ISSA calls for industry-wide cooperation on crypto assets
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ISSA calls for industry-wide cooperation on crypto assets 14 November 2019London Reporter: Drew Nicol
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Every part of the traditional and crypto markets must come together and collaborate to overcome substantial teething issues in the introduction of tokenised securities into the mainstream, according to the International Securities Services Association (ISSA).
ISSA’s working group on distributed ledger technology (DLT) and crypto-assets, which is led by Glen Fernandes of Euroclear and Urs Sauer of SIX, is calling on industry participants, including central securities depositories, regulators, custodian banks and central counterparties, to recreate universally recognised market standards and definitions for the emerging crypto world in a new paper released today.
The paper builds on ISSA’s previous work to help incorporate DLT and tokenised assets into the market, which culminated in an October 2018 paper: ‘Infrastructure for Crypto Assets’.
Today’s publication adds the perspective of custodian banks and fintech firms and explores issues around asset servicing, issuance, settlement, safekeeping of crypto assets.
In the report, ISSA stated that crypto-asset investors will expect their service providers to deliver an equivalent range of services to those enjoyed by the traditional market.
As part of its recommendations and best practice consideration, ISSA’s report lays out the following:
- Depending on the type of crypto asset, corporate actions can apply at the token level but can also apply to underlying securities in the case of asset-backed securities tokens, entitlements can be paid in fiat currency or cryptocurrency
- Corporate actions on crypto assets, and especially on securities tokens, should follow the same principles and standards as traditional securities
- Adoption of unique identification codes for tokens, such as the international securities identification number used for securities, would facilitate interoperability between DLT networks or tokenisation platforms
- Withholding tax reclaim implications for Asset-Backed Securities Tokens need careful consideration, given the high probability of differences between the tax residence of the entity holding the underlying securities and the investors in the tokens
- Smart contracts have the potential to enable tokens to self-service in terms of corporate actions, but this will require the emergence of strong governance and auditing principles to guarantee that smart contracts deliver the contractual outputs expected
Elsewhere in the report, the ISSA working group highlighted that new types of corporate actions and events specific to DLT networks and tokenisation platforms are likely to emerge.
For example, the group noted that ‘forks’—changes to DLT network or tokenisation platform software that improves the existing protocol or introduce a permanent split between the new protocol and the old—need to be carefully reviewed and understood.
Therefore the paper recommends that the management of a fork should not be treated as a corporate action, and service providers should have the right to opt-out of adopting a fork.
Throughout the comprehensive report, ISSA’s working group repeatedly argued that “the best way to overcome these challenges is to collaborate”.
“By working together, an agreement can be reached on the definitions of crypto assets, the legal and regulatory frameworks which govern them, and the business and technical standards that will allow all the eco-systems to inter-operate,” the paper continued. “It is the measure of agreement on those issues that will determine the rate of growth of the crypto-asset markets.”
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