Wholesale CBDCs to materialise in 2020Tokenisation: long regulatory updating work neededOther noteworthy developmentsConclusion
Thursday, 13 February, 2020
The Digital Regulator
CBDCs and asset tokenisation kick off digital regulation in 2020
After much conceptual debate in late 2019, wholesale CBDCs are poised to become reality during 2020. This will concern monetary flows between commercial banks and the central bank (CB). The degree of centralisation or decentralisation of the underlying distributed ledger technology (DLT) will depend on each specific case. The introduction of CBDCs at retail payment level, on the other hand, is less likely, owing to the number of structural issues raised that hinder the governance of the monetary system.
Discussions about asset tokenisation have traditionally focused on the benefits and consequences for the financial markets. The Organisation for Economic Co-operation and Development (OECD) has put forward a systematic analysis of the regulatory issues connected with widespread asset tokenisation. Allowing, supporting and accompanying asset tokenisation will require substantial regulatory upgrading work. First-mover jurisdictions that follow a principle-based approach to regulation, such as Switzerland, enjoy a material advantage over other countries.
Other noteworthy developments in the digital space at the beginning of 2020 further legitimate DLT on a global scale and underline the leading position of Singapore as a cryptofinance hub.
Wholesale CBDCs to materialise in 2020
CBDC initiatives are poised to move from concepts to reality in 2020. The applications will however be limited to the wholesale segment.
During the fourth quarter of 2019, international regulators focused on analysing CBDCs and their integration into DLT infrastructures, and concluded on the inevitability of CBDCs as a consequence of the demand for continuously available payment services and the emergence of electronic payment instruments and systems. A series of regulatory pronouncements in early 2020 indicates that wholesale CBDCs are poised to move from conceptual work and experimental tests to actual implementation in the course of this year. The centralised or decentralised nature of the underlying DLT will vary from case to case.
The introduction of retail CBDCs, on the other hand, is far from complete and will require further analysis. As emphasised by the ECB in a research paperresearch paperlink1, retail CBDCs could lead to risks such as the structural disintermediation of commercial banks, centralisation of credit allocation, facilitation of systemic runs on banks in crisis situations and blurring of responsibilities for the enforcement of know your customer (KYC) and anti-money laundering (AML) regulations. In an extreme scenario, the dual banking system would come under pressure and, concurrently, influence the way monetary policy is currently conducted.
Tokenisation: long regulatory updating work needed
The OECD highlights the daunting regulatory tasks related to widespread asset tokenisation. This provides first-mover jurisdictions such as Switzerland with an advantage.
There is little dispute about the benefits that widespread asset tokenisation would bring to financial markets in terms of efficiency gains, transparency, improved liquidity, inclusivity and easier access to financing by smaller businesses. There is also a common understanding of the challenges faced by asset tokenisation, which come in different forms, be it technological (scalability, interoperability, network stability, cyber-risk) or governance-related (AML/CFT compliance, data protection and privacy issues, legal status of smart contracts).
In a reportreportlink1 issued in January, the OECD recognises the consequences of widespread asset tokenisation (disruption of the market-making model, repo and securities lending activities, potential bifurcation of liquidity between on-chain and off-chain markets for the same asset) and focuses on the substantial regulatory upgrading work needed to allow, accompany and support widespread asset tokenisation.
The OECD argues that jurisdictions that adopt a technology-neutral approach to regulation have an advantage over other countries when it comes toadapting the regulatory framework. Switzerland has been a first mover by making its legal set-up compatible with DLTs, and has followed a technology-neutral approach in the context of a principle-based method to regulation. The Swiss jurisdiction is therefore clearly attractive to asset tokenisation projects and is prepared to take the lead in widespread asset tokenisation.
Other noteworthy developments
The announcement of national blockchain strategies further legitimates DLT technology
Turkey is initiating regulatory work in support of the widespread use of cryptocurrencies
Singapore has adapted the regulatory perimeter to include crypto, thereby generating a record number of digital banking licence applications
The ineluctability of wholesale DLT-based CBDCs is the most prominent regulatory development this year. Everything points to the first wholesale CBDCs coming into being this year.
The list of regulatory issues to be tackled by the authorities in order to support and accompany the widespread adoption of asset tokenisation confirms that regulatory issues are indeed a major obstacle preventing such adoption. Similarly, this situation grants a material advantage to jurisdictions like Switzerland – an early mover in adapting regulations within a technology-neutral and principle-based context.
The announcement of national blockchain strategies (Australia and India) further legitimates DLT technology, while a number of countries such as Germany and Singapore are adapting their regulatory perimeter to include and support digital asset activities.
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