Young Lawyers’ Programme – Decentralised finance: unlimited applications and a huge challenge for traditional financial infrastructures

Gabriel Núñez
Uría Menéndez, Madrid
gabriel.nunez@uria.com

Report on the joint session of the Banking Law Committee and the Securities Law Committee at the 37th International Financial Law Conference in Venice

Wednesday 11 May 2022

Session Chair

Gabriel Núñez Uría Menéndez, Madrid

Speakers

Ramón Ferraz Consultant in the Fintech/crypto industry, Madrid

Tullia Veronesi Schoenherr, Vienna

Maurizio Pastore Euronext, Dublin

This panel discussion was devised to attract young lawyers’ interest with an informal combination of different perspectives and experiences on one of the most exciting financial topics nowadays, ‘decentralised finance’ or the so-called ‘crypto universe’, which has unlimited applications and represents a huge challenge for traditional financial infrastructures.

The different angles were as follows:

• business angle, run by Ramón Ferraz, who has more than 15 years’ experience founding and leading digital startups and serving blue chip companies on the matter;
• legal angle, presented by Tullia Veronesi, associate lawyer at Schoenherr Vienna, with a strong practice on IT and technology, data protection, technology and digitalisation, telecommunications and media, startups, and consumer products and retail; and
• markets and stock exchanges angle, explained by one of the most recognised authorities in Europe, Maurizio Pastore, who is currently the Global Head of Debt and Funds listing for the Euronext Group.

Ferraz broke the ice with passion! He explained how he left everything to follow the crypto trend, founding companies and inventing business models around it. He presented crypto as a strong disruptor that goes beyond finance and is also behind social changing events like the metaverse. He stressed that all financial verticals are affected: retail (money, transfers, deposits, loans, investments and insurance) and wholesale (financing, trading, treasury management and payments). Ferraz ended by encouraging lawyers to specialise in this new ‘El Dorado’, stressing the importance of our role, which will be critical in a sector he is convinced is the ‘future of finance’.

We then got into the legal part and, when everybody was expecting a heavy summary of rules, Veronesi started to explain blockchain technology and how crypto assets work with engineer’s skills! It was a great surprise to see a fellow lawyer who really understands all technology aspects. How does a blockchain work and what is actually the advantage of this technology? The bottom line is that it makes it possible to operate a decentralised, unforgeable database without an intermediary. This makes this technology particularly interesting for the financial sector. Crypto assets are currently the talk of the town, but what are they and why should trading in these assets be regulated? Even though there is currently no legal ‘one-size-fits-all’ definition, the European legislator is trying to create a legally secure space – for both companies and customers – based on the Fifth Anti‑Money Laundering (AML) Regulation and also with new regulations such as the Markets in Crypto-Assets Regulation (MiCA) and the Transfer of Funds Regulation (TFR). One of the fastest growing applications of this technology is the decentralised financial instruments (DeFi) market. The idea behind it is that certain financial services and products are offered in a decentralised manner, avoiding intermediaries. With the help of technical solutions in the sense of protocols/applications in smart contracts (with simple ‘if-when logic’ and algorithmic consensus mechanisms). Depending on the properties of the token or the DeFi protocol, the issuer or intermediary is subject to different information and registration obligations. Another hyped concept currently is non-fungible tokens (NFT). Even though, currently, they are not regulated at all, this will change with MiCA. Perhaps the most applauded part of Veronesi’s presentation was the in-house NFT experiment that her former partner and talented conceptual artist Guido Kucsko carried out, which was used to explain how to create, protect and sell an NFT in practice.

Pastore closed the panel discussion by giving the exchanges view and how the markets are adapting to become an important player in the crypto world.

He mentioned that debt issuers around the world are testing the use of distributed ledger technology (DLT) to launch tokenised bonds. These are pilot projects with no real financing funding purposes. They normally use closed environment DLT to centralise operations, control the players’ interactions, limit transparency to restricted participants and so on. Several entities have successfully issued bonds on the blockchain, including Santander, Société Générale, the European Investment Bank (EIB) and DBS bank.

Pastore stressed that interoperability among the systems of all current market participants (brokers, issuers, investors, trading venues and financial market infrastructure operators) is crucial and remains an unresolved issue. For the successful and wider adoption of DLT for debt issuance, registration and, in particular, settlement, these networks must communicate and operate with each other. He also said that many legal aspects of smart contracts are still questioned and important issues are still unresolved, including the legal recognition of code as a contract.

The deployment of DLT in the fixed-income area will take time. A strong incentive to the use of DLT to issue bonds will be linked to a considerable reduction of time to market, operational cost, reduced environmental impact of mining and stability of the regulatory environment. It will take a few years before all these elements are addressed by the financial and technology industries. Naturally, the proof of success for the use of DLT in this area will be provided by the endorsement and wide access of international debt market players. In this regard, European market operators are looking forward to the activation of the European Union DLT Pilot Regime from 2023 and MiCA to have a legal framework for crypto-asset markets that is clearly missing today.