A look at Crypto- Regulation and Confusion Risk
2020 has been a volatile year for Crypto, Blockchain, and Defi, We have seen the rise of Bitcoin, not only in price, but also as a hedge against the $ or currencies in general, and becoming an Institutional asset class, and the use of Crypto by main street Money Institution to facilitate Payments. We are seeing the emergence of Government-backed Digital Currencies with China setting up a Digital Currency. PayPal has entered the cryptocurrency market, announcing that its customers will be able to buy and sell Bitcoin and other virtual currencies using their PayPal accounts.
Covid19 has led to Digital Transformation with Automated Onboarding now a must-have with Electronic KYC/AML now mandatory.
On the risk side, we are seeing increased Regulation and cyber risks and solutions to counter the challenges
This article looks at some of the trends, and concerns, and risks, and looks at some recent articles from the web.
The real debate is one of a centralized Economy controlled by Government and the Banks vs a decentralized one — i.e Defi.
The Articles below exposes the tension here.
Confusion risk: the next frontier
When people talk about the frontiers of FinTech, they usually mean new technologies or processes; something that changes the way we do things and causes wonderment.
Usually, the last thing they think about is legal and regulatory issues. As 2021 dawns, this is going to change. Except perhaps the lack of wonderment about regulation.
New inventions have limited value unless they can be sold to the public. Over recent years, various regulators, legislators, and governments have proposed ways to apply existing investment regulation and e-money frameworks to crypto. One starting point is that cryptoassets have the potential to bring significant benefits to market participants and consumers. Another emphasises the risks to consumers and market integrity associated with cryptoassets and focusing on their potential use for illicit activity.
From January 2021, UK Financial Conduct Authority (FCA) news regulations goes into force.
1. The anti-money laundering (AML) registration requirement for firms that exchange, or arrange, or make arrangements with a view to the exchange of, cryptoassets and firms that safeguard cryptoassets.
2. A prohibition on the sale to retail customers of derivatives and exchange traded notes where these reference unregulated cryptoassets.
https://www-cityam-com.cdn.ampproject.org/c/s/www.cityam.com/confusion-risk-the-next-frontier/amp/
AML6 or 6AMLD (sixth Anti-Money Laundering Directive) represents the next step in European regulations on money laundering and terrorist financing.
The current criminal framework against money laundering within the EU can properly be described as a mosaic of regimes and regulations rather than as a complete body. This system has led to a lack of legal clarity in certain individual cases and the lack of recognition of some crimes and security breaches by companies.
AML6 seeks to address these problems by hardening the definitions of offences and penalties so that cases do not remain unsolved and includes the evolution of corporate responsibility.
https://www.electronicid.eu/en/blog/post/aml6-sixth-anti-money-laundering-directive/en
US Treasury Proposes Sweeping New Disclosure Rules On Bitcoin, Other Cryptos
The new regulations, if adopted after a comment period, would require banks and some other institutions to obtain and report the identities of parties engaging in certain digital transactions, including payments involving what are called “unhosted wallets” — effectively secret bank accounts that hold cryptocurrency
What does this imply?
First, the regulation would mean that people who store cryptocurrency in their own wallets (rather than using a professional service) would effectively be unable to transact anonymously with people who store their cryptocurrency with a money service business. The regulation will likely chill the ability to use self-hosted wallets to transact with the privacy of cash.
Second, for some cryptocurrencies like Bitcoin, transaction data — including users’ Bitcoin addresses — is permanently recorded on a public blockchain. That means that if you know the name of the user associated with a particular Bitcoin address, you can glean information about all of their Bitcoin transactions that use that address
Third, the regulation could hamper broader adoption of self-hosted wallets and technologies that rely on them, or at least make it difficult to integrate these technologies with intermediaries like exchanges. The regulations make it significantly more difficult for self-hosted wallet users to seamlessly interact with other users who have wallets provided by a service subject to the regulations
In another Announcement
Cryptocurrency tokens are securities not assets, rules Israel Securities Authority
Israeli startup Kirobo unsuccessfully tried to convince the ISA that it will be issuing a utility token rather than a security token and therefore should not be subject to the same regulations
https://www.calcalistech.com/ctech/articles/0,7340,L-3885473,00.html
let’s look at the two sides of this debate
Aviya Arika, an Advocate who is an expert in Blockchain and Regulation posted on Linkedin
“An unfortunate, cowardly approach taken by the Israeli Securities Authority which has been silent regarding cryptocurrency’s status as securities since 2018.
From my personal familiarity with Kirobo I believe this decision is unjust and will lead to a situation where essentially only two categories of cryptocurrency exist: BTC+ ETH and all the rest = securities.
This approach can cause unnecessary stagnation and impede true innovative by genuine companies looking to integrate a legitimate payment token into their systems.”
In fact, there already is a distinction in the type of Tokens — namely, Security vs Utility Token
https://medium.com/stocheck/security-tokens-vs-utility-tokens-8d6d5223a4a
My View is different
This is an important decision. The idea of Defi or Blockchain is that this is an alternative way of holding shares and in theory is competition to a stock exchange listing. The takeaway here is that is an argument that Tokens will be needed to be listed. This is great for transparency as in effect tokens in some forms have underlying Assets or activities and investors need the confidence to invest and that there is some Accountability.
On the flip side, stock exchanges need to enable a more simplified listing and reporting process.
In addition, stock exchanges need to create a marketplace and avoid the need for Token issuers to go to crypto exchanges.
The question is further evaluate is not all Tokens are securities. Let's try to define this further
https://deficapital.com/what-is-defi/
The three models of centralization
Here we have three network models. The first model, centralized, is the model prevalent in finance today. Big and powerful financial institutions in center position and the users or consumers are connected to it and to it alone.
If we use the centralized model to send value to some other user of a centralized network, that value will have to go through the central party, controlling and observing all value that passes through it. It gives a user no freedom about any of the terms on which value can be sent or received.
Decentralization
Blockchain technology offers us the decentralized model, even the distributed model if we desire it. We believe decentralization is the future because there will be some that lack the desire to manage their finances themselves. Thus, a truly distributed model will never be achieved.
But it’s a lot better than the alternative
Because unlike the centralized model, blockchain technology allows for a network that has no central point of failure. And this is DeFi. With a decentralized/distributed model the chances of malfunctioning have been reduced to near zero, it’s always accessible. The more decentralized a network is, the more censorship-resistant it becomes since everyone has a copy of all the data and will continually verify each other.
Let’s see where this is heading
First Mover: As Bitcoin Rally Pauses, Defi Keeps Astounding
https://finance.yahoo.com/news/first-mover-bitcoin-rally-pauses-141928114.html?guccounter=1
Bradley Keoun and Omkar Godbole
In Defi, entrepreneurs are building semi-automated lending and trading systems atop blockchain networks — aiming to someday, potentially, challenge banks and Wall Street trading firms. The arena rose to prominence in June through September of last year as a flurry of usage and high-profile token rollouts ignited enthusiasm among traders and venture-capital investors alike
“User growth over time is ballooning and should continue to accelerate,” the cryptocurrency analysis firm Delphi Digital wrote in a Jan. 1 report.
Defi “can be best thought of as an emerging sector within the frontier digital asset market,” Dan Zuller, a partner at the investment consultancy Vision Hill, wrote last week in an op-ed. “Investors that put capital to work in this thematic sector of digital assets generally outperformed bitcoin and the digital asset market beta in 2020.”
That’s despite Defi sector risks exposed last year when several platforms were upended by software bugs, sophisticated trading exploits and unexpected exits (with tokens) by project leaders — the latter seen as so serious a threat that industry executives and journalists gave the maneuver its own term, the “rug pull.”
“The decentralized world of chaos is becoming more professionalized,” Vinokourov said. “There’s huge growth potential.
This leads to the next headline
Israeli cyberattack co NSO mulls TASE IPO
https://en.globes.co.il/en/article-israeli-cyberattack-co-nso-mulls-tase-ipo-1001356064
Highlighting the increase Cyber Risks and Potential Solution
Senior executives have met with Tel Aviv Stock Exchange management to discuss the possibility of flotation at an estimated company valuation of $2 billion.
In Conclusion, This article seeks to raise the debate about the tensions of traditional Payment and Investment Institutions vs new way of Crypto, Blockchain and Defi.
How this pans out 2021 will set the tone where this is heading.