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Key industry stakeholders discuss the challenges, opportunities, and future of digital assets in the UK, at an event hosted by Ripple and The Payments Association.
What is this article about? The role of digital assets in the UK, including the risks and opportunities, implementing regulation in the sector; as well as how it is progressing compared to other countries, and the importance of the payments infrastructure and interoperability.
Why is this important? In the backdrop of two relevant government consultations – crypto and CBDCs – the industry is waiting for the UK government to define the next steps for digital assets.
What’s next? Organisations interacting with digital assets must wait to see the consultation responses from the BoE and apply the lessons learnt from similar frameworks in other jurisdictions.
The UK’s digital asset landscape has evolved quickly in the last few years. And now, the industry waits for the direction of travel from latest government consultation, closing at the end of June 2023.
Scepticism remains around these types of assets and the crypto world has been under growing scrutiny following some high-profile developments. However, the case for central bank digital currencies (CBDCs) has strengthened because of the spread of digital assets.
Brunello Rosa, CEO and head of research at Rosa & Roubini Associates, was one of the panellists at an exclusive event hosted by Ripple in partnership with The Payments Association on 20 June, told attendees that public sector safe assets are a foundation for digital assets.
He said: “Imagine a world where you completely lose trust in the digital assets you own, then people look for the safest possible asset – that needs to be provided by the public sector.”
William Lovell from the Bank of England (BoE) echoed this sentiment, explaining that the bank identifies a clear role for digital assets.
“The first thing is having a payment medium that is risk-free,” said Lovell, who is the head of technology and architecture.
Consumers may compare these assets to digital money in a debit card, but this exposes them to the risk of the deposit taker of the bank that is holding the liabilities, he explained. In contrast, CBDCs can provide access to risk-free money to the public.
“The second thing is as a platform for innovation – if you’re moving into the digital domain, you can do things that you can’t do with central bank money,” added Lovell.
However, to encourage the flow of data, there are concerns around privacy. In response, the BoE and the UK Treasury have explicitly stated that they will not have access to users’ personal data.
Lovell said: “We don’t tell you how to spend your physical bank notes, and we don’t want to tell you how to spend your digital money either.”
However, some information must be exchanged, meaning discussions around security will be ongoing with some people remaining sceptical. Supervisory bodies will have to invest time and effort into education and allowing users to trust digital assets and their corresponding privacy measures.
There is also a need for broader education around digital assets, ensuring that stakeholders have a level of understanding of these new concepts on par with traditional financial matters.
Andrew Whitworth, policy director for EMEA at Ripple was also on the panel. He said: “Industry needs to team up with people from academic circles to offer training courses to people, to get information out there to a stage that people are comfortable with it and take certain levels of understanding for granted.”
The industry view on moving from policy to regulation
There has been a long policy development phase. Now, policy principles are being translated into regulation, which will provide some elements of clarity.
In terms of questions around supervision and implementation, digital assets need to be able to be used, traded, created in a stable proportionate regulatory framework that the industry can understand.
“We need to get to the reality stage of this, away from purely policy conversations [and translate it] into action and understanding,” said Whitworth.
On one hand the payments industry needs FCA rules, perhaps supplemented with secondary legislations rules, but also clarity around what a regime will look like, what licensing looks like, understanding how businesses apply for these licenses, what permission do businesses get and on what basis.
Comparing the UK’s regulatory process to other jurisdictions
“It’s not a race, there’s not a first mover advantage to this. In some way there may be a second or later mover advantage to this so you can learn from best practice that has emerged from elsewhere,” added Whitworth.
There are jurisdictions such as Dubai, Singapore and Hong Kong that are already interacting with digital assets, and developing a level of day-to-day experience – UK authorities and regulators can learn from that.
Furthermore, in a post-Brexit environment, there are questions around the benefits or disadvantages to being outside the EU for managing digital assets regulation.
As long as the UK is able to exploit its independence from the EU and it is able to move faster than its counterparts giving it a competitive advantage, then it’s a good thing, explained Whitworth. However, if economies of scale matter more, then this can be deemed a disadvantage.
He shared that being outside the EU is “exhausting”, as the business holds duplicate conversations with minor difference, for essentially the same outcome.
“Are there benefits from being outside the single market? Probably. There are also disadvantages […] but from where I sit, it doesn’t fill me with excitement,” Whitworth added.
There are questions around interoperability and cross border payments that may have been facilitated by being part of the EU. However, the UK supervisory bodies are collaborating closely with their counterparts in the EU and elsewhere – one hand learning from them and on the other, thinking about setting standards while working together.
However, from an international perspective, it is very difficult to reach a level of coordination to resolve cross border issues. Once that level has been achieved, then countries or clusters of countries can see how they can make their own systems interoperable with other without making separate infrastructures.
“How do we make that happen in the digital payments systems world? How do we avoid going towards balkanisation?” asked Rosa.
He went on to add: “Honestly, I don’t think we will succeed […] but, that doesn’t mean we should stop trying.”
Businesses engaging with digital assets should wait for consultation on crypto and CBDC, which closes on 30 June 2023, with the responses expected to be published shortly afterwards.