I wanted to get through Davos without touching it. Not only is Davos losing its importance, it’s also getting more boring every year.
However, such harsh judgment may be unfair. The purpose of Davos, a gathering of the world’s elite, is to invite the ultimate “influencers” to voice their opinions and address major global issues.
Sure, we ridicule the private jets used to transport people to debates about the impending crisis of climate change, ridicule privileged financiers for denying them tools for economic freedom, and mock censorship and falsehoods. We can laugh at the hypocrisy of trying to fight information.
However, Davos can also be valued as an opportunity to network and enjoy the glamorous media coverage. In fact, it is increasingly becoming the cornerstone of Davos.
Interesting but overlooked debates occasionally surface. It actually happened in the Tokenized Economy debate, and I enjoyed watching it.
In the debate, Jeremy Allaire of Circle, Denelle Dixon of Stellar, Lieve Mostrey of Euroclear, Skybridge Big names such as Skybridge’s Anthony Scaramucci delivered high-quality discussions.
Common topics such as use cases, regulations, and jurisdictional differences were eloquently discussed. And just as I was about to conclude at the end that it was good content, but nothing new, someone in the audience commented on the regulatory approach of “same activities, same risks, same regulations.” I asked for Finally, a controversial topic appeared.
Euroclear’s Mostrey was the first to speak, arguing that regulations must be technology-neutral to avoid impeding progress. This has been Euroclear’s approach so far, with the company issuing short-term securities on its own blockchain and continuing with traditional processes to fully comply with existing legislation.
I understand, and in principle I agree. What matters is the result, not the technology. But when it comes to blockchain and securities, technology is very important. Blockchain not only offers new benefits, but also new capabilities unimaginable using traditional methods.
Admittedly, it’s not exactly “the same activity.” However, insisting that all blockchain-based securities comply with current rules will limit the possibilities at the starting point. We will only be able to obtain “something irreplaceable.” I should be able to aim higher.
Same but different
Even if we start from the “same” place and work with regulators to create rules for the “different parts,” there are regulatory issues that need to be addressed.
To begin with, Euroclear’s blockchain-based bonds had to go through traditional processes to become fully compliant. This adds more processes, more layers, and the need for intermediaries. I don’t think it’s efficient. Why blockchain-based bonds fail to meet regulatory requirements?
That’s because natively recognizing securities transactions on a blockchain is not as simple as one might think.
For example, settlement finality is an important part of securities regulation. When was ownership transferred? In traditional securities, this is when a seller accepts payment for an asset from a buyer.
Finality involves a clearinghouse like Euroclear and involves a number of steps. However, in blockchain, the “finality” of payments is direct (payment and transfer occur in one step) and is usually based on consensus. How much consensus is enough for finality?
Further, the issue is further complicated by the fact that blockchains used for tokenization come in many different forms, including public blockchains, permissioned blockchains, proprietary networks, and even hybrid chains. Different blockchains work in different ways.
Additionally, it is currently unclear what kind of reporting is required for on-chain transactions and how it should be provided. Furthermore, what kind of identity (ID) should I use?
And if the entire security lifecycle is built into the code, who is responsible if something goes wrong? Depending on the platform chosen, modifying the blockchain is not trivial.
The Euroclear approach may be effective in some cases. By repeating everything in the traditional process while using blockchain, regulators can be satisfied and traditional investors can avoid feeling excluded.
But is it optimal? Is shoehorning this new type of asset into existing structures the most efficient approach? Getting it past gatekeepers has widened its potential reach for now, but ultimately it’s only a very short-term solution.
learn from the internet
Circle’s Allaire’s response succinctly summed up the point.
“The same activities and processes are still backward thinking.”
He cited the early days of the Internet as an example. If this idea had been applied back then, he says, the world would be very different today.
All websites would have had to register with the Federal Communications Commission. If you want to stream audio, you will need to obtain a wireless license. For peer-to-peer communications, platforms will need to apply to become carriers.
Because of this maze of requirements, the Internet’s primary use will likely remain the exchange of research papers.
Crypto assets are in a similar situation. I completely agree that regulation should focus on results, not technology. But ignoring technology’s ability to do things in a fundamentally different way is cutting off possibilities when you take the first step.
It’s a difficult problem to solve. Financial assets have completely different risk requirements than print or audio content. Regulations to protect investors will naturally be orders of magnitude more complex.
Additionally, waiting for drafts for new processes that take into account the new characteristics of blockchain-based asset transfers could end up delaying progress by years.
So what is the solution?
My hope is that “simple” tokenized securities will be subject to existing processes, allowing crypto natives and traditional market participants to start experimenting with the process and market reactions.
Sandboxes, on the other hand, need to allow for experiments with regulatory approval. Sandboxes need to recognize market changes and the potential for “outlandish” ideas to become the norm for an efficient future.
It wasn’t that long ago in history that electronic trading was seen as a dramatic departure from the norm.
Tokenization is a similar departure and leap forward. Just as electronic trading has enabled new types of products and trading strategies that were previously unimaginable, so will blockchain-based markets.
Just as electronic trading has enabled highly sophisticated dashboards, improving both intelligence and reporting, blockchain transparency can reduce risk while enabling new market functions.
The potential of blockchain goes far beyond efficiency. You will be able to do things that you could not do before. This will require new rules, but existing rules should be sufficient for the time being.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: andreas_naegeli / Shutterstock.com
｜Original text: Davos Debate: Should Tokenization Follow the ‘Same Activity, Same Rules’ Approach?