We have to speak out, so we can build up
As a builder and passenger on this colourful roller coaster of distributed ledger technologies over the past seven years, I feel I have the responsibility to speak up so that we can build up.
Speaking honestly, I am seeing a few things happen to the current regulatory landscape. To summarise and set the fairly monochrome picture, we are seeing an open game of regulatory arbitrage where regulations differ slightly between countries but have little to no prudential bite or any certainty for business in DLT.
This leads many businesses choosing to stay offshore as most onshore jurisdictions do not offer the appropriate regulatory environment to allow them to grow in a compliant framework. Since we started our business we have always tried to build on good regulatory foundations in a number of jurisdictions and we will continue to do so as much as we can.
Why is this arbitrage? A few reasons. Numerous jurisdictions are taking the opportunity and proactivity to truly capitalise on the void of appropriate regulatory frameworks that harbour economic growth. This is awesome and is what we have seen in Gibraltar, Malta, Dubai etc.
On the other hand, in Europe, trying to comply with all member states requirements at this stage is incredibly choppy to navigate and superbly costly. This crushes innovation right out of the heart of Europe.
The leap from AMLD4 – 5 and now incoming Markets in Crypto-Assets regulation (“MICA”) has created a regulatory environment that is jurisdiction specific for not only AML registration and regulation, but also their promotion / marketing rules.
Officially, there is no passporting of these registrations right now. This means that all jurisdictions may need to be registered by some DLT businesses. Even if you are using the best in class compliance processes and investigatory tooling, you need to jump through the same (or similar) hoops in various jurisdictions and pay for the pleasure, plus consider substance requirements and then also get to grips with promotion rules restrictions, if applicable.
These are pain points in plain sight.
There are opportunities for regulators without prudential frameworks in place to welcome those firms who have authorisations run in certain prudential regimes. Jurisdictions who do not have a framework in place can give a form of recognition or expedited process across the board for registrations.
Whilst every business is understandably different, where AMLD applies, as well as other prudential considerations such as reserve funding, client asset protection considerations, there are ways to provide recognition. This promotes economic growth and consumer protection as regulators can have direct access to those businesses directly to enforce if needed.
MICA will eventually solve these pain points through passporting, but in the meantime I have seen many businesses suffer and, for example, many are willing to be acquired to simply survive as the regulatory costs become a multiple if you want to trade, custody or broker digital assets, particularly in a low bear sentiment market if you are a retail exchange.
It can be brutal. We survived two bear cycles in our earlier days in Damex.io with low macro sentiment and price action – surviving and simultaneously building was hard over those years.
What is an alternative to the current model? Countries can apply easily harmonised wording and frameworks that have been tried and tested. We have seen our framework in Gibraltar has been effective since 2017, for example, and we are seeing jurisdictions starting to float standards and requirements – though these jurisdictions are not equalising requirements. This makes it difficult and costly for businesses to register across the board, particularly where regulatory wording may be rules based and very prescriptive in foreign languages.
If the EU (which sadly my home nation Gibraltar is no longer a member of after Brexit 😭) want to follow through about their ambition to drive economic growth in crypto and protect consumers, in that order, then let’s implement frameworks now and deliver clarity.
The UK treasury paper had their policy objectives in this order in their most recent consultation, and I hope that the UK will follow through. However, I expect it may be better for the UK to regulate to an equivalent to MICA and offer incentives and unique positioning that Europe may not. The UK may offer trading in other particular assets, perhaps, different banking rails and market access.
We have seen the recent clarity of MICA’s wording by the European Parliament and we are seeing certain member states such as France give some clear positioning. France, for example, has given clarity on its phased approach to bringing into effect MICA, bringing in a deadline day for entities to register as DASPs under the current regime, looking to safe-harbour a number of businesses in the lead up to MICA whilst many other member states have not yet taken a position on the incoming regulation, leaving many businesses guessing where to be ‘MICA proof’ in the meanwhile.
We need to have the regulatory environment with harmonisation, and the opportunity to be ahead in doing so is the play, not nominal arbitrage.
Philip Vasquez is the Chief Legal Officer and co-founder of Damex.io, a leading regulated digital assets OTC desk and payments group. As a qualified barrister, he has been a lawyer practising and building in this industry for seven years. After having delivered a clear talk at the Crypto AM Spring Awakening in 2023, Crypto AM have approached Philip to bring his fresh, assertive and balanced experiences as a legal builder in this sector to provide unique insight. From the get-go Philip has set a clear direction for the column:
The Damlex Journals’sets out a fair and honest drop of the current state of digital assets from a legal perspective – commercial, regulatory and risk – written for businesses building in crypto and also written for ‘outsider’ businesses looking to understand and learn more about the crypto environment. ‘Damlex is an acronym for ‘digital asset management’ law (lex being latin for ‘law’). Since I have first been building in this sector, the industry has gone from a fairly homogenous industry to an intricate rope weaved with many threads, ideologies and interests. It is easy even for the experienced to get lost and distracted by the forward looking speculation, prophetic like forecasts and fear driven coverage, though all we need is a level head and compounded introspection in order to successfully build for the long term. This is what I hope these columns will bring.”
About Philip Vasquez
Philip is the co-founder and Chief Legal Officer of Damex.io, and is responsible for all legal and regulatory matters in the business since its incorporation in 2017. Philip is a qualified barrister who has helped Damex obtain its prestigious DLT licence in Gibraltar as one of only 14 firms of leading global players. Damex.io is now also registered as a VASP in various jurisdictions, a registered EMI distributor/agent in the UK, the EU and Gibraltar.
He is currently leading on Damex’s further regulatory registrations and authorisations in Europe and the Americas. He also is responsible for the legal structuring of the group’s commercial transactions, acquisitions, token sale, private fund Bloq Capital and professional basketball league, the Damex Pro League.
He is also frequently involved in leading industry initiatives and community projects having written two books, including on Third Party Litigation Funding. He is currently an executive member of Gibraltar’s DLT group GANT and has held other industry positions such as the FSB and various start-up community meetups.