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The dawn of legitimate crypto-finance

The dawn of legitimate crypto-finance

02/02/2020
The development of the digital economy has sometimes become a commonplace in public policy. And often, beyond speeches and "magic thinking", the actions of States are often limited to the digitisation of existing services; the creation of applications facilitating the access and the use of traditional services; the interconnection of public networks and the centralisation of "Data". It is more a question of "scanning" the old world than adopting the revolution under way and enabling the creation of new wealth.

Likewise, few people are aware of the shock wave created by distributed register technology (DLT) and how it is already changing the world around us.

Public institutions, too, are struggling to come to terms with the past. And the feelings of the financial and political community towards crypto-finance have followed the Kübler-Ross model[1]:

Shock and denial: "I can say with near certainty that cryptomoney in general will end badly" Warren Buffet (2018)[2]

Anger: "#Libra does not only raise issues of security and financial stability. Libra actually asks states to share their monetary sovereignty with a private company. This is unacceptable!"[3]


(...) But it seems that we are now approaching the final stage, that of acceptance.
Indeed, on January 13, 2020, the Chinese Communist Party published a 200-page book entitled "Digital Currency: A Reader for Cadres [4]», subtitled "Cryptomonies are inevitably in the direction of history", whereas China had in 2017 a very strict position on the subject.[5] And on January 17, 2020 the OECD published a report on « Tokenization of assets and the potential implications for financial markets » which highlights the disruptive aspects of "digital assets" on market operations, liquidity, price, back office formalities but also considers the use of sovereign cryptosystems in certain transactions (Delivery versus Payment).

One of the particularly interesting points of the OECD report is the link between decentralised mechanisms and trusted third parties, which it highlights. Thus, the report notes [6]:« Despite its potential for disintermediation at many levels, the tokenisation of assets will ultimately depend on the existence of a reliable and credible central authority that will ensure that the tokens are backed by real assets, as well as their safekeeping. This may involve giving a central role to a trusted third party such as a custodian/ receiver who may be called upon to act as a trusted party to ensure the connection of the off-chain world to the distributed registry environment. ».

This is an opportunity to dispel the misunderstanding that exists about distributed registry systems that are supposed to operate without a trusted third party. Although their intrinsic operation is based on "consensus" and not "authority", this does not mean that in order to ensure the "veracity" of the information recorded in the registries (Oracles), the effectiveness of smart contracts (system auditors), the preservation of physical or digital assets (custodian) there is no need for "trusted third parties" or even "sovereign entities" as ultimate guarantors.

This is a way of encouraging States to tackle the problem of creating a secure, controlled and transparent digital money market by doing one of the things they do "best": regulating and controlling.


In this emerging international race, China is charting an original path that combines smartcity (Shengzen)[7], sovereign cryptomoney [8] and the conversion of the state apparatus to distributed registry technologies.

Another option is nevertheless possible (desirable?) for the countries that aspire to become the world references in digital finance, namely : (i) publishing global regulations on distributed registry technologies; (ii) creating the professions and authorities likely to ensure effective control of this new economy; and (iii) creating Sovereign Exchanges and Custodians, which are the only ones able, as they stand, to guarantee market security and ultimate compliance with the rules on customer identification and the fight against money laundering and terrorist financing. This is a prerequisite for connecting the "old world" of banking and finance to the "new world" of crypto-assets.


Time is running out, as there is only a small place on the podium of the most attractive digital financial centre and the race has already begun between small, agile countries and large, willing nations.

More than ever, the World belongs to those who get up early.


For more information, please contact Damien Concé, Doctor in Law: d.conce@rosemont.mc
 
[6] OECD (2020), The Tokenisation of Assets and Potential Implications for Financial Markets, OECD Blockchain Policy Series, page 33 paragraphe 6