Compliance of digital assets with the regulations, originally designed for traditional assets, is a major challenge to any blockchain firm. Archax, one of the most active global players in the field of security tokens, has recently hired Alex Royle to the position of the Chief Compliance Officer. Mr Royle had previously dealt with crypto related issues at FCA, the British financial regulator. Digital Asset Live Editor-in-Chief talked to him.
Q1: Let’s start with the most important issue: what is in your view is the challenging issue in compliance of digital assets?
Differentiating compliance from regulation and focussing specifically on security tokens, I think one of the biggest pieces is the broader legitimacy piece, and the acceptance of the security token space within the incumbent financial services framework.
It can be argued that security tokens lack good provenance. Whilst their current iteration is establishing itself as a viable new asset class, both within the UK and without, it’s probably fair to say that the road to this point has been peppered with events that have clearly hindered progress.
Whether through the actions of bad actors, or misplaced exuberance as crowds vie to be on the ticket of the ‘next big thing’, the space has dealt with a strong headwind thus far.
In the face of such history and given the new and novel nature of these assets, firms within the space have (rightly) found themselves facing increased scrutiny and potentially (wrongly) prima facie scepticism from many.
Q2: How do you intend to cope with it at Archax?
Archax is embracing the most robust requirements for authorisation by seeking to become the first approved security token trading venue by the UK’s Financial Conduct Authority (FCA).
The decision to open ourselves up to that level of scrutiny was in part to benefit from being the only authorised entity operating within the City of London, but also to move the needle on the legitimacy piece.
The FCA have taken a very pragmatic and forward-thinking position regarding innovation within financial services and have done so without compromising on their requisite standards.
By seeking authorisation from the FCA, we will provide all our stakeholders with increased confidence in our proposition, and our future participants with assurances that the market they choose to operate on is subject to the highest standards of integrity. This will ultimately prove that the nascent asset class has a place within today’s financial services landscape, not just tomorrows.
Q3: To Archax, you bring extensive regulatory experience, you worked at the FCA in the UK, and at ESMA at the European level. We have already discussed differences in compliance of digital vs traditional assets. What are the commonalities?
The biggest commonality is the framework within which both types of assets must operate. There is no specialist regime (yet) and so it’s necessary that the potential benefits of digital assets, which might not naturally fit within the incumbent framework, are carefully considered to avoid isolating them from the rest of the financial system. The current framework has evolved over time to offer the best, and fairest, system for all stakeholders. Arguably, it is not perfect for any single asset class or user, and those starting to assess it now through a ‘digital asset’ lens need to appreciate the necessity for a level playing field.
Q4: Perhaps, too much of a general question, but I cannot omit it: what in your view is an approximate cost of compliance for a digital asset. Let’s take a security token, as an example. What does cost of compliance consist of?
I don’t like considering compliance in the context of cost. Invariably the ‘cost’ of not being compliant with the regulations set out for the protection of both consumers and markets is always higher in the long run – and often not felt by those that originally breached them.
What I will say though is that today’s compliance overheads, on a per-issuance basis, are higher than they will be going forward. As the space gains increased momentum and new entrants interact with different parts of the trade lifecycle, any current frictions will be eased, and natural economies of scale will develop.
I strongly believe that eventually, in the relatively near future, we will reach an inflexion point where the ‘cost of compliance’ for digital assets is reduced beyond that which is possible for traditional assets due to the innate benefits of the underlying technology.
Q5: Tokenization is on the rise now. What would be your advice to a firm who intends to tokenize its assets, in the context of compliance.
Firms need to understand from the outset that the benefits they will receive will not come from reduced compliance or regulatory standards. The paradigm shift is on how things are done, not what is done. As such, my advice is that they should apply the same due diligence to a digital issuance as they would to a traditional one.
Seek legitimacy and hold those involved in the tokenisation of assets to the same high standards as you have of yourselves. The listing venue of choice is a visible extension of the venture underlying the tokenised asset too, as such those seeking to issue tokens should want the assurances that come with partnering with robustly regulated venues.
Q6: Please tell us about plans by Archax in the area of compliance?
First and foremost, our plan is based on realising the shift from a firm in its pre-authorisation phase to an authorised firm operating with its approval process complete.
It has rightly been a long process thus far, as we are attempting to break new ground in some areas. We welcome the scrutiny as we have built a truly robust and institutional-grade trading venue. Post-authorisation, our focus will turn to building out our compliance function to ensure the highest standards we have set are met and maintained at all times.
Simultaneously, we will engage with our trading participants, as well as the firms admitted for trading on our exchange, to help tackle the regulatory issues that arise as this nascent space evolves and matures.
Q7: What will change in compliance of the UK based digital assets now after the UK left the EU?
The inevitable Brexit question – with the disappointing answer! From an Archax perspective, broadly nothing. Archax is seeking UK permissions and will establish itself within the FinTech hub of the world, and our plan was always to create a global market and target clients based both within the EU and outside of it.
We will, however, naturally be keeping a close eye on developments regarding the framework for interaction with our European neighbours.
Archax’s aspiration to be a truly global exchange means that we take a global view of compliance and look forward to establishing our place within it.