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Practice paper

Risk of digital assets: Developments in regulation and implementation

Udo Milkau
Journal of Risk Management in Financial Institutions, 16 (4), 395-408 (2023)
https://doi.org/10.69554/QPVT8533

Abstract

The normative narrative about ‘crypto’ or ‘digital assets' as potential substitutes for the traditional financial systems has the downside that such a new system could present new types of risk, thus requiring dedicated risk management. But is this narrative justified by reality? Actual implementations with a trend to centralisation, generic features of blockchain-based systems to be exploited by new types of intermediaries and recent events (including the collapse of the Terra ecosystem and the bankruptcy of FTX), triggered feedback from central banks and banking supervisors. Recently, the current development of regulations was toughened with a proposal that ‘trading in unbacked digital assets should be treated by regulators like gambling’. This paper avoids any normative discussion of how crypto or digital assets should look theoretically, but focuses on the actual developments. An analysis of the whole stack of layers of blockchain platforms, from influencer marketing to features such as ‘maximum extractable value’, can be condensed to the litmus test of ‘`Cui bono`?’ (‘to whom is it a benefit?’). This perspective reveals that blockchain-based systems are determined by the objectives and intentionality of the (new) intermediaries and are typically a mixture of gaming, gambling and scam. Consequently, the revised high-level recommendations of the Financial Stability Board for ‘global stablecoin’ arrangements, the European MiCA regulation and the amended capital requirements to the Basel framework are benchmarks for the treatment of crypto and digital assets. These are based on the economic objectives: from E-money-like instruments on the balance sheet of (new) intermediaries via traditional securities (equity or credit) to native digital assets, which resemble gambling according to ‘same business, same risk, same regulation’.

Keywords: digital assets; regulation; native blockchain token; decentralised finance; stablecoins; gambling

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Author's Biography

Udo Milkau is a digital counsellor and lecturer at the Baden-Württemberg Cooperative State University in Mosbach, Germany. His experience includes such roles as Chief Digital Officer, Transaction Banking and lecturer at Goethe University Frankfurt am Main and Frankfurt School of Finance and Management. He has a PhD from Goethe University Frankfurt, and has worked as a research scientist at such major European research centres as CERN, CEA de Saclay and GSI. He is the former Chairman of the European Association of Cooperative Banks (EACB) Digital and Data Working Group, and a member of both the EACB Payments Services Working Group and the European Central Bank's Operation Managers Group.

Citation

Milkau, Udo (2023, September 1). Risk of digital assets: Developments in regulation and implementation. In the Journal of Risk Management in Financial Institutions, Volume 16, Issue 4. https://doi.org/10.69554/QPVT8533.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 16 / Issue 4
© Henry Stewart
Publications LLP

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