Maurice:

Welcome to C&F Talks. This is the programme in which I get to interview one of the speakers at a forthcoming event of ours. Today, it's my great pleasure to have with me Diego Ballon Ossio, who's a Partner at Clifford Chance. Diego is going to be speaking at the Digital Asset Innovation Summit, which is being held as part of City Week, on the 2nd of July at the Royal Garden Hotel in London. Diego, welcome.

Hi Maurice, thank you very much for having me.

Great pleasure to have you with us.

As crypto payments begin to gain traction, especially in cross-border transactions, what legal and regulatory frameworks need to evolve to support their mainstream adoption?

Sure, you know, that is a fascinating question because we're just about in the UK to launch a new regulatory framework, and this question is therefore particularly pertinent. I think what's happening for crypto payments is that regulation, as it has always been, is typically siloed in each jurisdiction in which it applies. And so, to the extent that there are discrepancies from a regulatory perspective in each individual jurisdictions, that can create friction and doesn't allow the operation of cross-border payments.

And we've seen that a little bit already in the context of the MiCA regulation in Europe, for example, where global stablecoin operators who have issued stablecoins had to set up their organisation in Europe somewhere and have to comply with a set of European standards that may not align with the standards that they're used to in their home jurisdiction. 

Similarly, if we start adding regulatory frameworks as they develop into the mix, that becomes really challenging and becomes a real problem and potentially forces stablecoin issuers not to go into a particular jurisdiction or not to make their asset available in a particular jurisdiction because the compliance burden of operating multiple frameworks may be too high. So, that's a deterrent and we want to avoid it.

So, coming back to your specific question, what are the frameworks that we need to evolve? I think it's harmonisation in the frameworks. It's recognising that there is a regime in another jurisdiction that provides adequate measures of control and protection to the underlying assets such that when the stablecoin is used as payment in other jurisdictions, that is accepted. It doesn't require a new regulatory compliance framework.

Yeah, yeah.

And of course, there's a lot of discussion about stablecoins at the present time and their position as a bridge between traditional finance and the crypto world. How do you assess their role in the future of payments and what are the key legal or structural hurdles that need to be overcome?

Sure. You know, I think the potential for stablecoins to be adopted globally is huge and their use is potentially also very, very big, not just in the retail space where we're going to use them to pay for our shopping or Tesco as another way of payment, but actually it may be the case that stablecoins are adopted in the wider wholesale markets to settle securities transactions, to enable cross-border remittances at a really structural level where the big institutions can use them for almost instantaneous settlement, which is one of the risks that the banking sector has been dealing with for a long time. And since the 80s, there is a clearing bank that's active for international finance that facilitates some payment pairs, right?

So, I think with the development of stablecoins, that is potentially another option for users. The risk with that, of course, is that when you are using a particular stablecoin, you are effectively relying on the creditworthiness or you're putting a price on the creditworthiness of the underlying assets and your ability to liquidate those assets. I think from a legal perspective, what's really important is to try to achieve a framework which gives the holder of the stablecoins adequate certainty that if something was to go wrong, the underlying reserve assets that are actually maintaining the value of the stablecoins are available to the holders of the stablecoins and are not somehow going to be swept away as part of the insolvency of the issuer. That is, I think, the fundamental point. It's this trust question.

And at the moment, the way it works is that financial services frameworks trust banks. They just do because banks go through internationally as a result of the Basel standards. Banks have an incredibly sophisticated prudential framework which makes sure that their capital is held super secure and that creditors are protected. That is not there for stablecoin issuers. Potentially, it may not be necessary if we manage the risks correctly, right?

So, I think that the real booster for their adoption will be the creation of a framework which has those things in place, which enables a stablecoin issuer to operate and that gives trust to the wider market, particularly to the sophisticated players, that those assets, those reserve assets are safe.

Presumably, banks are going to want to play in that less regulated stablecoin issuer space, aren't they? I mean, we've already seen signs of that. So maybe there's a bit of a danger of regulatory arbitrage. There's an article in the FT on that today.

But turning to central bank digital currencies, there have been many announcements of these projects across the world and there are various governments, I think up to 60 governments are currently working on them at the moment. But from a legal and governance perspective, what are the most critical factors to enable them to succeed, do you think?

Yeah, I mean, central bank digital currencies are interesting because obviously they are, in a way, a government's answer to the stablecoins. It's the flip side to that proposition, right? And I think within that concept, there are a few things that one needs to consider.

Many governments issue or are working on their stablecoin projects in order to solve what is in most cases a local issue. Either it's facilitating access to finance or it's to facilitate faster payments, avoidance of payment card schemes or providing alternatives to card schemes. So, there's typically within the jurisdiction, the central bank that is considering the issue, the use of central bank digital currencies are focused on a domestic question.

Because generally currency and legal tender, if that's what somebody wants, if one of the central banks wants to create that, is a matter for domestic policy, right? So, you focus on inward-looking issues and it's much harder to coordinate with your central bank partners, peers across the world to get a consistent framework for the operation of these coins. I think this is where the challenges for central bank digital currencies arise in the context of global payments.

You know, in theory, and there have been experiments to this effect, it is possible to create payment corridors, they're called, or payment bridges where central banks connect and whoever is party to that bridge can then interchange the central bank digital currencies. Those systems have challenges around governance because the question then is, who is sovereign? Who is actually controlling that system? Is it joint? Is it just one jurisdiction? Is it the others?

And who's responsible for the operation of those systems? And then really what's crucial for the market is how do we achieve things like settlement finality? How do we make sure that those payments are actually safe for the participants?

And that if a participant goes past holding these central bank digital currencies, they will be available in the context of the system in a normal way, they cannot be challenged as a result of the insolvency process, et cetera. So those questions arise in the cross-border space much more because there is less control and everybody wants to apply their legal framework. And so, what we've been working on in various jurisdictions is to try and come up with what I call a bit of a circus tent approach where everybody has a slither and you sort of build a dome by joining up these triangles of sovereignty, et cetera.

But that requires obviously that the central banks work together and collaborate and are willing to, also from a political perspective, share that control. And in the current world, that is a challenge.

Yeah, a significant challenge, isn't it?

How do you see the interplay between private sector innovations like stablecoins and the public initiatives like CBDCs? Your answer to the last question, I think it sort of started along those lines that there's sort of the equivalent in a sense, one government, one private.

Can they coexist or is regulatory tension inevitable? And a further point on that, do you think that governments that pursue CBDCs, are they going to crowd out some of the stablecoin issuers?

Yeah, so I mean, I think that is a really interesting question. And let me start with that question first. So, are they going to crowd out stable coin issuers?

If we look historically, there have been, you know, the first attempt of a global stable coin is the Libra or Diem proposition a few years back where among others, Facebook was one of the drivers. And that didn't go through. It didn't, it wasn't adopted because there was fear, I think, from a public stability, from an economic perspective, that governments would lose control over the macroeconomic factors that central banks typically can control as levers to manage the economy, right?

That was a concern. And so, I think that project sort of was stopped in its tracks, and it didn't go further. However, since then, there have been widely adopted coins. Maybe the way they started was with less fanfare, with less of a big splash. They just were created and started to be issued in particular jurisdictions. And we know they're all dollar pegged.

And they started operating across the world and they're now widely adopted. There are two big ones that we know are widely adopted. And in a way, they've reached a stage where it's very difficult for those to now no longer exist.

And we see in Europe, for example, the framework has been designed sort of around them and now they're complying with certain requirements. So, will they coexist? I think, yes, they will coexist. And I think that's the reality.

Yeah.

And the question around how they interplay with CBDCs is interesting, because it looks like, and we will see that as this coming back to our first question, how the regulatory frameworks develop.

If it is possible that we end up with global coins, I very much suspect that with what the US is doing at the moment and their current move from a policy perspective, there is going to be maybe two or three or four global coins that will operate across the globe and having to comply with multiple local standards, but are likely to be pegged to those particular currencies that are global currencies, those settlement currencies that people are comfortable holding, and the dollar and the euro and so on.

And I think you then may have in other jurisdictions CBDCs that can then interplay with those for lesser-known currencies. I think that is a real possibility, particularly in the context of, again, wholesale markets. I see that as a real thing where you want to facilitate cross-border transactions in tokenised assets.

We haven't talked about tokenisation at all today, but if you think about how that might look, that future where you tokenise a whole bunch of assets and you want to settle them in individual jurisdictions, you'd want to be able to use a digital version of the currency. And I think in that context, you can have the stablecoin as a global coin that can move around everywhere and then the individual CBDCs in multiple jurisdictions that serve as bridges to that on-ramp.

Well, it's certainly a fascinating world that is evolving before our eyes, isn't it?

For our viewers, if you'd like to hear more about these issues and how this world is evolving, do have a look at the website for City Week, because the Digital Asset Innovation Summit is being held as part of City Week on the 2nd of July at the Royal Garden Hotel, London, the website: www.cityweekuk.com. So further information on how to register is available there.

Diego, thank you so much for sharing those thoughts with us today. Look forward to seeing you at the conference in, what, four and a half weeks' time.

I look forward to that. Thank you very much.