Off the Record: Isadora Arredondo, global policy director, Hedera

Digital assets remain one of the most debated areas in financial services, with policymakers, institutions and regulators still trying to determine how blockchain-based infrastructure should fit within mainstream finance.

In this interview, Isadora Arredondo discusses the UK’s regulatory direction of travel, the practical implications for advisers and why the future of digital assets may be more about infrastructure than investment hype.

Tom Browne: You worked on policy at the Financial Conduct Authority and now lead global regulatory engagement at Hedera. From your perspective, what does the UK’s evolving digital asset framework signal about the direction of travel for institutional adoption?

Isadora Arredondo: I think the FCA’s stance overall towards the digital asset sector has been a mixed picture — sometimes cautious, other times showing flexibility and openness. But I think it has been quite pioneering when it comes to institutional adoption.

The presence of established, well-regulated players that deal with scalable market activity demonstrates there is an appetite

The wholesale markets crypto-assets team has done a lot of engagement with industry participants and introduced a number of consultations and discussion papers setting out the foundations for what they see a tokenised future looking like.

I think it enjoys quite a lot of senior leadership support at the FCA, on the basis that they believe DLT [distributed ledger technology]-based markets can bring down barriers to retail access, expand the range of investable assets and significantly improve trading and post-trading activities.

Of course, the FCA is also very mindful of its competing objectives in this space, in terms of both investor protection and market integrity. The most interesting development is probably the joint paper published by the Bank of England and the FCA, setting out expectations for tokenised markets.

Browne: The recent collaboration involving Lloyds Banking Group, Aberdeen Investments and Archax used tokenised money market funds and gilts as collateral in FX trades. What does that tell advisers about how digital assets are beginning to integrate with traditional financial infrastructure?

Introducing greater seamlessness across the asset life cycle would reduce costs and improve value for clients

Arredondo: I think it tells a story more about the underlying infrastructure than about the asset classes themselves.

There has been movement for quite a while in terms of crypto as investments and the extent to which institutions can include them within investment portfolios.

But there has been a much more focused discussion in recent years around traditional institutions using the underlying technology to settle and trade traditional financial instruments, rather than entirely new asset classes.

What it demonstrates is that this is not just a conversation about a new asset class. It’s a conversation about modernising financial market infrastructure and processes. The presence of established, well-regulated players that deal with scalable market activity demonstrates there is an appetite and there are strong use cases for it.

I think what’s holding back adoption is more a question of interoperability and liquidity across the asset life cycle, rather than necessarily a reluctance to use the technology itself.

Browne: Much of the discussion around stablecoins has focused on systemic risk and financial stability. Why does the Bank of England remain cautious, and where do you think the balance should sit between encouraging innovation and protecting consumers?

The FCA is very mindful of its competing objectives in this space, in terms of both investor protection and market integrity

Arredondo: The FCA is largely looking at smaller stablecoin issuers in the context of crypto-asset trading, where stablecoins are used as collateral and settlement assets. The Bank of England is looking at a potential regime for systemic retail payments.

The bar is very high when it comes to operating as an issuer in the UK. Banks and other financial institutions face high barriers because they are deemed systemic.

I think that’s what is colouring the Bank’s approach. It is concerned about potential competition with bank deposits and the risk of deposit flight, given how interconnected the banking system is with the wider economy.

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That’s the relatively narrow perspective it has taken. It hasn’t been particularly focused on broader policy objectives, like expanding the role of sterling stablecoins overseas or using stablecoins for wholesale settlement, although it has shown some openness to the latter use case within the digital securities sandbox.

Browne: Advisers are hearing more about tokenisation, digital settlement and blockchain-based infrastructure, but many still struggle to identify the practical implications for clients. What are the opportunities?

Arredondo: The more immediate opportunities are around introducing a greater variety of asset classes into portfolios, improving collateral management efficiencies and enabling more seamless cross-border use cases.

I think what’s holding back adoption is a question of interoperability and liquidity across the asset life cycle

Money market funds have become a particularly appealing instrument in that context. But full life-cycle adoption would probably be the most revolutionary development for the investment and asset management industry as a whole.

If you think about the current environment, it’s still relatively clunky. It depends on a large number of intermediaries and back-office procedures. Fundamentally, introducing greater seamlessness across the asset life cycle would reduce costs and improve value for clients.

But there are still quite a lot of obstacles on the journey towards that.

Browne: There appears to be growing debate within UK policymakers about whether the current regulatory approach risks being too restrictive. Do you think the UK is striking the right balance compared with other jurisdictions?

Arredondo: I think it’s a very mixed picture. There are areas where the UK is leading and areas where it is taking a very different approach.

In terms of institutional backing of tokenisation, it is quite a front runner, even though the digital securities sandbox has not necessarily catalysed activity as successfully as some had hoped.

This is not just a conversation about a new asset class. It’s a conversation about modernising financial market infrastructure and processes

Politically, the backing at a senior level has been strong, with support from the Bank of England, the Investment Association and industry bodies like AFME.

But in areas that relate more directly to consumer protection, I think the UK has been more conservative than some other jurisdictions.

The stablecoin approach in particular stands out as relatively complex because it effectively creates a cliff edge between smaller stablecoin issuers and systemic stablecoin issuers.

There is also a broader story around UK fintech generally, not just digital assets, that the regulatory gateway remains very high. The process of becoming authorised and scaling in the UK can still be quite difficult.

That tells a positive story about a strong regulatory culture, but there is also a longstanding debate around whether greater operational efficiency and agility are needed.

Browne: There is often a perception among advisers that digital assets remain speculative or disconnected from regulated financial planning. What needs to happen before advisers feel comfortable discussing these assets with clients more routinely?

The FCA’s stance overall has been a mixed picture. But I think it has been quite pioneering when it comes to institutional adoption

Arredondo: As an asset class, the space has matured. There is much more seriousness and professionalism in the industry, and much better understanding from institutions about the different offerings available.

What is going to be both challenging and exciting from advisers’ perspective is that this is not just about looking at investments from an asset point of view. It is also about understanding the underlying infrastructure — how resilient it is, how smart contracts work and how those systems interact with investment performance and risk.

Browne: Thanks for talking to us!