The Bermuda Monetary Authority is considering embedded supervision as a way to better regulate the digital asset space.

According to BMA chief digital officer Moad Fahmi, local regulators are considering the feasibility of supervision in which the regulatory process runs on the trading system, as opposed to the back end, allowing every transaction to be monitored in real time.

“That has great potential for regulatory intervention directly at the smart contract,” Mr Fahmi said. “That could be the way of the future if we are thinking about decentralised finance.”

He was speaking at the Hamilton Princess & Beach Club during the World Federation of Exchanges’ 62nd annual meeting on the panel Optimal Market Design for Digital Assets.

Mr Fahmi said the BMA will continue to work on global co-ordination with other regulators, but also with standard-setting bodies, such as the Financial Stability Board.

“There needs to be an emergence of global principles around digital assets,” he said. “We are working towards that.”

He forecast an evolution in regulation over the next five years.

“The market will be a resilient one,” Mr Fahmi said. “The convergence between traditional and digital assets will continue.”

He said that nearly everyone understands that regulators play a critical role in the digital asset space.

“There’s an alignment now between stakeholders, customers and venture capitalists,” he said. “They understand that regulation is paramount. There is a push from all stakeholders to ensure that the firms that we deal with and invest in are properly regulated.”

Panellist Guy Melamed, cofounder and chief executive officer of Exberry, said things are changing so rapidly that it is no longer possible to talk about the digital asset space in five-year periods.

“You need to talk about next year,” Mr Melamed said. “We will see not only a lot of digital securities, we will see some action on the crypto side. We will also see a lot of tokenisation of assets.

“As to liquidity, that’s a great question. It opens up vast opportunities to all of us to new markets, and understanding how our markets can have motion.”

John McPartland, senior adviser at Hidden Road Partners, predicted there will be fewer trading platforms in the near future.

“You really can't have more than 200 trading platforms being sustained five years from now,” he said.

He predicted there would be a dozen to two dozen at the most.

“A dozen would be good,” Mr McPartland said. “There will be an appropriate regulatory structure around them, to be sure.”

Kristin Johnson, commissioner of the Commodity Futures Trading Commission, was eagerly anticipating congressional action aiming at closing a regulatory framework gap.

“The Securities Act of 1933 and the Commodity Exchange Act established what would be our market-regulation structure,” she said.

“For spot markets, the CFTC has broad anti-fraud and market manipulation authority. But we do not have the authority to require registration or engage in oversight of the spot market or digital assets at this point. So there are a number of Bills pending in Congress that attempt to take up closing this gap.”

She said in Europe, Markets in Crypto-Assets Regulation is advancing quickly, but will almost immediately be in need of companion legislation because of how narrowly drafted it is.

The WFE annual meeting, hosted for the first time by the Bermuda Stock Exchange, attracted 250 delegates.