U.K. Financial Conduct Authority Provides a Role Model for Digital Asset Regulation
From Beijing to Barcelona to Buenos Aires, it’s possible to step onto a court and play a game of pickup basketball without ever having met the players before or even being able to speak their language. This is possible because the key definitions and core rules of the game are clear and consistent.
There will always be variations from country to country—the court might be a dusty parking lot, or the rim a hollowed-out box and the rules may differ—but the goal and principles remain the same: put the ball in the hoop, without fouling. Whomever scores the most, wins.
Despite policymakers’ commendable efforts in this space, a similar understanding is lacking in the world of digital assets and blockchain. Having a clear and consistent language and regulatory approach is important for innovation to flourish. But to date, the current frameworks have muddied the water.
Without clear and consistent frameworks for this new technology, many financial players and companies will continue to rely on outdated laws and rules. In the payments space, this would require tying up large amounts of funds in expensive pre-funded accounts on either side of a multi-country transaction. Even with these pre-commitments, transactions still take days to complete, are fraught with risk and offer little communication or visibility.
RippleNet was developed to address this exact challenge; it speeds up transactions to instant settlement, provides complete transparency and eliminates the need for pre-funded accounts. RippleNet’s On-Demand Liquidity uses the digital asset XRP as a bridge currency to facilitate fiat currency transactions and deliver these benefits at scale. But realizing this promise is challenging without effective frameworks and guidance on the use of digital assets.
Fortunately, a new effort announced by the U.K. Financial Conduct Authority (FCA) in July 2019 has the potential to mirror basketball’s collective appeal and clarity for digital assets. It attempts to definitively classify digital assets and provide companies with a clear understanding of whether they will need to be regulated and how to become compliant.
Specifically, the FCA classifies digital assets as one of three types of tokens: exchange, utility and security. These classifications are critical because they define the use cases for each type of token. For example, XRP is classified as an exchange token because of its role in facilitating cross border transactions.
By issuing these classifications, the FCA makes it clear to companies which digital assets fall inside its “regulatory perimeter.” Put another way, the FCA has demonstrated which types of tokens will be regulated as securities and which will not. The FCA has also made the framework flexible to account for evolutions in technology because it acknowledges that digital assets can move between classifications over time.
Businesses need this clarity on classification. As they work to build solutions for a particular region, it is essential that they understand the boundaries of what is permissible. Similarly, governments require clear guidelines in order to recruit new companies and promote emerging technologies that can lead to job gains and tax revenues.
The FCA guidelines can also play an important role in both protecting consumers while allowing innovation to take hold. The evolution of early Internet regulation is a useful parallel.
Until the late 90s, the sector was governed by a framework originally written for transistor radios and rotary phones. In 1997, the Clinton administration released The Framework for Global Electronic Commerce, which outlined a set of principles that helped accelerate the growth of global commerce over the web.
Importantly, this policy recognized the differences between technologies instead of enforcing the same set of regulations on an online bank, a blog and an ecommerce site for example. This is the same type of distinction made by FCA regarding tokens, enabling unique classifications and applications by function.
So just as the U.S. helped lead on Internet regulations, the U.K. is taking important first steps to regulate digital assets and blockchain. There are a number of other countries around the world that have already proven friendly to blockchain technology—including Switzerland, Abu Dhabi, Thailand and Singapore—and many more that might take important cues from the FCA and co-learn their own regulations.
Countries that take the lead on these frameworks will be better positioned to attract capital, companies and jobs—particularly since blockchain technology is here to stay. Regions that have unclear guidelines should establish their own frameworks to remain competitive and avoid losing companies to better regulated markets.
As with basketball, a sport that has become a beloved global game in part because it is easy to understand and accessible to all, digital assets and blockchain need well-defined rules that should be consistent enough with one another such that companies can operate globally without fear. Ultimately, the FCA’s guidelines can serve as an example framework for other countries, providing the much-needed regulatory clarity that will allow digital assets and blockchain to thrive.