The rise of blockchain and tokenisation means regulating more players, not the technology itself. 

Fundsquare’s Olivier Portenseigne will be speaking at the sixteenth edition of the Clearstream Fund Summit in Luxembourg as part of a panel examining new token regulation. 

The summit has the theme of “the rapidly changing face of the fund industry” and while all actors understand that technology is indeed changing the industry, the regulatory response to this transformation is just as important.

To legislate o​​r not to legislate?

European fund actors are shifting to the use of distributed ledger technology with the aim of creating a more efficient and effective industry-wide ecosystem.

As with any new technology there may be issues around regulation and supervision. Does this new way of working fall within the scope of existing law or should it be specifically subject to new regulations?

In this regard, regulators and lawmakers tend to be tech-agnostic concerning DLT and are taking a largely pragmatic approach, focused on what it is used for. A prime example of this is the Luxembourg law of 1 March 2019, which was an amendment to the law of 2001 on the circulation of securities to cover distributed ledger technologies. Most other EU member states have taken or are expected to take a similar approach, at least at the start.

The great token debate

On the other hand, significant legal uncertainty arises when we look at tokens, the pieces of information stored on a blockchain. Broadly speaking, financial regulators currently classify tokens into four main types.

  • Payment tokens (crypto currencies such as Bitcoin)
  • Utility tokens (which provide access to a service on a blockchain)
  • Asset or security tokens (which have some or all of the characteristics of a financial asset)
  • Hybrid tokens (combinations of the above)

How European regulators qualify each of these has important implications, most notably for security tokens.

Regardless of the regulatory consequences, security tokens are the future in any DLT-based infrastructure. They enable actors in the value chain to greatly enhance operations and provide low-cost, highly responsive and inclusive products, thus reducing entry barriers to all manner of services.

Olivier Portenseigne

Managing Director, Fundsquare

Financial regulators do not, in general, regulate technologies but rather how or what they are used for and who is using them. It is businesses that are important here. 

Developing a far-sighted supervisory response

While the final response to the new token ecosystem is uncertain at the moment, regulators across the world are acting by setting up dedicated innovator units and regulatory sandboxes.

Additionally, in January of this year, thirty-five supervisory authorities and seven observer organisations launched the Global Financial Innovation Network  (GFIN). It aims to “provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas.”

Regulators understand the potential of distributed ledger technology. In September, the Bank for International Settlements released a working paper   on “embedded supervision” in a blockchain world. Such supervision will change the way regulators validate compliance, as well as enabling automatic supervision and additional insights into markets.

Financial regulators do not, in general, regulate technologies but rather how or what they are used for and who is using them. It is businesses that are important here. If technology replaces an intermediary, the regulations apply to the entity that is using it. There is no regulatory vacuum.

Technology lowers entry barriers and can democratise industries, opening up the field to larger numbers of companies. Therefore, more and more firms could have licences, which today are held predominantly by a certain number of companies and so regulators will be in the position to supervise more entities.

Distributed ledger technology is here to stay. It will offer much opportunity for positive change not only in the fund and asset management industries but also in the supervisory space.

For more details about this event, see the Clearstream Fund Summit page.

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