Digital Assets Digest November

Big Innovation Centre: 2021 Report on Blockchain Industry in the UK Landscape

On 3 November 2021, a report was published by the Big Innovation Centre, a UK-based think-tank and technology consultancy. The report analyses over 500 companies, 250 investors, 50 hubs and 15 government agencies. The report aims to provide an overview of the blockchain industry ecosystem in the UK.

The report's key arguments are that: investment confidence in UK and London-based blockchain entrepreneurship is high and growing; London receives the majority of finance and is the headquarters for most UK blockchain companies; blockchain applications are moving beyond proof of concept into use across both private and public purpose sectors; and there is some alignment between UK blockchain entrepreneurship and regulators. The report calls for a comprehensive long term strategy, so as to preserve the UK's leadership position. It states that the strategy should include "funding, a responsive political class and a robust regulatory framework including standardisation for scalability".

G20 Rome Leaders’ Declaration

On 31 October 2021, the G20 published the leaders' declaration, adopted following the summit held in Rome on 30 and 31 October 2021. The declaration includes a section on financial regulation in which the G20 welcomes progress made in relation to the G20 Roadmap to enhance cross-border payments. The declaration also endorses the FSB's quantitative global targets for addressing the four challenges of cross-border payments (cost, speed, transparency and access). The declaration encourages progress on implementing the FSB High-Level Recommendations on global stablecoins and asks standard setting bodies to complete their assessment of any changes that may need to be made in light of the FSB recommendations. The declaration asks for further work to be done by the IMF, BIS and others in assessing the role of CBDCs in enhancing cross-border payments and the wider implications for the international monetary system.

ECB: Letter from Christine Lagarde to Gunnar Beck, MEP on digital Euro

In this letter, European Central Bank President, Ms Christine Lagarde, expresses concerns about cryptocurrencies and their suitability as an alternative to the Euro. Ms Lagarde also notes the growing market capitalisation of cryptocurrencies and differentiates a digital Euro from cryptoassets, arguing that a digital Euro provides the same level confidence as cash (as it would also be backed by a central bank). Ms Lagarde refers to the launch of the investigation phase of a digital Euro project by ECB's Governing Council and adds that this does not indicate a firm commitment to issuing a digital Euro (but that the project is designed to ensure that the Eurosystem is ready should one be launched). Ms Lagarde notes that amendments to existing legislative framework in view of the introduction of a digital Euro would be decided by European Union co-legislators. Ms Lagarde concludes that a digital Euro could have benefits of the Euro for Europeans in a digital age, combining efficiency with the safety of and trust.

FSB: Letter from Chair to G20 Leaders

On 28 October 2021, the Financial Stability Board issued a letter sent by Randal Quarles, FSB Chair, to G20 leaders ahead of their October 2021 summit. The letter refers to a number of areas of interest and contains a section on harnessing the benefits of technology. The letter refers to the G20 Roadmap for Enhancing Cross-Border Payments and Mr Quarles confirms that work in 2022 in this regard will focus on developing specific proposals on improvements to underlying systems and arrangements, as well as possibly developing new systems. The letter notes the growing market capitalisation of cryptocurrencies and increasing links to the financial system (the FSB's 2021 annual report on promoting financial stability cites links between cryptoassets and the mainstream financial system through trading platforms and custodial services and states that increasing participation in speculative cryptoasset trading could have broader financial stability risks) and confirms that it will be keeping a close eye on this and the potential implication for financial stability. The letter notes that a number jurisdictions have been looking at their regulatory frameworks in relation to specific risks arising from stablecoins.

FATF: updated guidance for a risk-based approach - virtual assets and virtual asset service providers

On 28 October 2021, FATF issued updated guidance on risk-based approach in relation to virtual assets and virtual asset providers. These guidelines were first issued in 2019 and require countries to minimise risks associated with virtual asset financial activities and providers (among other things). The 2021 Guidance focuses on the following six key areas: clarification on the definitions of virtual assets and VASPs, (ii) guidance on how the FATF Standards apply to stablecoins; (iii) additional guidance on the risks and the tools available to countries to address the money laundering and terrorist financing risks for peer-to-peer transactions; (iv) updated guidance on the licensing and registration of VASPs; (v) additional guidance for the public and private sectors on the implementation of the “travel rule”; and (vi) principles of information-sharing and co-operation amongst VASP Supervisors.

FSB: speech on renewed focus for 2022

On 18 October 2021, the FSB published a speech by Randal Quarles, FSB Chair, that among other things, considers how the FSB will address ongoing and future financial stability challenges in 2022 and beyond. One of the points raised was that the FSB is closely watching cryptoassets and stablecoins and will continue to monitor progress and seek to coordinate the regulation of global stablecoins.

BoE: Minutes of the CBDC Technology Forum - September 2021

On 19 October 2021, the Bank of England published the Minutes for the first CBDC Technology Forum meeting

Key points

• Objectives and proposed format of Technology Forum meetings. The role of the Forum is to assist the Bank of England in understanding the views of expert stakeholders on the technological challenges of designing, implementing and operating a CBDC.
• Recap of some assumptions around CBDC technology. The Bank of England has been researching, in some depth, technology options to see what approaches might be relevant and feasible.
• Forward agenda and members’ views on key CBDC technology topics. Members stressed the importance of addressing interoperability of the CBDC with other payment rails, as well as interoperability between payment interface providers. Members indicated interest in discussing offline payments, privacy and programmability.

ECB: Speech by Fabio Panetta: “Hic sunt leones” – open research questions on the international dimension of central bank digital currencies

On 19 October 2021, the ECB issued a speech by Fabio Panetta, Member of the Executive Board of the ECB, at the ECB-CEBRA conference on the international aspects of digital currencies and FinTech.

Points to note

• The ECB launched an investigation into the digital Euro in the Summer of 2021 and is investigating whether it would be possible to use the digital Euro in cross-border contexts, and under which conditions.
• Use of CBDC outside the jurisdiction where it is issued might increase the risk of digital currency substitution – or digital “dollarization".
• Allowing "non-residents" to use CBDCs can increase risk/potential for spillovers (issuing a CBDC can magnify the cross-border transmission of shocks, increase exchange rate volatility and alter capital flow dynamic).
• Strategic interactions have not been studied much in the context of CBDCs, and the international dimension even less so.

FCA: Perimeter Report 2020/21

On 21 October 2021, the FCA published its perimeter report 2020/21. This sets out the regulatory and legislative basis for the perimeter and the potential for harm to consumers arising from products and services. The report states that development of more complex business models that present themselves as ways customers can generate returns from their cryptoasset holdings are creating perimeter issues for the FCA. The FCA confirms that it will work with HM Treasury to consider whether further regulatory or legislative action may be needed to mitigate the risks these models present.

G7/HM Treasury: Public Policy Principles for Retail Central Bank Digital Currencies and Statement

On 14 October 2021, the G7 issued a report containing a set of Public Policy Principles for Retail Central Bank Digital Currencies, alongside a G7 Finance Ministers and Central Bank Governors’ Statement on CBDCs and digital payments.

The report states that no G7 authority has yet decided whether they will issue a CBDC and this is a sovereign matter for each jurisdiction. It sets out key principles for CBDCs covering areas such as: the design of a CBDC; standards of privacy, accountability in relation to usage of data; coexistence with existing means of payment; and financial risks and harm.

The Statement provides that any CBDC must support and "do no harm" to the ability of central banks to fulfil their mandates for monetary and financial stability. It welcomes the FSB progress report on the implementation of recommendations for global stablecoin arrangements. The statement also commits to the G20 Roadmap to enhance cross-border payments, and the global targets.

Bank of England: speech on impact of "crypto" on financial stability

On 13 October 2021, the Bank of England issued a speech by Sir Jon Cunliffe, Deputy Governor, Financial Stability. Mr Cunliffe looks at the impact of cryptoassets on the stability of the UK’s financial system and argues that unbacked crypto-assets (eg Bitcoin) and backed crypto-assets for payments (stablecoins) have begun to connect to the financial system.

Mr Cunliffe states that financial stability risks are relatively limited, but could grow very rapidly and argues that the extent to which those risks could grow will depend on the nature of the regulatory and supervisory response. Mr Cunliffe states that the focus should not be on regulating technologies but rather the activities the technologies are performing. Mr Cunliffe also expresses concerns about the decentralised finance sector and states that this presents a unique set of regulatory challenges. Mr Cunliffe welcomes the consultation launched by CPMI and others on the application of the Principles for Financial Market Infrastructures to stablecoin arrangements.

FSB: first consolidated progress report on roadmap for enhancing cross-border payments

On 13 October 2021, the FSB published the first progress report on the G20 roadmap for enhancing cross-border payments. The FSB published the roadmap in October 2020 and it was endorsed by the G20.

Key points

• Recent work has largely been focused on laying the foundation for future roadmap actions (e.g. finalising quantitative targets for addressing the challenges faced by cross-border payments).
• The majority of the roadmap's 2021 milestones have been successfully completed but some of the timelines have been extended.
• The next stage of work in 2022 will look at the development of specific proposals for material improvements of underlying systems and arrangements (among other things).

FSB: final report on quantitative targets for enhancing cross-border payments

On 13 October 2021, the FSB issued an update on the FSB's quantitative targets for enhancing cross-border payments. The targets are informed by the current payment landscape and publicly available data for the four challenges to cross-border payments identified by the FSB across three market segments: wholesale; retail; and remittances. A common target date of end of 2027 was set in respect of the individual targets, with the exception of the remittances.

The FSB confirms that by October 2022, it will publish a report with KPIs outlining further details on implementation.

HM Treasury: response to call for evidence on Payments Landscape Review

On 11 October 2021, HM Treasury issued a response to the call for on Payments Landscape Review.

Priority areas and actions

• Equipping Faster Payments for the future, supported by a new payments architecture.
• Unlocking Open Banking enabled payments safely and securely.
• Future-proofing the legislative and regulatory framework for payments to ensure it is agile and proportionate.

FPC: summary and record: October 2021

In the summary, the FPC considers that direct risks to the stability of the UK financial system from cryptoassets are currently limited. The FPC confirms that it will, however, continue to pay close attention to developments, including the relationship between cryptoassets and the UK financial system

FSB: progress report on regulation, supervision and oversight of global stablecoin arrangements

This progress report, published in 7 October 2021, provides a status update on progress made on the implementation of the FSB high-level recommendations for regulation, supervision and oversight of “global stablecoin” arrangements.

Key findings

• So-called stablecoins are not being used for mainstream payments on a significant scale but vulnerabilities have continued to grow over the course of 2020-21.
• jurisdictions have taken or are considering different approaches towards implementing the high-level recommendations.
• The work on fostering the soundness of global stablecoins is an integral part of the Roadmap for enhancing cross-border payments endorsed by the G20 in October 2020.
• Authorities have identified several issues relating to implementation of the recommendations that may need further consideration and further work at international level.

European Commission: EU Banking Package 2021 – prudential exposure to cryptoassets

On 27 October 2021, the European Commission published a package of legislative proposals amending existing EU prudential regulation (the 2021 EU Banking Package). This includes a proposed Regulation amending the CRR which asks the European Commission to review whether a dedicated prudential treatment for crypto assets would be needed and to adopt, if appropriate, a legislative proposal. This follows the BCBS's public consultation on preliminary proposals for the prudential treatment of banks' cryptoasset exposures (see our briefing here).

BoE and HM Treasury next steps on central bank digital currency

On 9 November 2021, the Bank of England published a statement outlining the next steps in relation to the UK CBDC project. The Bank of England and HM Treasury set up the CBDC Taskforce in April 2021. The statement confirms that HM Treasury and the Bank of England will launch a consultation in 2022 on their assessment of the case for a UK CBDC, The consultation will form part of a "research and exploration" phase and will help to inform policy development. The statement confirms that no decision has been made on whether to introduce a CBDC in the UK.

Co-author: Bisola Williams