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Today our General Counsel provides a look into the regulatory environment surrounding blockchain and crypto

Prelude

It is truly a brave new world that we live in now: the newest frontier in corporate financing is the Initial Coin Offering (ICO), a largely unregulated method of crowdfunding for companies with ideas that leverage the blockchain, while the introduction of crypto-exchanges allow any form of tokenised instrument to be traded at radically reduced fees and at much faster settlement times, and as you might have guessed, against a largely unregulated backdrop.

Regulators globally are catching up rapidly and there is also a growing trend of companies wanting to be regulated or compliant on a fully voluntary basis, one of the ways is through self-regulated organisations (SRO), which are sprouting up in major jurisdictions, revealing a new approach to regulation. We will be examining the various approaches taken by different regulators, these new trends taken by companies in relation to regulatory strategy and the impact that it has on the industry at large, and on CDRX.

Encouraging signs from progressive regulators

Let’s start with the more encouraging end of the spectrum. Regulators categorised as being ‘progressive’ or ‘forward-looking’ have regulations that are meant to help the industries grow. Sometimes change is not immediately afoot. We notice that some regulators prefer to adopt a so-called ‘wait-and-see-then-act’ approach, letting the sector develop alongside current regulations as they learn about the issues before adjusting the regulatory landscape. This journey is a continuous one involving constant fine-tuning of issues, regulations and consultation with the industry to ensure it stays relevant and attractive for all stakeholders.

Several jurisdictions are racing to become the first ‘crypto-nation’ or ‘crypto-valley’ like Malta and the Canton of Zug in Switzerland. Malta’s claim to fame is its passing of 3 simultaneous bills specifically tackling the blockchain industry, a first anywhere in the world. The Canton of Zug is introducing legislation to liberalise banking services to crypto-companies, which is a common pain point.

Elsewhere in Europe, Germany is trying to push for “global scale” regulation to counter the decentralized nature of cryptocurrencies in general. Joachim Wuermeling, a member of the executive board of Germany’s Bundesbank and ECB Supervisory Board, propounded this. He believes

“effective regulation of virtual currencies would only be achievable through the greatest possible international cooperation, because the regulatory power of nation states is obviously limited.”

This is for a sure a more progressive stance adopted by a country that had perhaps taken a backseat in the leadership of this sector.

Here in Asia, many look to the fintech hub of Singapore as a bellwether in this space. The light-touch and consultative regulatory approach adopted by its financial regulator, the Monetary Authority of Singapore (MAS) is one main reason why Singapore continues to have an outsized role in the industry. By one measure, it became the world’s third-largest ICO launch pad in terms of funds raised in the bumper year of 2017, according to a report from information portal Funderbeam.

To date, the MAS have been light on regulations. It has issued its ‘Guide to Digital Token Offerings’, with the main takeaway of which is to differentiate what digital tokens constitute as securities, and will therefore be governed by the flagship securities bill, the Securities and Futures Act. Public consultation has just ended on the proposed Payment Services Bill, which seeks to regulate the provision of cryptocurrency services, including the dealing and facilitating the exchange of these cryptocurrencies. Other blockchain aspects are still largely left unregulated.

Apart from core regulations, the MAS has instituted a regulatory sandbox and proactively partnered with industry incumbents and startups alike to further push the envelope.

An interesting partnership to illustrate this is the Project Ubin. It is a collaborative project with R3, a blockchain company, and a consortium of 11 financial institutions ranging from JPM, OCBC to SGX, to explore the use of distributed ledger technology (“DLT” is another name for the blockchain) for clearing and settlement of payments and securities. It is also looking to develop simpler to use and more efficient alternatives to today’s systems based on digital central bank issued tokens. They identified that DLT has the power to “make financial transactions and processes more transparent, resilient and at lower cost.” — a view shared by CDRX.

Phase 1 of Project Ubin concluded in October 2017 and was deemed a success. Phase 2 is now underway with the partnership widened to include 5 technology firms (Microsoft and IBM in the mix) and the open source-code and technical documents have been released to aid the public with their research and ongoing innovation in these fields. All these are clear signals from MAS that regulators should experiment more with the blockchain in order to understand the possibilities and intricacies of the technologies involved before defining new regulations, if any. Sopnendu Mohanty, MAS’s Chief Fintech Officer, even told CNBC that even if this collaboration is unsuccessful or not helpful in shaping regulations, regulators:

“[shouldn’t] fear doing experiments and fall into traps of signalling policy changes. Some regulators are afraid to do experiments because of this tremendous external pressure on them. We are trying to drive that culture [of doing experiments with industry players] globally.”

For the next and concluding part of this 2-part article, we examine the other side of the coin and will take a peak into what CDRX’s regulatory strategy is.

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