The recognition of digital assets has taken a significant step forward following the publication of proposals by the UK and Singapore that aim to reduce legal uncertainty and enhance market safety and predictability.

Once perceived as the sole purview of technophiles, speculators and a relatively small group of early adopters, digital assets have generated significant market interest in recent years amid developments in distributed ledger technology (DLT).

Typically deployed on blockchain technology that record their ownership, digital assets are broadly defined as a digital representation of anything that has value, from financial assets like money to intangible items such as carbon credits.

Public attention around digital assets has tended to focus on the highly volatile world of cryptocurrencies such as bitcoin, particularly given events such as the meltdown of crypto exchange FTX in November last year. However, digital assets also include central bank digital currencies, stablecoins and tokenised assets that can be traded by investors.

This latter use case has become of particular interest for participants in the trade finance industry who seek to open up additional sources of funding to address the ever-widening trade finance gap. However, aside from a few initiatives, among them a trade finance-based non-fungible token (NFT) transaction carried out by fintech Tradeteq in 2021, leveraging digital tokens for trade has remained something of a niche endeavour – due in part to a lack of clarity and security to users and market participants.

Recent developments in the UK and Singapore – two jurisdictions which seek to establish themselves as global digital asset hubs – look set to address this.

A new report by the Monetary Authority of Singapore (MAS), published last week, proposes a framework for designing open, interoperable networks for digital assets. Drawing on findings from Project Guardian – an initiative started last year to explore the economic potential and value-adding use cases of the issuance of tokens linked to assets – it outlines a strategy to advance best practices and technical standards across the financial services industry to foster a safe and efficient financial market infrastructure.

To support this, MAS has expanded Project Guardian, setting up an industry group of 11 financial institutions to further test their ability to act as “trust anchors” to screen, verify and issue credentials, enabling participants to only trade with verified parties.

“While MAS strongly discourages and seeks to restrict speculation in cryptocurrencies, we see much potential for value creation and efficiency gains in the digital asset ecosystem,” says Leong Sing Chiong, deputy managing director for markets and development at MAS. “This is why we are actively collaborating with the industry to foster a responsible and innovative digital asset ecosystem. As we enter this new phase of Project Guardian, we look forward to collaborating with fellow policymakers and industry practitioners to jointly develop effective frameworks to guide the sound development of future financial networks.”

Progress is already underway. Standard Chartered, which is part of the industry group along with others including Citi, DBS, HSBC, JP Morgan and UBS, says it will work to scale up a Project Guardian pilot it conducted in collaboration with Linklogis and Singapore Exchange to transform trade assets into asset-backed security tokens.

“We are committed to advancing the adoption of digital assets and unlocking their full potential to transform the financial industry,” says Kai Fehr, Standard Chartered’s global head of trade and working capital. “The initial pilot proves the viability of asset-backed tokenisation as an innovative originate-to-distribute structure, and the potential opportunities it presents to investors to participate in financing real-world economic activity.”

“We are eager to build on our learnings and take the next steps towards operationalising this innovation at scale, where we will focus on expanding the scope to include a wider range of asset classes, identifying additional partners and developing guardrails that ensure investor protection,” he adds.

Meanwhile, on the other side of the globe, the UK is taking its own steps to create a clear and consistent framework for digital assets as part of wider plans to drive technological development.

Following over two years of work on the topic, the Law Commission of England and Wales has published recommendations for the reform and development of English law to better address digital assets.

The report, led by Sarah Green, the commercial and common law commissioner for England and Wales, calls for legislation to confirm the existence of a “distinct third category” of personal property under the law which can better recognise, accommodate and protect the unique features of digital assets. It also recommends the creation of a bespoke legal framework that better facilitates the entering into, operation and enforcement of collateral arrangements relating to crypto-tokens and crypto-assets, as well as statutory law reform to clarify whether certain digital assets fall within the scope of financial collateral arrangements regulations.

A further recommendation is for the creation of a panel of industry-specific experts to provide non-binding advice to courts on complex legal issues relating to digital assets.

“There is precedent for this,” Green tells GTR. “Our 2019 report on electronic signatures called for a similar thing, which became the electronic signatures industry working group. The Law Commission covered the pure law aspect, and this group, which brought together technologists, industry specialists and lawyers, was about highlighting what people could do in practice.”

“Technology is going to keep evolving quickly, so just writing a statute to reform the law would not be that useful here, because by the time it gets through parliament, technology is bound to have moved on,” she adds. “Doing it through the court with the help of an expert group who can keep on top of the technology and the implications of the changes in technology makes it more nimble and more responsive.”

The Law Commission’s report coincides with the Financial Services and Markets Act receiving Royal Assent in the UK. The UK government says the act “bolsters the competitiveness of the UK as a global financial centre and delivers better outcomes for consumers and businesses”. Among other considerations, it grants HM Treasury the power to create sandboxes, similar to those being run by Singapore’s MAS, to test and adopt new technologies and practices.

David Sutter, CEO of OpenTrade, a platform that connects decentralised finance liquidity pools to tokenised assets including supply chain finance, welcomes the moves by both countries.

“I view both of these developments as quite positive and proof that all sides of the market, across startups, corporates, regulators and large financial institutions, understand the inefficiencies in the market today and how real-world asset tokenisation and digital cash, especially in trade and supply chain finance, represent a generational opportunity to greatly improve market infrastructure for all participants,” he tells GTR.

“Both the UK and Singapore clearly are looking to take a leadership position on establishing clear and consistent regulatory and legal guidelines for such activity, which can be a huge boost for companies like OpenTrade who are operating on the cutting edge of real-world asset tokenisation on public and permissionless blockchains,” he adds.

However, while both jurisdictions have taken notable strides in bringing digital assets into the mainstream, Singapore, which has already developed concrete examples of how they can function within the wider market, is currently leading the way. Whether the UK can catch up remains to be seen.

“There’s no question in my mind that we risk being left behind,” Green tells GTR. “Jurisdictions such as Singapore can move a lot more quickly because they have a different model which is a bit more agile. Law is one of our greatest exports, we have this great ecosystem, and there’s no reason why we can’t compete on the world stage with Singapore.”

“The English way of proceeding is very laissez faire, so the private sector is able to get on and do its own thing, but we have to put in the legal foundations so that the market knows what it’s dealing with,” she says.