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Digital assets: global regulation

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Regulators are concerned about protecting consumers and the ultimate stability of the financial system.

Why should I read this?

Digital assets are decentralised, global, and anonymous. From a regulatory perspective, they are not easy to navigate as many initiatives are starting to develop worldwide. This could lead to potentially different local perspectives and interpretations. And a lack of due diligence and awareness of regulatory outlook is building in a ‘ticking time bomb’ for future disputes.

Unlike some, our view is that the regulations that are going to be imposed will be fairly consistent with those that apply to other existing financial assets. They will not be a new form of regulation, but rather an extension of existing frameworks adapted to the particular features of digital assets.

What should I do?

Whilst the regulatory landscape evolves, there are some practical steps you can already be looking to take. You need to be thinking innovatively about how to identify, measure and manage risks in this space, including the use of new technologies and tools. key to those risks is the ever-increasing dependence on good data and the heightened concerns around quality, privacy, security, retention, and ethics.

Given the changing nature of digital asset products and services, of how they are delivered, and of communications with customers and counterparties, you need to consider the end-customer throughout the business and at all stages of a product lifecycle. You also need to review your overall risk management framework and think about how to attract staff with new skill sets in this highly competitive market.

This year in particular has seen movement towards widespread regulations of digital assets and an organised effort from entities in this space to appeal directly to regulatory organisations. This can be achieved through traditional methods of public comment on proposed regulations and by seeking to influence regulators to promote sensible and consistent regulations. All of which has the advantage of promoting uniformed rules around the world.

What else do I need to know about digital assets?

The growing move towards digital finance and the widening use of technology is getting the attention of regulators who are becoming more attuned to the risks (and opportunities) of new technologies and increased digitalization.  There are long-held concerns about protecting consumers and more recently concerns about the potential for circumvention of sanction regimes and the stability of the financial system.

This increased use of technology coupled with the regulators concerns is seeing the legal landscape in this space evolve. Regulators have a desire for robust and onerous digital asset regulations plus a demonstrated strong commitment to successful enforcement. These assets will become regulated across the world and sooner rather than later.

How can Eversheds Sutherland help?

With years of experience working alongside our clients in research and development, proof of concept and roll out of distributed ledger technology (DLT) driven process innovation, payments, asset origination and market infrastructure, we can help you advance your DLT strategy through digital asset regulatory classification, custody of digital assets, security, smart contracts, tokenization and more. Our team are well versed in all aspects of existing and emerging regulation surrounding digital assets and advise investment fund managers, issuers, depositaries, custodians, wallet providers and broker-dealers on all aspects of evolving regulatory frameworks to which they are, or may in the future be, subject. Find out more about our global DLT and digital assets team.

Further reading

Focus on Fintech: Federal Reserve explores benefits and risks of potential US Central Bank Digital Currency while the Biden Administration issues Executive Order for US policy on digital assets

New executive order forges path for unified US regulation of digital assets

Digital assets not sufficient for security of costs court tells bitcoin "inventor"

Digital Dispute Resolution Rules - a new approach to resolving disputes arising out of novel digital technologies?

Written by Clare Johnston in our knowledge team