Institutional crypto weekly roundup

Our weekly list of announcements about how capital markets participants and regulators are engaging with digital assets.

Reuters: Germany passes blockchain strategy to fight parallel currencies

Germany has passed a comprehensive blockchain strategy in which Berlin vows to fight any company efforts to establish a parallel currency, in the latest sign that Facebook’s planned Libra faces tough regulatory hurdles in Europe. The US social media giant’s Libra project is the most well-known of the stablecoins, a certain form of cryptocurrency backed by assets such as traditional money deposits, short-term government securities or gold.

In its blockchain strategy passed by Chancellor Angela Merkel’s cabinet on Wednesday, the government says it wants to boost the digital transformation of its economy but also tackle the risks stemming from such new technologies: “We want to be at the forefront and further strengthen Germany as a leading technology location,” Finance Minister Olaf Scholz was cited in Reuters stating, adding that blockchain technology could contribute to this as it was a building block of the future Internet.

“At the same time, we must protect consumers and state sovereignty,” Scholz said. “A core element of state sovereignty is the issuing of a currency, we will not leave this task to private companies.” The German government aims to liaise closely with its European and international allies to prevent stablecoins from becoming alternative currencies, according to the blockchain strategy passed by cabinet.

Berlin will intensify its existing dialogue with the Bundesbank, Germany’s national central bank, about digital central bank money in order to explore the current state of developments and address possible risks, it said. The German government also aims to propose legislation this year which would allow the introduction of blockchain-based electronic bonds, the document showed.

France and Germany said on Friday that Facebook’s Libra currency poses risks to the financial sector that could block its authorization in Europe. They also backed the development of an alternative public cryptocurrency in Europe. The criticism comes as the European Central Bank is working on a long-term plan to launch a public digital currency that could make projects such as Libra redundant.

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Senior officials from public authorities meet on stablecoins

Senior officials from public authorities worldwide met in Basel to discuss policy and regulatory issues posed by the emergence of “stablecoin” initiatives backed by financial institutions and large technology companies. The conference was hosted by the Bank for International Settlements (BIS), and included presentations by Fnality International, the Libra Association and J.P. Morgan.

“A key part of assessing new initiatives is to understand the details,” said Agustín Carstens, general manager of the BIS, in a statement. “When such initiatives cross national borders, it’s important for regulators to coordinate and come to a common understanding.”

The event was convened by the Group of Seven working group on stablecoins chaired by Benoît Cœuré, chair of the BIS-hosted Committee on Payments and Market Infrastructures. The group will produce a final report on its work by mid-October. “As a new technology, stablecoins are largely untested, especially on the scale required to run a global payment system,” said Cœuré in a statement. “They give rise to a number of serious risks related to public policy priorities. The bar for regulatory approval will be high.”

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Embedded supervision: how to build regulation into blockchain finance

How might blockchain-based financial markets be regulated and supervised? This BIS working paper argues that asset tokenization and underlying distributed ledger technology (DLT) open up new ways of supervising financial risks. It then puts the case for “embedded supervision”: a framework that allows compliance with regulatory goals to be automatically monitored by reading the market’s ledger, thus reducing the need for firms to actively collect, verify and deliver data.

The paper’s main theoretical result is to show how much capital verifiers would have to stake so that no market participant would ever find it profitable to bribe them into reversing the transaction history. As transactions would then be economically final, supervisors could then trust the distributed ledger’s data.

The paper also discusses what kind of legislative and other arrangements would be needed to promote low-cost supervision, data privacy, and a level playing field for both small and large firms. It argues that the main challenges would be to embed the concept of economic finality in the legal system and how to design rules for assigning responsibility in decentralized markets.

Read the full paper

BNY Mellon to provide asset servicing for cleared bitcoin product

VanEck and SolidX announced the SEC-regulated issuance of its cleared bitcoin product. The shares will provide institutional investors access to a physically-backed bitcoin product that is tradeable through traditional and prime brokerage accounts. The Shares are the first institutional-quality, cleared product providing exposure to bitcoin and enabling a standard ETF creation-and-redemption process.

BNY Mellon will act as the daily fund accountant, administrator and transfer agent, which includes facilitating the investor creation and redemption activity. SolidX was among the first to file with the SEC a registered physically-backed bitcoin ETF and the first to include an “innovative” insurance feature as part of its approach, according to a company statement.

“We are heavily focused on supporting innovation in asset management, including in the delivery of digital currency strategies and investment options to investors,” Jeff McCarthy, global head of Exchange Traded Products at BNY Mellon, said in a statement. “We are excited to leverage our firm’s focus on digital and alternative asset classes with aspects of ETF-servicing through the creation and redemption process to facilitate investor access into this first-of-a-kind offering access to Bitcoin.”

Read the full release

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