Category Archives: Blockchain, Crypto, Digital Assets Regulations

How blockchain regulations will change in 2020

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TechTalks | Andrey Sergeenkov | Feb 12, 2020

blockchains - How blockchain regulations will change in 2020As 2018 drew to a close, crypto skeptics were ready to write obituaries after the devastating bear market that year. Talk of blockchain and cryptocurrency demise was rife among seasoned analysts. Just over twelve months later, the industry has shown remarkable resilience to rebound back.

Regulators are a segment of stakeholders who seem to be appreciating that crypto is here to stay, with Federal agencies in the US and Chinese authorities praising the potential of this technology in their respective countries’ digital future.

Blockchain technology has gained independent credibility over and above its application in cryptocurrency. The opportunities are endless as the emerging enterprise sector continues to draw plaudits. So far, this technology has grown in spite of regulatory infrastructure rather than because of it. A suitable regulatory climate is essential for widespread adoption.

See:  The Decade in Blockchain — 2010 to 2020 in Review

This is how Jason Lee, Vice President of NEM Foundation, describes the industry’s evolution:

“2017 was the year of the blockchain craze. In 2018, we hit the brakes towards the end of the year. For 2019 and the start of 2020, Don Tapscott at the World Economic Forum Annual Meeting reports says that the ‘blockchain revolution ground to a halt.’ This is because not all initiatives are going past the proof of concept stage just as blockchain regulation shapes progressively as it moves forward in the right direction. In 2020, real use case projects are starting to shape up and will play a crucial role.”

Therefore, industry leaders and enthusiasts at large are eagerly following regulator sentiment. Themes like consumer data protection and harnessing tech will be constant in these discussions. What is going to be the major themes around blockchain regulation in 2020?

Privacy and anonymity on enterprise blockchain

Anonymity and privacy were defining aspects of the decentralized blockchain projects. This sector went mostly unchecked until blockchain platforms became increasingly popular.

Last year, the release of the Libra project whitepaper by Facebook brought these issues to the fore.  Specifically, concerns about blockchain enterprises, including cloud services and handling customer data gave regulators an opening to legislate on such platforms. Blockchain enterprise will continue to draw unprecedented legislative scrutiny in 2020.

In late 2018, the US Department of Homeland Security started scrutinizing privacy tokens that shield user information. Similarly, G20 countries issued regulations in June 2019 for exchanges to comply with “anti-money laundering” (AML) and “know your customer” (KYC) requirements. In February 2019, the Cyberspace Administration of China (CAC) implemented additional guidelines specifically for blockchain companies.

See:  Blockchain Fundraising Can Benefit African Tech Startups

Chinese regulators claimed that these measures are aimed at settings the standard for blockchain development in the country. In the US, the Blockchain Promotion Act of 2019 focuses on finding potential applications for the distributed ledger and opportunities through which government agencies can explore and incorporate the technology. 2020 is sure to bring more scrutiny and legislation on this premise.

Crypto regulation over perceived threats to national currencies

Many countries initially took a position of ignorance about cryptocurrencies. However, as bitcoin took a larger-than-life profile after the monster rally in 2017, this position was no longer tenable. The only reason that blockchain experienced the crypto winter was due to being unregulated rather than the breakdown by governments.

The unchecked printing of money before and after the financial crisis of 2008 by the Central Bank led to some people becoming disillusioned about centralized financial systems. Bitcoin and other cryptocurrencies offered an alternative to these people. As with any power structure, the entities in charge will not relinquish power with ease.

China took drastic measures against trading cryptocurrencies in 2017. Last year, India went even further and completely banned non-sovereign cryptocurrencies. The fundamental aspect of decentralization is an existential threat to the ability of major central banks to control monetary policy.

See:  Visa R&D Arm Develops a Blockchain System That Could Replace Financial Data Aggregators

Even without expressly stating this position, the Securities and Exchange Commission in the U.S. decided to classify coins like Telegram Open Network (TON) as securities to regulate their rise. Regulators in the U.S. see blockchain currencies and commerce as an issue that needs to be addressed.

As 2020 begins, some countries are looking at digital currencies as an opportunity rather than a threat. China astonished the world last year when the People’s Bank of China announced that it was researching on a national digital currency. Such a development could trigger an arms race of sorts between nations that want to be the first to innovate in this space.

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NCFA Jan 2018 resize - How blockchain regulations will change in 2020 The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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An IOSCO report highlights crypto trading issues, but stops short of setting standards

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Investment Executive | James Langton | Feb 12, 2020

 

contemplating regulation - How blockchain regulations will change in 2020Regulators grapple with crypto trading

Global securities regulators are monitoring the emerging crypto asset sector, but aren’t yet seeking to establish global standards for crypto trading platforms.

The International Organization of Securities Commissions (IOSCO) has issued a report detailing the risks associated with crypto trading, including concerns about platform access, asset safekeeping, price discovery, transparency and conflicts of interest.

See:  SEC Commissioner Speech: A Proposal to Fill the Gap Between Regulation and Decentralization

Many of these same issues arise in the regulation of traditional securities trading too, the report noted. So, to the extent that particular crypto assets are considered to be securities, “the basic principles…of securities regulation should apply,” the report said.

However, crypto trading platforms may also raise novel regulatory concerns due to their particular business models, IOSCO warned.

The report said that some regulators have determined that their existing frameworks for overseeing traditional trading venues will also apply to crypto trading, but that some are also considering new requirements “to account for the novel and unique characteristics” of crypto trading.

The group’s report — which was prepared by an IOSCO committee led by the Ontario Securities Commission (OSC) — aims to help individual regulators identify the issues raised by crypto trading and look at ways regulators around the world have started to deal with these issues.

View more:  Curated Fintech and Financing Research Reports here

“These key considerations and toolkits are intended to assist regulatory authorities who may be evaluating [crypto trading platforms] within the context of their regulatory frameworks,” the report said.

At the same time, the group isn’t proposing to set global standards for regulating crypto trading.

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Report:  Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms

IOSCO | Feb 12, 2020

The emergence of crypto-assets is an important area of interest for regulatory authorities, including those with authority over secondary markets and the trading platforms that facilitate the secondary trading of crypto-assets (Crypto-asset Trading Platforms or CTPs). The aim of this Final Report is to assist IOSCO members in evaluating the issues and risks relating to CTPs.

Published in February 2017, the IOSCO Research Report on Financial Technologies (Fintech), the Fintech Report discussed distributed ledger technologies (DLT) and the role of tokenization of assets and fiat money. In the Fintech Report,

IOSCO noted that “Tokenization is the process of digitally representing an asset, or ownership of an asset. A token represents an asset or ownership of an asset. Such assets can be currencies, commodities or securities or properties.”

For this Final Report, crypto-assets are a type of private asset that depends primarily on cryptography and DLT or similar technology as part of its perceived or inherent value, and can represent an asset such as a currency, commodity or security, or be a derivative on a commodity or security.

See:  Canadian Securities Regulators Publish Additional Guidance for Facilitating Crypto Asset Trading

Where a regulatory authority has determined that a crypto-asset or an activity involving a crypto-asset falls within its jurisdiction, IOSCO’s Objectives and Principles of Securities Regulation2 (IOSCO Principles) and the Assessment Methodology3 (the Methodology) provide useful guidance in considering the novel and unique issues and risks that arise in this new market. The IOSCO Principles and Methodology also facilitate the promotion of IOSCO’s core objectives of securities regulation,4 which include protecting investors and ensuring that the markets are fair, efficient and transparent.

The Final Report describes issues and risks identified to date that are associated with the trading of crypto-assets on CTPs. In relation to the issues and risks identified, it describes key considerations and provides related toolkits that are useful for each key consideration. These key considerations and toolkits are intended to assist regulatory authorities who may be evaluating CTPs within the context of their regulatory frameworks.

The key considerations relate to:

  • Access to CTPs;
  • Safeguarding participant assets;
  • Conflicts of interest;
  • Operations of CTPs;
  • Market integrity;
  • Price discovery; and
  • Technology.

 

The operational model adopted by a CTP and the existing regulatory framework may determine the extent to which issues or risks exist, are relevant or have already been mitigated. IOSCO recognizes that this market is new and rapidly evolving. As a result, the key considerations and toolkits put forward in the Final Report are not intended to suggest or mandate any particular regulatory action or requirement. They represent specific areas that IOSCO believes jurisdictions could consider in the context of the regulation of CTPs.

See:  The UK Provides Legal Certainty For Smart Contracts And Cryptoassets In Its Landmark Legal Statement

The toolkits are examples of measures that can be used by regulatory authorities to address the key considerations and the associated risks and issues. For any particular IOSCO member there may be other considerations not highlighted in this report that it views as relevant to its legal and regulatory framework. IOSCO will continue to monitor the evolution of the markets for crypto-assets, with a view to ensuring that the issues, risks and key considerations identified in this report remain relevant and appropriate.

Finally, this Final Report does not include an analysis of the criteria that are used by regulatory authorities to determine whether a crypto-asset falls within its remit. Rather, it focuses on the trading of crypto-assets on CTPs when the regulatory authority has determined that it has the legal authority to regulate those assets or the specific activity involving those assets.

IOSCO Report:  Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms (55pg PDF) -> Download Now

 


NCFA Jan 2018 resize - How blockchain regulations will change in 2020 The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Blockchain Fundraising Can Benefit African Tech Startups

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Forbes | Oluwaseun Adeyanju | Feb 10, 2020

African startups - How blockchain regulations will change in 2020African startups raised a record $1.34 billion in venture capital in 2019, up from just under $200 million in 2015, according to WeeTracker, a media firm focused on the African entrepreneurship space. That’s about a 46.3% increase on a compound annual growth rate (CAGR) basis. WeeTracker estimates show that the total African venture funding had reached $725.6 million in 2018.

Despite the impressive growth rate, there are still huge funding gaps that the continent needs to fill and here’s why.

The larger portion of funds being raised by African startups comes from venture capital firms outside the continent. Given how the technology ecosystem in Africa is still in its nascent stage, coupled with how venture capital funds are typically directed toward growth, many early-stage startups on the continent still struggle to raise early-stage funding. And that’s because there aren’t sufficient local angel investors to fill this gap.

See:  EU rules to boost European crowdfunding, platforms agreed

For instance, in Nigeria, only about $1.5 million of the $133.5 million that the country attracted in 2018 came from the Lagos Angel Network, Africa’s largest angel network, according to online business news publication Quartz. Nigeria attracts the majority of African venture capital — nearly 50% in 2019.

The consensus within the African angel investing community during the 2018 Africa Early Stage Investor Summit is that the lack of clear exit opportunities is a major contributory factor.

“It is easy to invest money in Africa right now, but it is hard to make money in investing here. The key is to be exit centric — we only invest in entrepreneurs who are focusing on building sustainable businesses that can exit,” Ben White, the CEO of Venture Capital for Africa (VC4A) said. “This conversation succinctly captures the challenges venture capital faces in Africa and why we need to keep working to strengthen and support the entire African venture ecosystem.”

How blockchain can solve the early-stage liquidity problem

Traditionally, investors in startups are able to exit and make money from their investments through three major avenues including IPOs, acquisitions and mergers. Each of these typically requires that a company achieves a reasonable level of growth. For a technology ecosystem that’s still at its nascent stage like Africa, reaching this level of growth can take a longer time frame than in matured markets.

The implication of the longer time frame here is that convincing investors and high net worth individuals (HNIs) to inject funds into the African startup landscape can be tough. They already have access to more stable investment opportunities elsewhere. For instance, the Central Bank of Nigeria’s Open Markets Operations Bills returns about 15% per annum.

See:  Getting In Early: SEC Sees Growth In Equity Crowdfunding

One of the ways to encourage investors to inject money into startups in the early stages is to develop a liquid market.

“One of my key thesis is that if we have more secondary markets in Africa and that allows early-stage investors to get some kind of liquidity, we will be able to recycle funds within the ecosystem,” said Yele Bademosi, a Binance Labs director and founder of Nigeria-based angel investment firm Microtraction.

“However, the current infrastructure for capital markets across Africa doesn’t necessarily support this.”

Here’s where blockchain comes into play.

The distributed and trustless technology has powered a new method of fundraising that can be borderless. This is evident in the initial coin offering boom and subsequently the emergence of the security token market.

While ICO fundraising, for the most part, has sought to circumvent regulatory spotlight, the development of security tokens has been about redesigning the regulated capital markets to increase access and remove the inefficiencies that presently exists.

In Africa, blockchain can help increase market access for early-stage companies for a start.

See:  Architecting a New World: Investment Crowdfunding and Digital Assets

“There is an opportunity to create our own funding infrastructure using blockchain to issue security tokens or hybrid tokens,” Bademosi added. “We will need to define our own guidelines and regulations around that, but what gets me excited about blockchain is that it can allow us to rethink capital formation and capital markets from the ground up in a way that could be trustless.”

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NCFA Jan 2018 resize - How blockchain regulations will change in 2020 The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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SEC Commissioner Speech: A Proposal to Fill the Gap Between Regulation and Decentralization

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SEC | Commissioner Hester M. Peirce | Feb 6, 2020

Commissioner Hester M. Peirce - How blockchain regulations will change in 2020Thank you George [Chikovani] for that kind introduction.  I appreciate the opportunity to be with all of you today.  Before beginning, I have to remind you that the views I express are my own and do not necessarily represent those of the Securities and Exchange Commission or my fellow Commissioners.[1]  Indeed, the views I will express today are not fully formed in my own mind and may not reflect my own opinions in the months to come.  To that end, I welcome the feedback of all of you and anyone else with an interest in the regulation of digital assets.

Before detailing my proposal for a safe harbor, I will first outline the problem. Many crypto entrepreneurs are seeking to build decentralized networks in which a token serves as a means of exchange on, or provides access to a function of the network. In the course of building out the network, they need to get the tokens into the hands of other people. But these efforts can be stymied by concerns that such efforts may fall within the ambit of federal securities laws. The fear of running afoul of the securities laws is real. Given the SEC’s enforcement activity in this area, these fears are not unfounded.

See:  Canadian Securities Regulators Publish Additional Guidance for Facilitating Crypto Asset Trading

There is, I think, a way to address the uncertainty of the application of the securities laws to tokens. The safe harbor I am laying out this morning recognizes the need to achieve the investor protection objectives of the securities laws, as well as the need to provide the regulatory flexibility that allows innovation to flourish. Accordingly, the safe harbor protects token purchasers by requiring disclosures tailored to their needs, preserving the application of the antifraud provisions of the securities laws, and giving them an ability to participate in networks of interest to them. The safe harbor also provides network entrepreneurs sufficient time to build their networks before having to measure themselves against a decentralization or functionality yardstick.

Getting into the specifics of the proposal, the safe harbor would provide network developers with a three-year grace period within which they could facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws, so long as the conditions are met. This objective is accomplished by exempting (1) the offer and sale of tokens from the provisions of the Securities Act of 1933, other than the antifraud provisions, (2) the tokens from registration under the Securities Exchange Act of 1934, and (3) persons engaged in certain token transactions from the definitions of “exchange,” “broker,” and “dealer” under the 1934 Act.

The initial development team would have to meet certain conditions, which I will lay out briefly before addressing several in more depth. First, the team must intend for the network on which the token functions to reach network maturity—defined as either decentralization or token functionality—within three years of the date of the first token sale and undertake good faith and reasonable efforts to achieve that goal. Second, the team would have to disclose key information on a freely accessible public website. Third, the token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network. Fourth, the team would have to undertake good faith and reasonable efforts to create liquidity for users. Finally, the team would have to file a notice of reliance.

See:  The UK Provides Legal Certainty For Smart Contracts And Cryptoassets In Its Landmark Legal Statement

Now that I have outlined the safe harbor,

I suspect some of you are asking, “Who cares?”  I get the point.  I am one of five Commissioners.  I cannot write rules unilaterally.  However, to quote another of the Boss’s songs: “you can’t start a fire without a spark.”[11]  It does not hurt to get the ball rolling.  People change their minds.

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NCFA Jan 2018 resize - How blockchain regulations will change in 2020 The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Stunning Japanese Admission About China May Foreshadow Digital Currency Breakthrough

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Forbes | Steven Ehrlich | Jan 27 2020

japan and digital currency - How blockchain regulations will change in 2020There are at least 18 central banks developing a form of sovereign digital currency, according to a recent survey from crypto news outlet The Block. Some such as China see the efforts as a way to reduce fraud, increase financial transparency, and support flagging economic growth. Others like Iran and Venezuela are looking for ways to evade global sanctions. Finally, tinkerers such as the European Central Bank are making somewhat symbolic efforts as a hedge against Libra, to placate impatient innovators, and use them as an opportunity to learn.

See:  Central Bank Digital Currency and Fintech in Asia

For this latter group, it would be great if something beneficial comes out of this experimentation, but there is no real sense of urgency.

The same cannot be said about Japan, where senior leaders took the extraordinary step of not only reversing recent guidance from the Japanese Central Bank saying that they weren’t pursuing a form of digital currency, but admitted that a primary reason for doing so was concern about what may happen if China’s far more advanced efforts succeed.

 

Drawing a Line in the Sand

Consider these recent statements.

This week Norihiro Nakayama, Japanese Parliamentary Vice Minister for Foreign Affairs, told Reuters, “China is moving toward issuing digital yuan, so we’d like to propose measures to counter such attempts.” Not to be outdone, earlier this month former Prime Minister and Current Finance Minister Taro Aso said that it would be a “very serious problem” if digital yuan becomes a popular means for international settlement.

See:

 

Best of Enemies

There are geopolitical and economic reasons why China’s attempts to corner the market on CBDCs are seen as an existential threat in Japan. First, for as technologically advanced as Japan’s economy has become, it is highly reliant on global supply chains and vulnerable to trade tensions, such as the recent hostilities between the U.S. and China. Additionally, it has extremely limited fossil fuel deposits and must import most of these precious resources from precarious regions in their own right. As an example, 80% of its oil comes from the Middle East.

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NCFA Jan 2018 resize - How blockchain regulations will change in 2020 The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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10 ways regulators need to change in 2020

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World Economic forum | Lisa Witter and Jaee Samant | Jan 31, 2020

10 ways regulators need to change - How blockchain regulations will change in 2020

Summary

  • We need a more agile approach to regulation that supports and adapts to the change of the Fourth Industrial Revolution.
  • Agile regulators can “lean into the latest technology trends and proactively shape them.”
  • The UK, South Korea, Canada and other countries show how regulation can be used to foster innovation and improve technology governance.

It can take weeks to introduce a new idea or business model but years to pass a change in the law. Our rules can block innovations that can power productivity and solve our most pressing social and environmental challenges, and fail to protect our citizens as they struggle to adapt to a new era.

A more agile approach to regulation is needed to maximize the potential of the Fourth Industrial Revolution. Through the Global Future Council for Agile Governance, we have gathered the latest evidence from across the world on how our rule-making system needs to adapt to this new environment.

Here’s our 10-point pitch for how regulators need to adapt:

1. Embrace the future

Recent history is littered with examples of regulators being caught short by disruptive innovation and reacting suboptimally. Agile regulators lean into the latest technology trends and proactively shape them, using foresight methods to identify possible futures and make preparations to adapt.

See:  Canadian Securities Regulators Publish Additional Guidance for Facilitating Crypto Asset Trading

Singapore has embraced foresight thinking and set up a Centre for Strategic Futures in the Prime Minister’s Office to create a “strategically agile” public service. Other governments are now following suit.

2. Focus on outcomes

Too many rules focus on process, not outcome, stifling businesses that find new ways of doing things.

Agile regulators are designing “tech-neutral”, outcome-focused regulatory regimes. Not only do these generally perform better in adapting to technological change, they can actually stimulate businesses to innovate to meet outcomes.

Japan is implementing a new governance model in areas such as health and safety. Instead of setting requirements around the design of factory facilities and processes, it looks at how well factory systems are able to monitor safety, reduce risks and intervene when issues are detected, giving businesses greater freedom in their operations.

3. Experiment and learn.

Agile regulators are creating space for businesses to trial and test new approaches – and learning about how their rules need to adapt along the way.

Many administrations have emulated the UK Financial Conduct Authority’s “regulatory sandbox”, in which regulators permit businesses to test novel products and processes for a trial period.

The UK is driving a new wave of regulatory innovation through its Regulators’ Pioneer Fund. Established in 2018, it has invested in 15 novel experiments – from stimulating tech entry to the legal services market to supporting testing of AI-powered medical devices.

4. Be responsive

Agile regulators are harnessing the power of technology to monitor and evaluate the performance of these outcome-focused regimes more effectively – enabling them to intervene in more targeted ways to uphold performance.

See:  Fintech Regulatory Developments: 2019 Year in Review

The Dubai Financial Services Authority has developed its own “in-house regtech” to crunch through huge volumes of financial data and enable more sophisticated management of risk. As well as enabling better risk-based enforcement, regulators are increasingly using these techniques to monitor whether regulation is really working and, if not, to reform it.

5. Bring business on board

Laws cannot – and should not – be frequently revisited. Agile regulators are using mechanisms such as regulatory guidance and industry standards to help fill the governance gap, especially in areas of rapid technological innovation.

The UK’s Centre for Connected and Autonomous Vehicles has created a role model of public-private collaboration. It has created a code of practice to help steer the testing of self-driving vehicles without the need for repeated changes to legislation as the technology evolves, alongside working with the British Standards Institution on standards for self-driving vehicles.

6. Connect with your peers

In the Fourth Industrial Revolution, innovation often cuts across sectoral and regulatory boundaries.

See:  Regulating financial innovation – going behind the scenes

Agile regulators are working with their peers to ensure a joint response to new products and services so that innovators don’t suffer “death by a thousand paper cuts” and that bad actors can’t exploit gaps between institutions. The Danish Business Authority, for example, has established a “one-stop shop” for new business models to help businesses find their way through the regulatory landscape and bring their ideas to market quickly.

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NCFA Jan 2018 resize - How blockchain regulations will change in 2020 The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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FATF Travel Rule interview with iComply: Cryptocurrency is Meant to be Trustless, Not Anonymous

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Blockchain News | By Lucas Cacioli | Jan 27, 2020

In JunFAFT travel rule interview - How blockchain regulations will change in 2020e of 2019, one of the most authoritative regulatory organizations worldwide, the Financial Action Task Force (FATF ), issued new guidelines on how digital assets should be regulated.

A point that caused great concern and confusion for exchanges was the “travel rule,”: which refers to section 7(b) in the Interpretative Note to Recommendation 15 in the FATF Guideline, which requires Virtual Asset Service Providers (VASPs) to collect and transfer customer information during transactions. While FATF recommendations are not legally binding, the G-20 stated that it uses them to regulate cryptocurrencies for Anti-Money Laundering.

So what do these recommendations really mean, and how should exchanges or VASPs observe them? We decided to gather some of the questions being posed by those in the exchange and cryptocurrency sector and put them to an expert, Matthew Unger, CEO, iComply.

See: New money-laundering rules change everything for cryptocurrency exchanges

Matthew Unger is the CEO and co-founder of iComply Investor Services. At 22, he became one of the youngest executive financial advisors in Investors Group Financial Services’ history, building a $42-Million business in under five years. He has a decade of technology management consulting experience, driving innovation for companies ranging from high-growth startups seeking to scale into enterprise markets to major multinationals, including Virgin Group, Investors Group Financial Services, BDC, Bank of Canada, and has held Secret-Level clearance with CSIS (a.k.a. Canada’s CIA).

His previous FinTech experience includes leading the systems architecture on an end-to-end digital workflow solution for a wealth management firm in Canada. Unger led a proof of concept at MIT to use Ethereum to automate the matching and fulfillment of interest rate swaps over LIBOR.

iComply Investor Services (iComply) is a regulatory technology (Regtech) company focused on making financial markets more robust, secure, and efficient. Its mission is to improve the user experience of compliance for all counterparties in every transaction.

Does the travel rule spell the end of cryptocurrency anonymity?

No, it does not. The travel rule only applies to people who are trading or facilitating trades for others; it doesn’t impact peer-to-peer transactions.

The subset of digital assets dubbed privacy coins, which have long delighted libertarians and frustrated law enforcement, are feeling the pinch of a step up in regulation—what would you tell advocates of the technology who believe in the autonomy of personal finance and operating free of state surveillance?

A few points here:

The top two privacy coins are Monero and Zcash. Both are able to fully comply with the travel rule, depending on privacy settings that the user has enabled in their wallet. One of these is set to be private by default; the other is transparent by default. These coins will allow the user to give audit access (say, to a regulator) to view transaction details…and software can be created to enable these coins to be compliant at scale, without giving away transaction history to surveillance firms such as ChainAnalysis.

See: Davos 2020: Financial inclusion and fintech is key to meeting the UN SDGs

There is a larger conversation embedded in this question regarding state surveillance. While we want to be free, money has a direct impact on people’s lives. The reality is that crypto is often used in the child sex trade, to launder massive amounts of money, and to undermine the free democratic process in favor of corruption and foreign influence, such as was the case in the 2016 U.S. election (re: the Mueller report). We’ve seen even more extreme values on privacy in the last few years. While some people say privacy is more important, these people limit the current and potential uses of crypto in the financial system.

The original objective of this technology is not to be anonymous—it’s to be trustless.

You don’t need to know anything about an individual to know that you can trade with them and that their money is real. What the tech can’t do is tell you if the crypto is stolen, was used to harm someone, or was used to facilitate acts of terrorism, crime, or other illicit or harmful activities. In order to use crypto in good conscience, it’s prudent that users deal with people that they have vetted...although it’s not possible to know all their details (that eliminates the whole concept of trustlessness). You need policies to be managed at large institutions, so you know that you can actually use cryptocurrency properly.

The reality of the FATF travel rule is that it’s just a method of data standardization. Once you standardize that data format (i.e.: FIX for stock exchanges and SWIFT for banks and bank wires), and if you are an advocate of crypto adoption, having an open-source global data standard is the gateway to mainstream adoption.

Would a technology like Zero-Knowledge Proof be an acceptable way around the declaration of personal data required by FATF?

Again, the people who are required to report and use the FATF travel rule are already legally compelled to do KYC. There is no additional requirement. All this does is make sure that, for example, if someone takes all the money out of Quadriga and starts washing that money, at least people will know where the money went. This is not about the user of crypto making declarations; it’s about VASPs being held accountable for transparency and protection both of their users and the integrity of their platforms.

See:  Fintrac releases key updates to AML obligations, including virtual currency exchange MSB registration

Zero-Knowledge Proof is a very broad term that could be implemented in many ways, but it’s not really a useful tool for this application. This is because you are not asking for authentication of info (such as, is this person’s name, date of birth, address, etc.). Instead, you’re required to actually pass that data forward from the sending VASP to the receiving VASP.

A much better framework than Zero-Knowledge Proof would be to use blockchain to ensure that users consent to their info being shared, which can be done off-chain using standard encryption and APIs, or other means.

Ryan Taylor, CEO of Dash Core Group said: “Exchanges are struggling to understand the specific requirements because the FATF regulation must be implemented in local jurisdictions, which will undoubtedly act on the guidance differently. For now, it is a guessing game.” —Will this mean that the travel rule is likely to be implemented unequally?

There is already a global standard emerging for adhering to the FATF travel rule. iComply, among other reputable companies from all around the world, have worked together to establish a best practice for how the travel rule data can be shared through a common standard (similar to FIX or SWIFT) while using blockchain to protect identities, privacy, and decentralization. This new standard will be a key discussion point at the FATF plenary in May 2020.

Again, we are merely talking about a standardized way to share data between VASPs. If a VASP wants to adopt its own standard for data, such as the format of the date of birth, it will be on them to maintain their data and the “translation” of that data with other VASPs. Adopting a public and open standard saves everyone time and money.

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