What are the different parts of the jigsaw that make up trust in digital assets, and where do we find the missing pieces in the quest to restore that trust?
These were among the questions posed in July’s Financial Market Insights webinar. Following on from our recent paper, Restoring Trust in Digital Assets, panellists Sean Kiernan (CEO, Greengage), Jannah Patchay (Executive Director and Policy Lead, Digital Pound Foundation), Toby Babb (Founder and CEO, Harrington Starr), Rebecca Park (Senior Practice Director, Global Counsel) and Hirander Misra (Chairman and CEO, GMEX Group and ZERO13) brought a variety of expertise and viewpoints to the table. The discussion centred on the complex interplay of political, regulatory and economic trust factors, and set out a vision for the future and actions for today.
Was trust in digital assets already weak before the scandals of 2022?
The digital asset industry is still young and has a lot to learn, says Jannah Patchay. “The crypto market is gradually discovering through a process of trial and error why certain market structures exist in the traditional space.” Digital assets bring huge opportunities to cut out some of the levels of inefficiency in traditional finance but the industry is finding out why those layers of intermediation exist. It is also clear that regulatory and prudential requirements and the supervisory structure of traditional markets create a trust environment. The digital asset industry suffers from uncertainty around the fundamental legal bases of the market, and this has not yet been adequately addressed.
Rebecca Park homed in on a lack of awareness and understanding as a key factor in current levels of trust. “The broad media narrative around digital assets is incredibly negative,” she says. “There is an image issue happening because of what [the public] have read. They don’t know what happened to FTX, but FTX is in the ether and it’s linked to perceptions of fraud or it’s linked to negative sentiment.” One bad apple changes the whole perception of an industry. “In 2008 no one cared which bank collapsed. It didn’t matter. It was a plague on all your houses.”
Sean Kiernan sees the need to dig deeper than the headlines and to continually educate ourselves and others. “Take that knowledge and pass it around to the people that are making policy and speak openly and freely with them. If we do it well, we will bring people into the fold to engage in good behaviours,” he says.
A political hot potato
Policy is not a smooth path. The UK Financial Services and Market Act, which passed into law at the end of June and classifies crypto as a regulated financial activity, “should be a high watermark moment for parliament, policymakers and parliamentarians,” says Rebecca. “But it was done with incredibly limited debate or understanding about what’s changed and what’s been implemented. That negative feedback loop that exists with the public and the media and is now in the policymaking process.”
This Act supports Prime Minister Rishi Sunak’s desire for the UK to become a ‘crypto hub’ but the devil is in the detail. The industry is keen to see how much backing there is across Whitehall and the regulatory community for these political commitments. “There’s usually quite a big mismatch between the political sentiment and the technical regulatory reality,” says Rebecca. “This is going to be a really testing period.”
Regulation, of course, is one of the key elements of regaining trust that was highlighted in the Financial Market Insights paper Restoring Trust in Digital Assets. It is equated by Toby Babb to “bringing the grownups into the room.” It’s vital to develop a regulated environment that allows people to have a robust system which they can trust, and to not see their money disappear overnight.
Conditions for success
Sean Kiernan sees three factors which will help the UK to succeed in its ambition. “Common law is the first and foremost capacity for a responsive legal infrastructure that can work with change,” he says. “The second thing that really helps in the UK is a combination of London primarily being a Financial Services centre, a technology hub, and a centre for creative industries. The third thing is the people advocacy. We have a workforce here that is deep in terms of talent pools.”
The talent pool is crucial. We have already seen hirings from traditional finance by blockchain and digital asset companies to bring some of their expertise around compliance and regulation and standards, and many traditional finance institutions have been hiring people with digital asset experience to teach them about the technology.
Toby Babb sees several different factors impacting the movement of people and knowledge between the two. Pre-Covid, he says, “we saw an absolute brain drain of talent from traditional finance going into digital assets.” There is still an appetite for new challenges and innovation, but this has been tempered by current instability across all markets.
Toby is positive about the future. “I think within financial services, you generally tend to see a bit of a risk appetite from a lot of people, particularly coming from trading backgrounds,” he explains. As industry confidence grows and regulation starts to move forward, he says, people will want to “get involved in sexy projects and sexy technology. I don’t see anywhere better than within the digital asset space.”
Can technology harmonisation restore trust?
Hirander Misra’s GMEX group is a market infrastructure firm working on hybrid finance. He has an overview of the digital assets in multiple markets including the UAE, where the industry is harmonised to a much greater extent with policy, regulation and commercial implementation including sandboxes and licensing. He wonders if there will be a political will in the UK to do something similar, and if the FCA will be in a position to support it.
Technology itself is also a key factor. “A lot of this trust issue can be addressed through interoperability,” he says. “There are a lot of silos.” There is light at the end of the tunnel, though, and an appetite for interoperability from all the major players. “That kind of interconnect is going to be crucial to restore trust,” says Hirander, “because there’s more visibility around what’s happening in a more cohesive manner.”
The missing pieces
What are the key takeaways from this excellent panel? In this blog we have touched on just a few of the points made. Hirander Misra summarises them neatly. “What can instil trust?” he asks. “Policy and regulation; Education, training and awareness; and Technology enablement – with all of these leading to financial innovation.”
And what can we do now to improve perception of our industry? Sean Kiernan urges the digital asset sector to step up and act before the regulations require it. “Where is the mass digital asset sector sign up to voluntary commitments on fraud prevention?” he asks. “Where is the sign up for really clear guidelines on transparency and the way we’re going to act in the NFT market or in broader tokenization of assets?”
In summary, it is up to us as an industry to restore trust in digital assets and to highlight the positives that often go under-reported.