s easy to overlook the supervisory elements, and just to rely on writing rules, but, as I say, I think that could blow the credibility of [the] regime and we have a trusted regime, and that trust has been built up over generations, and we need to be very careful not to sacrifice that. At the moment, the wholesale markets are largely unregulated, apart from the AML stuff. I think the AML … The reluctance of the FCA to allow certain people into the market under the AML rules is [well] founded. It’s not entirely … I mean, on the examples I know, I think there are reasons for it. And again, reputationally, letting things, product offerings in where you can register just with an email address, below a certain financial threshold and so on, I mean, that carries … Well, first of all, I think it’s in breach of FATF requirements. But it also carries reputational risk for whoever let’s that sort of business in. 

41.52: Is the hands-off era of Sandboxes and Safe Harbors over now – should the cryptocurrency markets expect an internationally co-ordinated torrent of regulation to wash through them? 

41.52 Dominic Hobson: Even the AML is – sorry to interrupt you – even the AML is all over the map, across these various jurisdictions – different thresholds, different states, some have implemented already, some have not to the point which you raised earlier, Oliver, about the need for international collaboration. Here, we need some kind of harmonisation. You’ve got these differences between civil jurisdictions and common law jurisdictions. What I’m hearing is that the period of experimentation in regulation is now over. There’s going to be no more Sandboxes. No more Safe Harbours. There’s going to be no more hands-off or hands-on here. The regulators are getting their minds around this question. And you can say what you were going to say, Oliver, immediately, but could you also address this question? And I’m sure Wilf may have some views on this. The question from a member of the audience is: `Given the cross-border nature of crypto trading – and market manipulation is one of the key issues – could you share your thoughts on how this issue can be addressed effectively?’ You’ve stated, Oliver, there’s a need for international cross-border collaboration. What’s your suggestion as to how to make it happen, given these differences I’ve just alluded to.

43.00 Oliver Linch: Well, thank you. So I think there’s about four or five different open points here. Let me try and go through them. I think the issue that runs through everything that Barney mentioned, you know, DAOs, conflicts of laws. The underlying point is this question of the property rights associated with them all. And I think, in fact, that there’s very little difference when we’re talking about common law or civil law jurisdictions in this space, because [in] the common law jurisdiction here, nobody is suggesting that we sit back and wait for the courts to make decisions on these things, because that would take 20 years and you know, in crypto years we would all be dead by then. So nobody’s suggesting that as a common law jurisdiction. Nor is anyone suggesting that we sit back and let the regulators, however specialist or clever they may be, come up with their own rules on an ad hoc basis, because that would that would breach the rule of law and lead to total chaos and unpredictability. So common law/civil law system doesn’t really matter for these purposes, when you’re talking about what the rules are. And then to Barney’s point about the level of supervision. Well, again, it doesn’t really matter if it’s the Financial Market Authority (FMA) in Liechtenstein supervising [or] the Financial Conduct Authority (FCA) in the UK supervising. You just want expert, clever, interested regulators who get to grips with what’s really going on. So I think, actually, the civil law/common law thing might have wider implications. But it doesn’t really impact on the discussion we’re having here because the question goes to the property rights and I understand the Law Commission are actually working on this at the moment with a view to bringing in new guidance or new suggestions on property rights in the UK. Obviously, places like Liechtenstein and the EU addressed that more directly by just introducing new rules within their codes on it. So I think that’s a really important point. On the international front, I think it’s important not to overstate the matter. You know, globalisation of finance has been a reality for 40-plus years now, and there is no sensible call for a global shares regulator or a global derivatives regulator. The markets work perfectly okay when everyone does their own thing, but you have co-ordinating international organisations. So I think that’s the model that should be followed. And there will be a recognition of those jurisdictions that have genuine regulation supervised appropriately and those that haven’t. So I don’t think that we’re going to see a global crypto regulation, nor would we want to, because actually that really does get down to the realms of stifling innovation. What you will see is the better models, through some kind of survival of the fittest, being adopted by other jurisdictions. We’re already seeing that MiCA is explicitly based on the TVTG in Liechtenstein. Other examples, Sian mentioned the one in Gibraltar. There are models out there that [are] already answering the difficult questions. And we’ll see that those become a template for jurisdictions that want to get involved in actual taking [of] grips on regulation. So I agree with everything Barney says in terms of it requires a supervisor to actually supervise, a regulator to actually supervise and be on the ground. But, you know, that’s true of anything. That’s true if I want to regulate derivatives, if I want to regulate shares, if I want to regulate pension funds. Ultimately, you can write whatever you want in the prettiest font you can find but if it’s not applied, then it doesn’t matter.

46.38 Siân Jones: If I may just add to some of the points there that Oliver’s made. And also, to you Dominic, you said just a moment ago that experimentation in regulation is over. And I think you reference the numbers of Sandboxes that have been running for periods of times, in some cases, I think, for four or five years now if I think about the FCA’s [Innovation Hub]. And I’m actually going to disagree with you about this. I think experimentation in regulation of crypto has barely started. I think there’s been a lot of lip service played to trying to understand quick term, limited time Sandboxes, whether it’s six months or a year, to figure out how stuff fits existing regulation, in order to learn more about it, has been the typical characterisation of those Sandboxes. And actually very little has been going on, in trying to regulate this new stuff, whether in new ways, or indeed trying to make them fit the existing regulatory frameworks. Oliver mentioned they’re co-ordinating efforts, and there are a lot of co-ordinating efforts going on, you know. Much is driven by the Group of 20 (G20), using it instruments in the form of FATF and the Financial Stability Board and International Organisation of Securities Commissions (IOSCO) and [the] insurance equivalent, but using these international, these multi-governmental organisations,to find some common ground, to set standards that countries can then apply. But you know something? They’ve been very slow at actually doing any real stuff. And I’ll give you a good example. I sat on FATF’s Policy Development Group at the time that virtual assets came into scope, so I like to think I know a little bit about this. You know, we’re going back to 2017-18 when FATF started work on this. It came out with a one sentence, two sentence, change to one of its recommendations, effectively bringing crypto into scope in 2018. It came out with guidance a year later in 2019. And, you know, something less than half of FATF members – I sat FATF members [but I mean] within the whole FATF network of 209 countries, less than half of them have actually implemented anything. We’re now 2022, three years after the guidance came out, four years nearly after crypto was brought into scope. And when you look at, say, one aspect of it, the Travel Rule, [of] which much is talked about, actually only 11 countries – only 11 out of 209 countries – are currently enforcing the Travel Rule. This foot-dragging is part of the problem as to why bad actors have still been blighting the sector. There has been a lot of talk and very little action.

50.15 Is a globally harmonised cryptocurrency regulatory regime what the global marketplace wants – and is there a downside to it?

50.15 Dominic Hobson:Yeah, I can give you those figures. 98 jurisdictions that took part in that FATF survey in March, only 29 have actually passed a Travel Rule, 36 have yet to start on legislation. And as you say, the 11 have actually started enforcing anything. There’s no jurisdiction yet that is fully compliant with the FATF standards on virtual assets and Virtual Asset Service Providers (VASPs), and only 12 of them are actually even largely compliant. So even in the one area where this industry has been explicitly regulated, there isn’t much progress. Wilf, can you …There’s an observation here from .. on the question .. A member of the audience raised up, `How do we regulate these things [that] are traded across borders? How do we, on the market manipulations issue – how do we tackle that issue?’ I’m not sure we’ve really answered that yet. You may have some thoughts on it. But here’s an observation by a member of the audience, [Anonymised]. He says, `We’d rather not have a globally harmonised approach because such is typically crafted in the image of and domination by the global north, which is not tailored to the needs of the global south.’ So it’s a fair point. Markets need different regimes. So how can we answer one member of the audience who thinks we need a globally harmonised approach? `Is this the work of the G 20? IOSCO? CPMI? FATF? Who does it? And on the other hand, do we need lots more competition, more experimentation between jurisdictions because of different strokes for different folks or whatever cliché you prefer? Wilf, how do we strike a balance there?

51.42 Wilf Odgers: I think it’s an interesting point. You know, I think part of the question is, `What is the nature of the global harmonisation? Is it just simply, you know, a few principles that jurisdictions are expected to abide by? Or is it something much more detailed and prescriptive on, you know, `You must regulate crypto in this way.’ And, and by doing the latter, you’re obviously, as you say, shutting down perhaps more innovative jurisdictions that want regulatory arbitrage and attracts people when perhaps the regulation is less stringent or more welcoming. But I do think there needs to be something. You know, we have it in every other sector. So why not in crypto? But I do think the question is, `What is the nature of the harmonisation?’ And I think, just going back to one of the earlier points, what I think is quite interesting is, you know, we’re talking about bigger jurisdictions dragging their feet here. And now other jurisdictions, such as Liechtenstein and Bermuda, were very agile and set up their regimes very quickly. And Gibraltar, of course. I do wonder where we’ll be in five or ten years when we have MiCA up and running, and everyone has sort of worked out how it operates. The UK presumably will have a regime by then. The US will have a regime. Will we then be saying, `Well, actually, they did the right thing.’ They, you know, the CFTC under [Christopher] Giancarlo had the Do No Harm approach: see how it plays out; see what these things are; see how they develop. Will that come to be the better approach because the regimes are sort of more apt and more fitting for what is required for crypto regulation? And perhaps the first movers move too quickly and are left behind. I think that’s something to bear in mind. It might be that we say completely the opposite. And we say, `Well, you know, the UK, the US, the EU, were far too slow. And their regime, you know, their attractiveness to cryptos has suffered as a result.’ But, certainly, going back to the original point, yeah, I do think there is a requirement for some sort of harmonisation. But it’ll be interesting to see, you know, the nature of it.

53.59 Dominic Hobson: You brought up the question of principles-based versus rule-based. Is that a sound foundation for an agreement which would cover both the global north and the global south and also meet the requirements for some kind of collaboration, coordination, harmonisation across different jurisdictions? Is it even possible in a civil law jurisdiction to have a principle-based approach to regulation? Oliver – you want to say something?

54.25 Oliver Linch: Yes, it absolutely is. There’s nothing inherent about a principles-based set of regulations that demonstrates it’s a common law [speciality], again because, in this area, it’s going to be a question of applying written rules. Again, we’re not we’re not talking about something that’s going to evolve over case law. So, fundamentally, from a supervisory perspective, I don’t see how it makes any difference if it’s published in the FCA handbook, or if it’s published in the FMA. rulebook that, you know, the legal regime underpinning those makes no difference.

55.01 Barney ReynoldsI’ll just add to that. I think there is a practical difference in how the regulators and judges operate in a Code-based system. It’s not just civil law because Scots law though codified civil law is similar to common law in this respect. So it’s the Code-based approach. I think the regulators and judges are more mechanistic in the Code-based approach and more reliance is placed on the wording of the rules, albeit, in fact, paradoxically, there’s more twisting of wording that goes on in their systems because of the ossified nature of the rules. I mean, just in terms of crafting it, my concern is that we’re going into something which is novel, and we’re going to have to create some new elements of architecture for it. And in the nature of law and regulation, once you get the foundations in place, then everything is an embellishment on that, effectively. And going back to basics, after you start, is exceedingly difficult for everyone involved, and the regulators [tend] to be very reluctant to do it. The method that we have in the UK is generally to build in a minimalist way on existing structures and reinterpret what we’ve already got. And the benefit of that is that you get automatically with that a lot of certainty that flows from the learned knowledge of all the existing rules and ways of thinking and case law and legal principles and rules. And so I am keen that we do that, and that we don’t just start writing rules for the sake of it. I mean, as I see MiCA, it’s mainly a sort of pared down version of MiFID II and the Prospectus Directive. So it’s not such an original sort of thing. But by creating a stand-alone sort of further panoply for this asset class, what you’re doing …  I think it’s too crude, in particular in relation to differences between tokens and financial instruments. Is there one, how do you deal with that? I mean, even at FATF the definition of virtual assets then has some guidance carving out Non-Fungible Tokens (NFTs)? Well, that in itself is also a big point. So I think I agree with some agreement at a global level, then everyone goes away and works out their own way of doing it, or at the same time. And so for the Stablecoins, the UK was heavily involved in the CPMI-IOSCO paper, which advocated extending the payment rules to Stablecoins, which in principle is sensible and especially, obviously, the devil’s in the detail of how you do that. And at the same time, the UK has announced that it’s going to do that itself. That sort of method seems to me to be the way forward and Stablecoins in the meantime, as Sian said, you know, the things that have happened in that market have not been unexpected, but we’ve now got vivid examples of what can go wrong. And, you know, algo Stablecoins, you know, need an awful lot of thought if they’re going to be allowed to be integrated. But I think, as I say, I think less is more. And so our system, which does tend towards simplicity, I think will prove its weight as we get going, because I just think that’s the best way to do law and regulation. And just on the Sandbox, I think the Sandbox is – I agree with Sian – I think we’re just beginning on that. Sandboxes are essential to this to allow people to try things out in a safe environment, which is a regulated environment. Then I think we need a related approach, which is not one in EU law or on the continent, which is more one-size-fits-all, which is I think there should be ways of structuring rules around things according to how bigger market share they have, or how systemically risky they are. So that we can have fewer rules for things that are less risky. And we can have a sort of a ladder, up to the riskiest things. But it is consistent and coherent, where you add segments or rule books, according to risks being brought into the system, but defining that is obviously tricky. And one other point, just on sort of going back to where we are now. I mean, the US regulators have been restricting their banks, de facto, from getting into this market, which is another thing going on as well. I mean, financial markets are not yet fully integrated into this world. And so all of that thinking needs to take place. And I think it’s inevitably going to be iterative and slow. But we’re sitting here on a global financial centre, one of the top two. And so what we do scales up beyond what happens anywhere else, pretty much. So it’s a very delicate exercise. I think more thought and less is more is the best approach. That’s not to say nothing is good. We do need to do things, and I agree we need to get on with it.

59.54 Oliver Linch: I just want to agree briefly with Barney … one of Barney’s points there about MiCA, because I think you know that there’s a lot in MiCA that is very good. But there are some instincts there to over-regulate, which is something that you unfortunately see across the EU’s thinking. Now we at Bittrex Global have the benefit of being regulated in one civil law jurisdiction and one common law jurisdiction. So we see it on the ground. The BMA are a highly sophisticated regulator, very experienced at regulating, obviously, the insurance sector, operating under the common law principles. The FMA is similarly a very sophisticated regulator used to regulating the traditional banking industry within the context of the EEA. And it turns out, the answer is they may get there by slightly different approaches. But more often than not, they’re getting to the same place. So, again, I think it’s the question of – and  come back to [the fact] not all regulation is equal – [that] some jurisdictions are just better at it than others. And I think if there’s an international co-operation role, it’s a levelling up role, or an identification of those jurisdictions that are, are worth the name `regulated.’

1.01.07: Is the best way to regulate cryptocurrencies by instrument, by institution or by activities or by all three? 

1.01.07 Dominic Hobson: Thank you. We’re actually running over time now. So I think it would be a good idea to – Sian, I now you want to say something and I hope that I’ll give you an opportunity in a sec – but I think we should try and wrap this up within the next, say, ten minutes or so because people need to go, our audience as well as some of our panellists. Could I ask you perhaps first Sian, to pick up Barney’s suggestion that we get back to basics. And one of the things he said was that the FATF definition excludes NFTs. One of things that struck me when I was preparing for this discussion today was actually how little agreement there is in the definitions of what actually we’re trying to regulate here. The FATF actually talks of virtual assets. The EU refers to crypto assets. We have asset-backed tokens. We have native tokens. We have cryptocurrencies. We have DeFi. It’s actually like nailing jelly to the wall trying to work out what we’re actually regulating here, which is why maybe a principles-based approach is a sensible answer to that. So that’s my first point. Is, you know, is agreeing a set of definitions of what’s being regulated, essential to come up with some harmonised global regulation of this industry, which suits the needs of the global south and the global north? And if so, are we going to stick to regulating the instruments? Or are we also having to regulate the institutions which deal in, issue, safekeep, list those instruments? So I guess my big question is, `How can regulators combine regulation of the instruments, whether they/we call them virtual assets or crypto assets, and the institutions that deal in those virtual or crypto assets?’ It strikes me as a difficult conundrum, that – regulating the intermediaries or the instruments?

1.02.59 Siân Jones: Actually, right now, we have that same conundrum which is addressed in two entirely different ways, if you consider the US versus the European approaches. So in Europe, we define a set of instruments and then we define a set of activities, activities performed by various types of actors in relation to those instruments, and we say if they tick the boxes in both columns, they fall within MiFID. That’s the typical approach. And that’s largely the approach that MiCA  is setting to copy. Just defining some new instruments, as you rightly point out, aren’t necessarily entirely the same definitions as other jurisdictions have applied. And then various activities, and if you tick those boxes, then you’re going to be regulated by MiCA. And I think you’ve raised a super-important point, because we cannot and should not be talking about the regulation of crypto assets or cryptocurrencies or digital assets, or digital, whatever you want to call them. Although, actually what you call them, and the definitions that go with them are super-important, and they need to be resolved and haven’t yet been, what we should be talking about is the regulation of various activities in relation to these crypto assets, digital assets, and so on and so forth, recognising that not all cryptos are exactly the same. And there’s been this tendency of late to lump everything together under one sort of heading of crypto assets or whatever. And rather than looking at the different functions of different types of crypto assets, and almost forgetting the different types of activities and functions of those who interact with cryptos. So, I think your question is spot on, and the very first piece around which there needs to be agreement is vocabulary and taxonomy. So there’s the very start point for that co-ordinating activity that needs to be undertaken. Otherwise, we’re talking about oranges and apples, depending on where you are.

1.05.28 Dominic Hobson: Wilf, a last word from you, perhaps, on this point about (a) definitions and (b) the balance between regulating instruments and regulating activities and/or institutions?

1.05.40 Wilf Odgers: I think certainly there needs to be some sort of agreement on how we do define these things. You know, as we’ve discussed, it’s in every different jurisdiction, they’re defined in different ways, and then often imperfectly, and I don’t think that’s anyone’s fault or any issue. It’s just, you know, we haven’t … everyone hasn’t sat down and thought, you know, `How do we properly capture what these things are?’ And I think once that’s done, everything will then start to flow from that. But I don’t think you can have the set of principles we were talking about without nailing down, you know, a sort of common definition of what we’re actually talking about here. So, yeah, I mean, I do think it’s important. And it’ll be interesting to see whether there’s any sort of move towards trying to do that. But I do, yeah, I do think it’s an essential thing going forward.

1.06.40 Dominic Hobson: Oliver, what’s your … How would you like to be regulated as an institution? There’s a set of activities … by the instruments in which you trade?

1.06.50 Oliver Linch: Well, I think the regulatory framework that’s developing amongst those jurisdictions that are taking it seriously is the right one. There’s the token container model, which is the one that underpins Liechtenstein and MiCA. [It] seems to us to have a lot going for it because it means that people know exactly what it is they’re trading and what the rights associated with that are. But just I guess it goes back to your question about the Sandboxes and development. The technology moves on so quickly, the practice moves on so quickly, and the offerings available to users move on so quickly, I think we would be churlish to think that we’re going to solve this once and never have to look at it again. The fact is there’s going to be a dynamic level of regulation. Some things are immutable. We think the KYC/AML stuff is immutable, because the principles have been there for many years and are well known. It certainly suits some institutions to pretend that they don’t know how the regulation for AML is going to look, but we do. Sophisticated participants do know what that looks like. But on the technology side, what’s true today may not be true in six months or a year from now. And regulators are going to have to be quick to adapt, and work in partnership with the people that are actually participating in the sector to make it a fair, secure and regulated industry that people want to participate in.

1.08.22 Dominic HobsonSo you like MiCA but you recognise that it might very soon be made out of date by the technology?

1.08.28 Oliver Linch:Well, it depends on what you mean by `made out of date.’ The principles underlying it ought not to be out of date. But the details, as Barney said, the devil is always in those. So will there need to be an evolution? Certainly. If there’s one thing we know about the sector, it’s that innovation proceeds at lightning speed. So I think you know, the best instincts of MiCA, the best instincts of the TVTG are to regulate by principle, to set out what we’re trying to achieve and how we’re trying to achieve it, rather than be tricked into or trapped by a kind of much more detailed, granular, `This is exactly what we’ve got now, so we’re going to regulate this now,’ because that really does risk becoming out of date very, very quickly.

1.09.19 Dominic Hobson:  Barney,I’m coming to you to close out the entire webinar. The two words I’m going to carry away from our discussion this afternoon is `definitions’ and `principles’ as a flexible, iterative way forward for regulating an industry which continues to evolve pretty rapidly. What else?

1.09.14 Barney Reynolds:In fact, the MiCA approach, the EU MiFID approach, came from the 1986 Financial Services Act in the UK, which was a very cleverly drafted piece of legislation, which split things into instruments and then activities and then, if you conduct relevant activity in respect of an instrument, then you’re regulated. And the wording has pretty much stood the test of time. What we now need to do, on our method, is move incrementally from that to map onto these new assets and figure out how they fit in there and create new ones only where necessary. On the instrument side, obviously, many … You need to leave it so that most people out there who touch these instruments don’t fall into regulation. It’s only people doing heavy duty activities that are affecting the value of these instruments, or looking after them for someone or whatever, that need regulation. So, on the instrument side, though, there’s lot of thinking that needs to be done as to whether or not we need to create new ones, or in fact, lock into existing definitions, perhaps with some tweaks. That’s the first thing. And then on the activity side, we need to think whether we can use existing activities pretty much for most of the people like custodians floating around the edges, or exchanges. There’s a whole load of rules that have been developed over decades around exchanges which were very thoughtful. Do we just apply those to crypto exchanges? Or do we address them, water some down and so on? And that’s really where the rubber hits the road. So it’s that kind of dialogue that we need to get into sooner rather than later in the UK. I believe it’s already happening behind the scenes. And it’s when that starts to be unfurled – and we’ve already talked about payments and Stablecoins  – that we will really see the regulatory landscape take shape.

1.11.33 Dominic HobsonOne thing you refer to is the 1986 Financial Services Act. I think one thing, one aspect, of that that didn’t survive was self-regulation. So can we expect that this industry is going to be formally regulated by instruments or institutions of the State rather than by the industry itself?

1.11.50 Barney Reynolds: Well, actually, in the ‘86 Act, the Self-Regulatory Organisations (SROs)  – there were three of them – were under the oversight of the Securities and Investments Board (SIB), which was a statutory regulator. So it was a two tier system. It had the normal statutory regulator, and then you had three SROs that produced quite similar rule books, in some ways with principles, which Andrew Large came up with – a sort of Ten Commandments approach. And that is what proved very effective. We created the statutory regulator when, [after] things had settled down, it became clear what then needed to [happen was that SROs] be subject to a greater grip. So I don’t think we should rule out going back to SROs for elements of this market, under a statutory regulator. And in fact, you know, Lloyd’s of London has a supervisory role in relation to its market under supervision, as it were, from our statutory regulators or normal regulators. So I think it’s a model that’s very interesting. It doesn’t mean hands off at all. So I think we should look at that again. And you know, the Financial Industry Regulatory Authority (FINRA) in the US is an SRO.

1.12.53 Dominic Hobson:Right, it’s back to the future with the 1986 Financial Services Act. That’s a great note to end on. I can see we’ve barely scratched the surface of this topic in the hour and ten minutes we’ve been talking about it so we will have to revisit it again. But we must stop now. I’d like to thank our panellists: Barney Reynolds and Wilf Odgers from Shearman and Sterling; Oliver Linch from Bittrex Global; and Sain Jones from X Reg consulting. Thanks, also to you, our audience for your questions and your comments. Here at Future of Finance, we’re taking a break now for the summer. We will be back on Thursday, the 15th of September, same time (1400 London time), same place (Zoom), to discuss `How to make the InsurTech revolution actually happen.’ I hope lots of you will be able to join us then. Personally, I will be at the Investment Association here in London on Tuesday afternoon for a discussion related to this subject, a very new and interesting paper on digital issuance digital investing is being unveiled that day and you can join that discussion if you go to the IA website and register. I hope to see many of you there. But for now, it’s goodbye. 

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