A Common Technology Framework for the Establishment of a Global, Liquid Digital Assets Marketplace
By Jackson Mueller, Director of Policy and Government Relations
One of the defining characteristics of financial technology is its borderless nature. At the same time, however, the full potential of this feature is frequently limited by the unique compliance regimes of the many regulatory agencies across multiple jurisdictions that have been in place for years. While prudent financial market regulation has contributed to a vibrant, competitive, global financial services ecosystem, the ever-increasing pace of financial technology development creates constant stress on these regulatory frameworks, and exposes an apparent tension between fintech innovators and global regulators. All too often, the technologist’s mantra of “move fast and break things” collides with the regulator’s mission to maintain, enhance, and monitor market integrity and ensure investor protection. To minimize this friction, regulators and multilateral institutions have launched a series of initiatives from regulatory sandboxes to innovation hubs and pilots to understand the interplay between innovation and regulation and the opportunities and challenges that flow from a certain degree of “managed disruption”. These efforts can help to bridge the various gaps between innovator and regulator, spotlight opportunities for each, and open up larger discussions and feedback on the future direction of financial markets.
There are spirited discussions underway among central banks, other regulatory agencies, multilateral institutions, policymakers, and both startup and incumbent firms on the future of value and its movement within and among international markets. Much attention has focused on resurgent cryptocurrency prices, the boom and bust of initial coin offerings, private stablecoin issuance, the regulatory taxonomy of digitalized assets, and exhaustive exploration by central banks into issuing their own digital currencies. However, outside of single-ledger environments and monolithic, top-down government-sponsored networks (such as China’s Blockchain Services Network), relatively little attention is paid to establishing common value-movement and compliance infrastructure to support these innovations. How, then, to develop a global marketplace where these different forms of digitalized value can co-exist? A marketplace where the issuance and secondary trading of these forms of value can occur in near real-time? One where such transactions can occur across different networks in cross-border settings with automated compliance that respects and responds to the unique and complex regulatory requirements of multiple jurisdictions?
Last month, at the request of securities regulators from three different international jurisdictions, Securrency conducted a pilot test that demonstrated:
· The ability to build directly into the asset itself rulesets defining applicable securities regulations, holding periods, and exclusions of multiple jurisdictions;
· The ability to automate enforcement of these multi-jurisdictional rulesets in both primary and secondary cross-border markets transactions;
· Decentralized interpretation and enforcement of these multi-jurisdictional rules;
· The repeatability and reusability of these rulesets to streamline compliant digital asset creation and issuance; and
· The plain-language auditability of these rulesets to facilitate regulatory oversight of tokenized securities offerings.
Utilizing the Stellar Network, a decentralized, open-source protocol for currencies and payments that is supported by the Stellar Development Foundation, the pilot showcased the ease with which issuers can build self-executing regulatory policies into a particular securities token using an intuitive plain-language interface. Importantly, these policies are machine-readable representations of securities regulations that can be interpreted “on-chain” — through an instance of Securrency’s policy engine built directly into the Stellar ledger — and “off-chain” simultaneously for security and auditability. Furthermore, these policies can be easily audited by regulators to ensure consistency with existing rules and can be updated as regulations change without the need to remove and recreate the token under a revised regulatory framework. Altogether, Securrency demonstrated how a tokenized regulated financial instrument, infused with regulatory policies governing that particular token, corporate policies (business logic), and certain attestations used to determine whether particular users or parties can participate in the transaction, can be built in a matter of minutes and issued into multiple markets in near real-time in a manner fully compliant with the rules of each jurisdiction for both primary and secondary market transactions.
This is a significant development with massive potential for the digital assets space and the future of finance. As demonstrated, the use of an open and interoperable compliance framework can reduce market friction, reduce legal and compliance costs, generate greater transparency and consistency in the application of certain securities laws, provide for enhanced regulatory oversight and reduced fraud and market manipulation, and expand global access to capital and investment opportunity.
This demonstration focused specifically on the ability of Securrency’s technology to automate enforcement of regulatory and transactional rules. In the coming months, Securrency, at the request of regulatory agencies, will also demonstrate several other critical features, including; enrollment and qualification of investors, custody features of tokenized securities, clearing and settlement functionality, showcasing interactions between transfer agent, broker, and other interactions, and reporting requirements and disclosures.
We look forward to continued collaboration with these regulatory agencies and invite other interested regulatory authorities and policymakers to connect with us to discover how the development of an open, interoperable compliance framework capable of supporting the co-existence and movement of all forms of value across a variety of payment, investment, trading, and servicing infrastructures can simultaneously bridge an often fractured relationship between innovation and regulation.