Why we need evolutionary, not revolutionary, regulatory initiatives
Clearing regulatory hurdles is essential for forward-leaning jurisdictions that goal to draw essentially the most innovative firms.
This July, Luxembourg — the world’s second-largest domicile for funding funds behind the United States — submitted a draft law updating law from March 1, 2019, that allowed for the registration and transfer of securities by custodians. With this draft law, issuance itself can be primarily based on distributed ledger technology, thereby introducing actually dematerialized DLT or blockchain-based securities.
Moreover, a central “issuance account” keeper (transfer agent) is required to imagine accountability, and the account keeper needs to be approved by any member state of the European Financial Area, which implies that non-Luxembourg credit institutions and funding firms can be the central account holder.
Two weeks later, on Aug. 11, Germany’s Federal Ministry of Finance and its Federal Ministry of Justice and Consumer Safety submitted a draft bill for the introduction of electronic securities. The bill intends to revamp both Germany’s securities law and the corresponding supervisory law, with a focus on the blockchain technique.
The draft differentiates between the retaining of a central electronic securities register by a central securities depository and the retaining of registers for issuing electronic bonds made possible by distributed ledger technologies. It additionally offers better regulatory readability: The Federal Financial Supervisory Authority will monitor the launch and upkeep of “decentralized registers” as new financial services in the agreement with the Electronic Securities Act, the German Banking Act Kreditwesengesetz, and the key securities depository rule.
The proposed modifications to the authorized framework, by adopting blockchain and different new technology, aims to bolster Germany as a hub of enterprise and enlarge “transparency, market integrity, and investor safety.”
For now, the draft bill is restricted to bonds, however, it may be extended to any safety, together with stocks and funding funds. The aim is to obtain comments from the German states by Sept. 14 and to pass the regulation later in 2020.
The draft law additionally offers a number of modifications to the prospectus law, the custody account law, and different rules so that all electronic securities are handled like legacy nondigital securities. With this, the draft law clears a significant regulatory hurdle to the mass adoption of digital assets.
What does it mean for the industry?
Germany’s very conservative government is taking the digital transformation of its securities markets extraordinarily seriously and recognizing the benefits in terms of speed, settlement times, and transparency that blockchain technology has to offer. Having first up to date current Anti-Money Laundering/Combatting the Financing of Terrorism legislation to permit banks to the store and sell cryptocurrencies to both institutional and retail customers (effective on Jan. 1), it has now turned its attention to dematerializing securities with using permission DLT or permissionless blockchain technology (e.g., public Ethereum). In impact, the draft law states that electronic security in the form of a token, for instance, carries the same rights and legal investor protections as a paper certificate.
This new draft galvanizes the philosophy that there is no need for radical new laws — somewhat, laws need to be technology-neutral — whereas clarifying the legal tie between a real-world asset and its representative digital token. More will be done, of course — for instance, introducing machine-readable policies that may update the compliance software with zero or minimal manual intervention.
On the identical time, projects within the blockchain space proceed to provide thought leadership and take away technology hurdles by combining safe digital identity with strong online privacy (e.g., personal transactions on public chains) and compliance oracles that tie digital attributes and attestations to automated policy enforcement in both the area of cryptocurrencies (e.g. compliance with the Financial Action Task Force’s Travel Rule) and digital securities.
Finally, digital transformation with the use of blockchain technology will lead to significant price reductions by means of the elimination of many error-prone manual processes, higher compliance, and more practical crime-fighting by means of increased transparency, better world accessibility to high-quality assets and, therefore, better financial inclusion.
The views, ideas, and opinions expressed here are the author’s alone and don't essentially mirror or represent the views and opinions of Cointelegraph. Manuel Rensink is the strategy director at Securrency. He oversees strategy and business development, focusing on industry partnerships and commercialization of the firm’s IP in the areas of digital assets, id management, and exchange protocols. He has over 20 years of expertise in institutional capital markets throughout all major asset classes. Prior to Securrency, Manuel worked as a strategy consultant, head of MENA at index and analytics firm MSCI in Dubai, and head of EMEA at JPMorgan spin-off RiskMetrics Group in London.
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