International Coordination - a Prerequisite for Digital Assets
Shearman & Sterling
Digitisation is changing the way we own, trade and think about traditional financial assets. Resolving the legal and regulatory concerns that digital assets raise for financial services will open up tremendous commercial and economic opportunities. While international coordination of regulation and supervision might be desirable, this is, at best, likely to be slow and not comprehensive. Fortunately, a single legal and regulatory system, serving as a “home” jurisdiction for core businesses, can provide the solution to most, if not all, of the problems. The U.K. system, which looks to combine proper regulation and supervision in a business sensitive environment, makes an attractive proposition.
Many jurisdictions are setting out their separate legal and regulatory stalls for this new business. There is little agreement between nations, even on matters of definition. Some regimes also suffer from individual quirks. The EU’s system introduces new, abstract concepts—such as “e-money token” and “asset-referenced token”—which cannot be intuitively understood or applied and are disconnected from the business world. The U.S. system has, at its root, a distinction based on securities and commodities, which carries little logic but arises from the statutory jurisdictions of two key U.S. regulators.
Digital assets can be accessed from across the globe. A key question is the degree to which one jurisdiction can resolve all the issues itself, with the result that those with the best system will benefit from a flight to quality by businesses, or whether international co-ordination is a pre-requisite for regulation. The Financial Stability Board has proposed a framework intended to improve international consistency, on the principle of “same activity, same risk, same regulation.” But regulatory competition has not abated—indeed, it would be undesirable, and futile, to seek to restrain those countries which manage the best systems by levelling them with others that choose to operate differently. A harmonised global system that applies pragmatic common law reasoning would be attractive, but impracticable, not least because of fundamental fissures between the underlying legal approaches in use around the world.
The U.K. has the opportunity to serve as the prime jurisdiction that offers an attractive home for digital assets activity. It has an advantage in its sophisticated and trusted approach to law and regulation. In extending its regime to digital assets it will bring to bear its traditional values of investor protection, safe and sound markets, and financial stability. Its common law approach offers the greatest possible degree of legal certainty, protection and confidence, whilst encouraging innovation and entrepreneurialism.
Of course, the precise details of the U.K.’s new digital regime need detailed thought, but the U.K.’s legislators and regulators appear open to fresh ideas and determined to succeed. Some international coordination could still be sought—such as a global framework for market abuse and insider trading, which could boost cross-border markets.
The difficulties in execution should not be underestimated. The U.K. has successfully operated a global financial services market for centuries, but its approach to law and regulation deceives people by its simplicity. Designing a regime around the new asset class under the U.K.’s regulatory umbrella requires new and careful thinking. Only then will customers from around the world be able to reach out from under the blanket of their national regimes to benefit from the greater certainty and safety provided by the U.K.’s regime. The U.K. should now seize the opportunity and complete the necessary work to apply its system to digital assets as quickly as it can.