In our publication “Future matters | Enabling digital assets”, we highlight some of the progress that has been made in key jurisdictions towards a truly global regulatory framework for digital assets. We also outline the work we have undertaken as we remain committed to helping our clients and the industry leverage the concrete benefits of distributed ledger technology and digital assets.
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- The digital asset landscape has evolved significantly over the last few years as a result of extensive industry and regulatory experimentation. Live trials of distributed ledger technology (DLT) and asset tokenisation are at the core of this evolution. Many markets across the globe now view the adoption of this technology as a competitive game-changer and have tied it to their innovation agendas.
- Greater regulatory clarity with the introduction of regulations such as the Markets in Cryptoassets (MiCA) Regulation in Europe and the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) in the United States has sparked much more enthusiasm and interest across the industry to participate in live projects and experimentations over the next few years.
- The focus of most regulators is on adopting a pro-innovation approach to regulating the sector, enabling the industry to engage in safe experimentation of this technology. Some regulators have adopted sandboxes and pilot programmes to encourage industry engagement in DLT experimentations in areas such as trading, clearing and settlement.
- The digital asset sector requires increased liquidity and secondary market activity in order to grow further, which necessitates greater harmonisation, accessibility and interoperability from a global perspective. Interoperability can be viewed from several perspectives including the interoperability of the types of digital assets, regulatory frameworks governing these assets, technology networks supporting these assets and their integration with traditional assets.
- One approach to building scale within the market is greater consolidation of the market infrastructures and networks supporting digital assets. Another is developing interoperability for assets, regulatory frameworks, networks and technology with the adoption of industry standards and market practices.
- One of the major hurdles facing the industry is the remaining lack of a digital cash equivalent to support the payment side of a securities transaction. Key to this is the work of central banks in developing wholesale central bank digital currencies (wCBDCs), the projects of commercial banks to provide tokenised commercial bank money, and a range of developments related to stablecoins and payment initiatives.
- Collateral management has also been a recent area of tokenisation. Tokenisation could potentially act as an enabler to increase the number of asset types available as collateral by removing some of the operational frictions, while providing stability to the financial system.
- BNP Paribas’ Securities Services business has engaged in many projects to master the process of tokenisation and related activities as much as possible, from getting comfortable with the technology through to understanding the legal and compliance considerations.
- Our role is to ensure that the worlds of traditional and digital assets can compatibly coexist. There are still some challenges ahead for the market such as, the need to align regulations for settlement on DLT, the ability to scale, and the fragmentation of blockchains from an asset support perspective. We aim to shield our clients from this complexity and rather than them having to connect directly to multiple incompatible environments, we are on the right path to provide seamless support regardless of the asset type and network. We are also engaging in several interoperability initiatives at the industry level to ensure the digital asset space progresses from a standards adoption perspective.
- One obvious lesson that we have learned over the last few years is that the adoption of truly transformational technology takes time. Market participants need to first get comfortable with the key tenets of the new market requirements, before they jump into the digital asset space. The concrete benefits of distributed ledger technology (DLT) have been recognised and will be further proven over the next few years.