️‍Shaping the Future of Digital Assets: The Role of Regulatory Evolution

[Music] good afternoon everyone my name is Jin Kong I'm the global head of legal at hased and today we're honored to have two really good friends of mine um to talk about the evolution of digital assets and its regulatory landscape um in different jurisdictions um before I start though I like to humanize a potential regulator before talking about things because at the end of the day we sometimes forget that there are human beings at the end of the day so Brian um I would like you to perhaps talk about your background and what has you know LED you to join adgm yeah okay um thank you very much Jen it's a pleasure to be with you all as um someone might expect obviously there are things outside of Regulation that we do uh and so my journey I think just to give a very quick synopsis started out in the industry it started out from Building Products it started out actually in finance traditional Finance in banking corporate banking uh later in in in Investment Banking and then uh I founded a fintech startup that was looking at crossb payments and then I transitioned from the industry perspective of trying to push the envelope push the uh the ability of regulators to understand I think a lot of the conversation was like Regulators don't understand the space how are they going to formulate regulation that's going to help us if they're not well versed with the development in the industry uh and so I moved into this space with uh with adjm and I currently lead the fintech unit to help bridge that and being able to now take a perspective of just not just one firm but actually the entire market and a lot of the focus I have is thinking about this more from like a periodic table what elements do we have in uh adgm which ones are missing where are there opportunities for cross-pollination and it's really that dual hat that attracted me into uh doing what I do but at the at the end of the day it is the only way to fully appreciate what is happening in the space is by using these various products engaging with industry engaging with startups who are building and solving problems through Innovation I think the invention itself is interesting and I I always kind of step back and think if if someone showed me fire and said fire is awesome the next logical question is what can I use it for and so a lot of the focus for me is okay can I use it to cook fantastic can I use it to burn a house of course you can but at the same time it's like what are the safeguards that can be put in to help this grow and that's uh you know my journey is really about um engaging with the industry in that respect thank you Jen and we also have another kindred soul um flying from Europe um Thomas please also introduce yourself for the audience so my name is Thomas NE and before becoming a lawyer I used to code software for about 10 years so I have a tech background and um in 2016 the lonstein government it's a very small country in Europe for those of you who don't know Lenin bordering Switzerland and Austria uh we started a process to think about if we should regulate the industry that was in 2016 uh and the answer to that was yes so we came up with a framework regulating service providers uh but also a tokenization framework that's another topic I think in 5 years we will talk about tokenization without spvs not for now um so we came up with that framework and that was actually uh announced in 2018 uh and then the European commission looked at what we did and obviously that also served as one of the blueprints for the uh European Mika regulations uh we have now in in Europe very uh close so it's around the corner my day job is being a lawyer obviously uh we we help clients getting licenses in Europe uh and uh my role here is I'm the chair of the board of in atpa in atpa is a European based Association but it's a global Association to repres the industry because I think our industry uh needs good representation and uh we have something to say and I think we matured as an industry and therefore I think we uh also need to to talk to Regulators globally uh and to help them understand what we do and also educate the industry what what how we should approach things how we should understand also the regulatory side of things right because it's a dialogue and we have to listen to each other and I think if I could just add something on to like what Thomas has said it's an important piece of having a common voice because one of the challenges we have as a you know on the regulatory side is is there a common view coming back from the industry if one firm says one thing another says another and there's a clear disagreement even within the indust industry of what good looks like that's challenging so we're very keen to hear that there's a cohesive voice that comes on the nature of regulations and the engagement that needs to happen I just wanted to add that thank you and speaking of engage agement um as the global head of legal before deciding our future home to be in Abu Dhabi I've spoken with various lawyers from various jurisdictions before making that decision and so I personally have a lot of my views on adgm as my our next home and why it's very suitable for us um but I think there were some initial um challenges in understanding the different jurisdictional framework within the UAE and how adgm um distinguishes itself from it so Brian could you walk us through the um different jurisdictions that are existing in the UAE and what is adm's kind of goal and vision and how does it distinguish itself from other jurisdictions okay I think you sort of have to take a step back and think about this from like 30,000 ft High to ask the question of when someone flies in and they come into the UAE appreciating that first of all they're different Emirates the Emirates themselves have their mandates and that's one point of reference to start with which is it they're not homogeneous you see that in the demographics you see that in the client base you see that in the focus at the government level and so when you look at the financial jurisdictions because I'll speak primarily to the financial side you or adjm in essence looking at it from a financial services perspective you broadly have three possible places you could be right you could either be onshore which is where you have Regulators like um Central Bank uh the Securities and commodities Authority escar you have Vara in Dubai uh as a presence and then you have the International Financial free zones where you have two in the UAE you have the Dubai International Financial Center which has been around for the last 15 years and then you have the abudhabi global market which has just recently celebrated n years so you might then think okay well why would one go to one or the other it there are a lot of factors to consider over and above the simple is it a case where I can get a license from entity a or reg jurisdiction A or B some of it is just more fundamental on the the legal framework right uh the two Financial free zones use common law English common law so if you're thinking about business that is international that has an Nexus with the kind of counterparties who will lean on common law then the financial free zones uh make sense in that respect um you also have the nature of the target market that you're thinking about doing is it primarily onshore are you focused on the local jurisdiction where there's already regulated environment for you to operate in then quite naturally the the onshore presence makes sense when it comes to what we as adgm are doing it it it goes back to why adjm was formed in the first place it should surprise no one at least I hope in this room that you have Abu Dhabi as the larger contributor to the global uh sorry to the GDP uh of the UAE and that contribution has been primarily from hydrocarbons um you you know where we are it's primarily oil and gas which is contributing that and the government basically said we need to find non-financial uh ways to bring in other means of contributing to this economy and financial services was one area that they identified at the get-go the domain of digital assets was front and center it wasn't an afterthought it was a deliberate right from the beginning to build digital assets into the fabric of what do we do as a non-financial center what are the infrastructure layers that are needed you know as as uh Ventures and as Enterprises you commonly think about minimum viable product think about that from an ecosystem what is the minimum viable ecosystem to build the future of finance and that really goes down to all of these components and then and from an Abu perspective it was what legal framework can we put in place place what regulatory framework needs to be there what are the U the ecosystem Builders The Hub 71s the accelerators The Venture side and it's the combination of all these parts coming together that actually starts to create that DNA that is adgm now obviously you need the passage of time to validate this we've seen initially a lot more startups that were setting up in adgm some of them have matured they've grown they've built presence in other jurisdictions that's you know a validation of the framework we've had to go and extend what we have in the framework by building more capabilities um working even within our own regulatory sandbox touching on right now what we're doing is for example tokenized commercial paper we appreciate that there are various different products that are coming into the center where we as Regulators need to be able to work much more closely with the Innovative side and that Innovation comes from the edge it comes from finex it comes from startups who are building capabilities but on the other side you have institutional players that want to leverage that and they want to know can I trust them are they regulated should they be regulated are they infrastructure provider what kind of counterparty risk do I need to cater to so all of these factors are where we as adgm are very much focused on providing that safe those safeguards so that that ecosystem can grow and you know I think this as well for those of you who are in the room it's it's Testament to that uh to that uh capability great and speaking of digital assets and the regulatory framework we would be a Miss if we weren't to talk about eu's MAA um given it's um coming into effect in December so Thomas walk us through quickly I know it's an impossible task but how is it structured um how does it distinguish itself from mithit and what are some of the key classifications that exist within Mika so first of all it's obviously um a huge uh regulation it covers basically service providers uh issuance it has a very strict rules for stable coins um and that is the reason when like there was a big social media company announcing that they want to come up with a stable coin project uh that's where the European commission was quite fast in introducing their framework and so you have to think of Mika as a as a as a regulation for you as a service provider so if you provide custody if you provide a trading uh engine if you transfer uh crypto assets then you have to get licensed first and you do that with your National competent Authority so Mika is a framework which is applicable in the European Union and the European economic area so the the member states if you if you have your company in Germany you can apply with the German regulator if you have your company in Lenin I'm I'm from there you can apply with the national competent Authority and that is also the interesting uh change we will see end of this year before uh whenever you got a license from your home state like let's say in Austria or in Spain or in France uh it will only give you access to France right it was a kind of a a very fractionalized system right you you got one license but you could only operate actually in that jurisdiction everything else was a gray area we did not know if it was possible and that changes end of this year with MAA in force in the European Union if you get your license in France you have access access to the whole EU EA framework and that's 450 million users and 23 million businesses for me that's actually the the best part about MAA that it gives you access to a bigger Market um and then obviously if you want to also and that's that's another big thing uh Europe said and the European commission and the Parliament said we want to allow for issuance token issuance is a legitimate legitimate way how to finance your venture or your company if you follow the rules so that's why you have to disclose uh uh you have to have disclosures in a in in a white paper but you could actually Finance your company uh with with a white paper and again could raise in all of Europe uh based on that because it's actually also harmonized and the third part is stable coins which is a a huge topic right I mean uh there was a big question mark what stable coins actually mean to uh also central banks and regulators and how and if we should actually allow them uh and now we have have Circle they they got the first license from uh from AMF so the French regulator um and uh so again there these are like the area of stable coins is very very very uh tough like from a regulatory perspective you have to follow uh and and fulfill a lot of requirements but again it is allowed and now with the recent changes in the US that might have changed uh but for quite a while like our industry was not able like there were some exemptions like here in in Abu Dhabi or in UAE where you could actually set up your company but in a lot of jurisdictions it was not possible Regulators would not even talk to you right and that completely changed with bigger jurisdictions and jurisdictions like here uh really showcasing that it is possible to regulate the industry it is possible to give clear guidance and it's it's it's possible to allow uh this Innovative uh industry to to to provide products and services and I think that is what uh what I think we will see that with that harmonization in a way with that access and the uh the clear guidance we will see that our industry is actually growing it's uh it's it was the missing piece I think um from from my perspective and um unfortunately we do not have all the time that I would like to have to kind of talk about asset reference tokens e-money tokens other tokens and I I actually spared that out sorry but you help me J asset reference please and also utility tokens virtual asset tokens you know fat reference tokens here but I think just focusing on the regime of issuance the industry has really welcome the edm's support in giving the DT framework for issuance um Brian could you just walk us through some of the details and the relevant features and how the industry may be able to utilize the framework for its you know uh expanding its business yeah and and it's it's actually interesting I just um escaped from a round table um on this very topic uh um the DT foundations within the center uh and you sort of have to take a step back and look at the entire space and what required such a framework to begin with um as adgm we had a framework for foundations and but obviously that was much better suited to your trusts the type of entities that are not necessarily decentralized they're not on chain in in any capacity and trying to force fit um what you know would be a DT Foundation construct into that regulatory framework was very much a round Peg sorry a square peg round hole problem and so instead of trying to to do that the idea was no let's build something from the ground up that actually resonates with where the industry not just is but also where it's going now a lot of that work extended to looking at what other jurisdictions had done so obviously you had the likes of Switzerland and various other markets where the ability to actually set up establish run a foundation were already in place uh and the legal wrapper by which that was possible a couple of things that were added into the framework that we have here I think by and large from a foundation perspective you might find a lot of similarities the nature that it's U not non-commercial not for-profit type uh activities the um the barrier in essence around it is do you need to be a conso of identified individuals so the completely pseudonymous or anonymized basis of operating such a a foundation as you can appreciate from a how is accountability managed doesn't really cut the mustard right uh Financial crime is a base requirement when you think about these activities uh and so that was a an initial piece that needed to be put in place now when you sort of start to layer on top of that what are the interesting aspects to it it will be U the ability to actually have the certainty around the activities that you carry out um the ability to then run a treasury with those are operating in digital assets from an adgm perspective it is thinking about this what type of digital assets are permitted in the center you will see that the foundations are operating with you know treasuries that hold many of these digital assets can they custody them within the center they can can they be able to um find mechanisms by which they can build and scale the the the protocol or the the utility that is driven by that Foundation they can and some of those in my mind from from a financial services perspective could eventually become financial services so you could have a protocol building um a capability that then becomes let's just say for an argument sake um an amm an automated Market maker and that in itself starts to extend into financial services but the foundation itself is not interested in doing that it is building the base layer on which all of these Innovations and capabilities can be built on top so from a financial services perspective we are very keen to make sure that the foundation is strong we understand the framework we understand the liability we understand accountability they understand as well the important aspects of making sure that the security assessments done against their protocol against the token issuance very clear white papers and tokenomics some of this is bread and butter if you've been able to think about uh the uh the requirements of just running um a foundation but at the same time giving that Clarity of what the expectation is we feel makes it much more transparent so that you know what to expect um and that very um that very initial step that was made end of last year with pushing out a consultation paper crystallized through engagement with industry um with two foundations that were in conversation at the time in the final set that um was feedback from the industry plus of course those entities becoming live foundations that's in a public register you can see and that continues to be a growing and budding ecosystem what do we think that really means when you stand that it is the ability to identify a foundation in the center build it grow an ecosystem scale engage with other parts of the adgm which may be some of them Financial some of them are infrastructure because things you know you have a token you've issued maybe it's a proof of stake chain how do you do staking are there infrastructure providers in the center all of those types of questions are part of the broader where does DT Foundation fit within the construct of OB Global Market but it's also thinking about future proof what does this actually mean when you extend from 5 10 20 50 500 different foundations how does that scale most of this is becoming very much automated through smart contracts so it's then asking what libraries are you using how are you carrying out security are you doing bug bounties what protections are you putting in that are as transparent as possible not just for the regulator but for anyone else that's using the uh you know the particular protocol so these are ways in which we're raising the The Watermark but also enabling that transparency to be reflected from anyone looking in on those foundations and certainly what that also means is the feedback as more foundations come into the center is then an opportunity to say actually the foundation now needs to start thinking about the next level of progression we're not um afraid to go and make amendments we continue to make enhancements some of these will come out initially as guidance but certainly if the industry continues to develop in a particular path that that's an opportunity to make enhancements to the existing framework and thank you for this proactive view on the regulatory perspective and looking forward um I think Thomas the question I wanted to ask is even though Mika is coming into effect this month um what are some of the things that you think are missing from the framework that we should be anticipating in the future so I that's my personal view obviously uh there are things which some people think are missing and I think they are not missing are missing on purpose it's defi uh and we already heard now why you might not you should not regulate defi in in that that sense uh but I think what I would actually have asked for is a clear guidance on on staking and lending um I think that is a part which is missing um and I think for good reason we don't have uh we don't have nfts uh covered and we don't have defi covered and I want to make that very very simple to understand if you have a centralized a centrally organized exchange uh and you can think of whatever exchange uh you you you know um and then you will understand like we saw like the cases like FTX um you have the it admin could easily just access the order book front run your orders something can goes WR can go wrong with the custody uh there can be like a lot of things going wrong because people are doing provid providing services and you have to put trust into into these people and that reminds me of where we actually all started uh we we start with trustless Technologies so Technologies you don't have to trust they do uh what they're expected to do so if you do the same thing with the with a DEX with a decentrally organized exchange uh if it that if that set of smart contracts is is set up properly you cannot front run people right you you have to self custody and if you want to you can do that obviously there is a part which we should always consider that's compliance so money laundering and financing of terrorism that's a big challenge which we yet have to solve but so that's like two approaches one is to regulate service providers who provide services for the ones who do not want to interact with metamask in a web three in a browser and and do that themselves right but we should allow if you want to do that we should allow that if that works and I think what the industry has to prove now uh uh and we we still do that and I I think we still have to because for years we were telling Regulators look we are a fully decentralized platform and they were not right and then The Regulators said yeah but that you have quite some very centrally organized elements within your platform so what we have to do is we have to prove that this technology serves the purpose addresses the risks properly and then I think Regulators will get more and more comfortable with say I'll allowing an understanding that there is a part which is outside of the scope of regulation for good reason we don't need to regulate whatever true defi is right so we have to understand and come up with a with a with a common understanding what that is and that's going to be actually evolving like because the industry is evolving um but uh that is a part where iy is the biggest potential and um yeah so I I I don't think we we need a a MAA 2 at the moment I think let's let's work on what we have now uh it's anywhere a very tough and challenging journey and if I could just very quickly pick on something that uh Thomas just mentioned um staking virtual assets lending and borrowing these are elements that we've just published in a consultation paper this month so if you have views around those you know certainly as we make amendments to our digital assets framework that would be very very useful for us to hear from from you I would invite you to read what Lenin did it's already in force in law as of this year we have a a staking and lending service provider where we actually did exactly that that will be looked at thank you thank you for witnessing constructive uh relationship between two different jurisdictions and my personal hope for the industry is that there will be increasing collaboration between different jurisdictions especially you know coming from South Korea APAC Japan you know we have so many other jurisdictions and I think given the global nature of the digital asset I think it's greater the greater emphasis has to be placed on working together so thank you for your wonderful contribution today and thank you everyone for listening [Music]