Davos Debates: 'Same Activity, Same Rules' Approach for Tokenization?

• The Annual Meeting of World's Elite: Davos
• Highlight of the Tokenization Economy Panel
• The Challenges and Potential Solutions
• Seeking a Middle Ground

The Annual Meeting of World's Elite: Davos

While the annual meeting at Davos may seem tedious and irrelevant at times, it is crucial to note its significant role in addressing global issues. The event invites influential figures from varying fields to share their insights and perspectives. Though the luxurious manner of their arrival and apparent contradictions in upholding certain principles may invite criticism, their contributions are invaluable. The event is also a hub for networking and media coverage, often bringing underrated discussions into the spotlight. One such discussion took place in the Tokenization Economy panel, featuring notable speakers such as Circle's Jeremy Allaire, Stellar's Denelle Dixon, Euroclear's Lieve Mostrey, and Skybridge's Anthony Scaramucci.

Highlight of the Tokenization Economy Panel

The panel involved a fruitful discussion on various matters, including use cases, regulation, and jurisdictional differences. Towards the end of the session, an intriguing question was raised about the regulatory approach of same activity, same risk, same regulation. The panel's response to this query becomes a significant point of discussion.

Mostrey from Euroclear was quick to point out the importance of technology-agnostic regulations in order not to hinder progress. This view has been reflected in Euroclear's strategy of issuing a short-term note on their blockchain before integrating it with the traditional system, thereby aligning with existing laws. The approach reaffirms the importance of outcome over the means used to achieve it, especially in the case of blockchain and securities, where technology plays a significant role.

The Challenges and Potential Solutions

However, the Euroclear approach has its limitations. The necessity to transfer the blockchain-based note to legacy rails for full compliance adds extra steps and mediators, reducing efficiency. The complexity arises from recognizing securities transactions on a blockchain, which aren't as straightforward as they may seem. This issue becomes more challenging considering the different types of blockchains used for tokenization - public chains, permissioned ones, proprietary networks, and sometimes a hybrid. Furthermore, confusion arises regarding the reporting of on-chain transactions, the type of identity to be used, and assigning responsibility when things go wrong.

Allaire from Circle also emphasizes that the principle of same activity, same rules has a retrospective viewpoint. Citing the case of the early Internet, he warns against imposing excessive regulations that could hinder progress.

Regulating financial assets is an intricate task due to their risk profile. The existing regulations are designed to protect investors and maintain economic stability. However, new rules accommodating the unique characteristics of blockchain-based asset transfer may be required. At the same time, it is essential not to hamper progress while these rules are being formulated.

Seeking a Middle Ground

One solution could be to apply existing rules to 'simple' tokenized securities. This approach would allow both crypto-native and traditional market participants to experiment with processes and assess market reactions. Simultaneously, a 'sandbox' environment could be established, facilitating experimentation while adhering to regulatory norms. This would acknowledge the evolving nature of markets and the potential of pioneering ideas to become tomorrow's norm.

Embracing tokenization can lead to a revolutionary shift in trading, much like the transition to electronic trading. With blockchain-based markets, a range of new products and trading strategies can be explored. It can also enhance transparency and mitigate risk, thereby opening up new market functionalities. While it is evident that new rules will be required in the future, working within the existing regulations can provide a useful starting point.

Edited by Jonathan Stoker