The Key Takeaways from the Summit:
- We need a global response to a global technology
- Custody is key to unlocking institutional adoption
- It may be novel now, but stablecoins will just become stale-coins
- Digital Trust is imperative if we are going to realise the potential of tokenization
- The jury is out for the jurisdiction of choice for digital assets.
You can watch the full video of the conference here
Discover the Digital Trust whitepaper here
Opening keynote: Lord Hammond
We were delighted to have Lord Hammond join us to deliver the opening keynote speech. With his time as Chancellor of the Exchequer in mind, Lord Hammond spoke on the topic of finding a natural home jurisdiction for the nascent digital asset industry.
While the potential is immense, the agility and innovation of small firms will need the trust and capital brought along by the incumbents. He noted, “technology enables change, but does not make it happen.”
Along with trusted market participants, the use of this technology will benefit from clear regulatory and legislative frameworks, something which has been affected by changing geopolitical landscapes. The position in the U.S., and lack of clarity on the regulatory treatment of digital assets has left a notable gap for the geographic home of digital markets. Until decisions are made in the U.S., which he believed would come after the next election, there is a vacancy for the jurisdiction of choice for the digital asset industry, which other jurisdictions are looking to fill.
Lord Hammond questioned whether or not the UK would be able to step in to this position: while the UK had once been leaders in innovative industries, policymakers would need to take a significant change of gear before the UK was considered the top jurisdiction for digitalized finance.
“Something is stirring…the cowboys, or some of them, are going to jail or losing money, courtesy of the U.S. Department of Justice. Digitization is on the brink of transforming global financial markets – and yet this nascent industry remains homeless.”
And with that, Lord Hammond laid out our key themes: trust – whether from industry participants, the clients, or regulators and policymakers – and the role of regulation in creating a safe and innovative environment for digital asset adoption.
Tokenization of real world assets
Panel discussion
Hogan Lovells Partner, Bryony Widdup, led the panel discussion on the tokenization of real world assets, with perspectives from financial institutions, as well as enterprise service providers. The panel consisted of: Katey Neate, BNY Mellon; Annabelle Bernal, Société General FORGE; Anthony Woolley, Ownera; and Graham Rodford, Archax.
Neate and Bernal noted the drive coming from the financial institutions to adopt and provide services for digital assets. Trust is key here: that the clients feel they have the clarity over the processes to be able to trust and build strong partnerships.
Rodford mentioned that from Archax’s perspective, they have noted an uptick in trust and demand from clients to leverage the opportunities of tokenization.
Much of the demand here is for funds and debt instruments, both because the regulatory environment is clearer, and there is sufficient liquidity in the assets.
The drive is also there to open digital exchanges to private markets, asset managers, and other key participants. However, with less liquid markets, there are considerations for distribution and interoperability. If the market can solve challenges related to interoperability and finding trustworthy systems in and out of the digital asset ecosystem (whether stablecoins, tokenized deposits, or central bank digital currencies), the liquidity will follow.
Participants agreed that the network would expand with these developments, which is where the true opportunities remain, and the benefits and efficiencies will become clear.
Explore more on the topic of tokenization in the Digital Trust whitepaper here.
Global Roundup
Over the past month, we have hosted seminars, roundtables, and panel discussions in Hong Kong, Singapore, Frankfurt, Brussels, Milan, Paris, London, Dublin, and Washington. The conversations have focused on the topic of digital trust in digital assets and tokenization in financial services. Partners from Hogan Lovells were asked to report back on their discussions with clients in each of their designated jurisdictions, to altogether give a comprehensive, global overview of the state of the industry—with one key challenge: they must each do so in under three minutes.
With the countdown timers live, some speakers made it and others had to be ceremoniously cut off. Here are their key takeaways:
Andrew McGinty, Hong Kong, reported on the need for a dedicated regime for custodians; clarity on the application of KYC/AML requirements; and further regulation to stop illegal practices such as wash trading. He added that there was a sense of lack of education in the market, and that large failures in the industry were very damaging to trust in digital assets.
Luke Grubb, Singapore, reported that there is a knowledge gap on the topic and that some are resistant to change. Roundtable guests also noticed the wide distrust of cryptoasset service providers, and that there were key regulatory barriers to overcome. Lastly, he added that there was a change of mindset needed for policymakers.
Leo von Gerlach, Frankfurt, reported on discussions focused on digital payments. Here, participants noted the importance of the EU’s DORA. Further to this, the conversation centred on the Bundesbank, BaFin, and potential impact of a digital euro on the financial sector.
Charles-Henri Bernard, Brussels, highlighted the balance yet to be found between centralized models and decentralized ones, where – for the time being – having a trusted centralized party is still preferable. Participants also noted the importance of e-Identity solutions, where interoperability is a key challenge.
Elisabetta Zappieri, Milan, reported on the role of MiCA and DORA in building trust. Participants also highlighted the importance of sandboxes in driving trust and adoption, as well as clear communication channels with the regulators. There have now been at least 130 entities already enrolled as virtual asset service providers in Italy.
Vincent Fidelle, Paris, reported on the importance of demonstrating a clear business case for digital asset infrastructures. Although cryptocurrencies have captured the attention of many in recent years, there is a benefit to bringing the focus back to “traditional” models and use of trusted parties.
Elizabeth Boison, Washington D.C., spoke about the lack of trust both from regulators and towards regulators in the U.S., as shown by the litigation action being taken, in the absence of a dedicated regulatory regime or clarity on the regulation of digital asset activities. In particular, there is concern among industry participants that regulatory are overly focused on ‘rug pulls’ on businesses.
Eimear O’Brien, Dublin, by contrast, reported on how regulatory regimes were driving trust, with MiCA very much welcomed by industry. Participants noted that the EU regulatory regime was more cohesive. Nevertheless, there is a need for regulators to stay up to date rather than being reactive to new technologies. This requires a strong understanding of the relevant technology and how it works. An initiative being carried out to develop such understanding is the CBI’s Innovation Hub and the Innovation Sandbox Programme.
Bryony Widdup, London, reported on the need for interoperability with a view to building trust. Effective communication with regulators is also required, as well as further initiatives such as “sprints” and “sandboxes”.
Regulatory and policy developments
Panel discussion
Lavan Thasarathakumar, Senior Advisor at Hogan Lovells, moderated a panel discussion between Ivan Keller from the European Commission, Christina Rolle from the Securities Commission of The Bahamas, Elisabeth Wallace, the Dubai Financial Services Authority, and Helen Boyd from the UK’s Financial Conduct Authority on global regulatory and policy developments.
There was agreement among the panellists on the significance of the recently published IOSCO recommendations for the regulation of crypto and digital assets. Given the cross border nature of the digital assets activities, speakers highlighted the need for collaboration and cooperation on an international level between regulatory authorities. The IOSCO recommendations provide a helpful roadmap for jurisdictions across the globe to develop their own regulatory frameworks to address the digital asset industry.
At the same time, there was also recognition that depending on the circumstances of different jurisdictions, there is no one-size-fits-all approach. A prime example is the use of “sandboxes”, a tool for industry and regulators to experiment with new use cases that do not necessarily comply with existing regulatory regimes in a controlled environment—such sandboxes have been implemented by the UK, the EU and Dubai, while in contrast the Security Commission of The Bahamas, after careful assessment, took the active decision not make use of sandboxes.
The panel discussion also highlighted key issues to be addressed in regulation such as the vertical integration of activities by digital asset firms, the challenges of addressing market abuse in the absence of market data, and decentralized finance (DeFi).
Digital asset custody
Panel discussion
We are in a period of rapid innovation in digital finance, and custody is central to this. Hogan Lovells Partner, Michael Thomas, led a panel discussion between Eva Gustavsson, Cooper.co; Glen Fernandes, International Securities Services Association; and Alasdair Pitt, Zodia, a subsidiary of Standard Chartered Bank.
The conversation looked at the ways in which digital asset custody is different from custody in traditional finance. “In digital assets, custody is not a term of art,” said Pitt. The core services are the safekeeping and management of the private key, which can come in different forms. The different versions of this offer different levels of security, speed of deployment, and security. The panellists noted that there is a continuous evolution in what it means to provide these services to a customer.
What is certain, is that clients need the same security as they can expect from traditional asset custody. However, Fernandes also noted that there are considerations for the contractual or property rights to the assets, applicable beyond the bankruptcy of the custodian. This implies a need for a certain level of segregation.
As well as being down to market practice, this is also a question for regulatory and legislative clarity. Gustavsson noted the heightened scrutiny over digital asset custody given the recent events. There is much regulatory development at the moment, and it can be difficult for market participants to keep up.
The speakers discussed the ambiguity over the FCA’s proposed application of the Client Assets Sourcebook (CASS), where CASS is mostly about the segregation of assets in the case of insolvency. If ‘custody’ of digital assets refers to the safekeeping of the private key, what then happens in the case of insolvency? Does the private key fall to the firm’s estate, or is it locked away if the custodian were to become non-operational?
The panellists went on to discuss issues of convergence or divergence in regulation of digital custody. In its complex and nascent state, the lack of standardization in the market is an issue, but this is gradually growing in maturity, mostly driven by the client side who are better at knowing what questions to ask. Fernandes spoke on the GBBD Digital Finance custody report, which includes a checklist of standard questions to consider when considering digital asset custody from the client perspective.
On the topic of disintermediation, the speakers discussed the roles of custodians beyond safekeeping, and in risk reduction and the prevention of financial crime. Pitt elaborated on the concept of digital assets being considered eligible as financial collateral. He called for further analysis on the topic of digital assets as a means for risk reduction.
The panel concluded that there is a need for greater clarity in the definition and minimum requirements for custody services, as well as a need for regulatory consistency across borders. With an institutional focus of the conversation, operating in a regulated environment is crucial to further adoption. Beyond the regulation, the market needs to focus further on educating investors so that they understand the key risks and challenges, and are not found to be stuck in the traditional, analogue world.
Read more on digital custody from our report here.
Digital payments: from stablecoins to CBDCs
As noted in the first panel of the day, having a trustworthy payments leg to digital assets is crucial for the adoption of tokenization across financial services. Hogan Lovells Partner, Roger Tym, led the final panel discussion, this time on stablecoins and central bank digital currencies (CBDCs) in the context of wholesale settlements for assets traded on DLT. The speakers included Claire Wells, Coinbase; Jack Fletcher, R3; Mirjam Plooij, European Central Bank (ECB); and Hakan Eroglu, Bank of International Settlements (BIS) Innovation Hub.
The speakers noted the clear growth of stablecoins and interest in CBDCs which has come hand in hand with the growth of interest in digital assets. When asked whether or not one version of tokenized payment would out-do the other, Fletcher mentioned that there are risks each way – but that the most important issue to address was that the solution needs to meet the needs of the user, both in providing interoperable payment systems and digital money that is substitutable.
Plooij, whose focus is on wholesale CBDCs in the eurozone, noted that the drive for a token-compatible payment system is coming from the market, particularly in the context of tokenized securities. She discussed the different approaches being considered, whether the central bank money would be in the form of a DLT-based token, or simply play the role of allowing other DLT platforms to seamlessly communicate with central bank money. She remarked that the two options are not mutually exclusive, but that the ECB is exploring different methods.
Eroglu spoke of the BIS Innovation Hub’s research, including Project Sela, exploring how CBDCs can be issued without compromising on security or privacy; and Project mBridge, which looks at cross-border payments for international trade, with new structures where no one winner takes all.
The speakers discussed the importance of interoperability of bank ledgers, and the role that the central bank can play in enabling this. Lastly, Wells commented on the opportunities for programmability, both in payments and in re-tooling traditional finance. This is demonstrated by the innovation seen in stablecoins over the past three years.
Roger Tym’s challenge at the outset was to question which form of payment would emerge as the winner above others, and would this cannibalise other forms of payment? The speakers were in agreement that there would be use cases for both stablecoins and CBDCs, as well as tokenized deposits. Where the innovation might be pushed forward by the private sector, there are clear use cases for a central-bank payment system that is token-compatible, whether such a system would involve a CBDC or not. What will be interesting to watch is the evolution of the private-public partnership required to drive sustainable trust in digital payments.
Read our Digital Trust whitepaper chapter on Digital Payments here
Closing remarks: Lord Holmes, Sharon Lewis, and Lawrence Wintermeyer
To close the conference, Hogan Lovells Partner Sharon Lewis was joined by Lord Holmes and Lawrence Wintermeyer, the Chair of GBBC Digital Finance. Bringing excellent humour to the session, the three discussed their thoughts on the content of the Summit, and the drivers of trust across the digital assets ecosystem.
When asked which jurisdiction had ‘won’ in the Global Readout, Lord Holmes commended Andrew McGinty’s coverage of Hong Kong, mostly for his perseverance in continuing to report even when the timer had run out. On a more serious note, he highlighted the need for collaboration across jurisdictions: “It was a tremendous session that gave a great flavour for all the activity going on globally. But really there is not any one jurisdiction: the important consideration is how we collaborate. That is how we win.”
Next, the three turned to the hinderers and enablers of trust in digital assets. Focusing on the hinderers first, Wintermeyer spoke on the need for changes in behaviour. Speaking in the context of capital markets and wholesale use cases, he noted that it is not the regulation, and it is not the technology that is not ready, but rather the change of approach in behaviour, something which takes time to develop and requires the buy in of multiple stakeholders.
Lord Holmes noted the need to differentiate between the narratives surrounding blockchain and DLT, and the narratives surrounding cryptocurrencies such as Bitcoin.
Lewis spoke of the need for clear use cases as a hinderer. Moving to the drivers behind adoption, her view was that, just as there was a drive to online banking in the retail space, there will be a drive towards digitalization in wholesale banking led by the political-economic climate, with rising interest rates, inflation, which will move governments and financial institutions to look for the most efficient systems.
Lord Holmes agreed and added the importance of the financial services ecosystem, technology sector, and law working in harmony. For example, the Electronic Trade Document Act which he led through Parliament over the past year is both tech-neutral and yet only enabled by advances in technology such as DLT. “The Blockchain Bill that never mentioned blockchain!”
On the drivers, Wintermeyer asked the audience to watch where smart capital is focused, and see it as a signal of trust. We will have to get comfortable with the existence of two infrastructures together – the new rails and the old ones will co-exist for some time.
And lastly, central to building trust and adoption is community building – whether via associations such as GDF or initiatives led by Hogan Lovells, which take stakeholders from across the ecosystem and bring them together to speak the same language.
The Summit was brought to a close and the audience headed to our drinks reception. Join us next year for another Summit looking at the developments in digital assets, distributed ledger technology, and tokenisation across financial services.
Next steps
See the related press release here: Digital Assets Summit - Key highlights (hoganlovells.com)
Explore more of the DAB Hub tools here, including:
Authored by Sharon Lewis.
