BEF Highlights: Regulation vs. Self-Regulation. Who Should Design the Rules for Blockchain?
Regulation and self-regulation of the blockchain were one of the most important topics of LATOKEN Blockchain Economic Forum in New York. As the founder of LATOKEN Valentin Preobrazhenskiy puts it, “an autonomous self-regulating mechanism could decrease the need for regulators’ intervention. The market leaders can introduce and reinforce rules of self-conduct protecting uninformed contributors and preventing misuse of their contributions while scaling benefits of the technology”.
The speakers of the Forum agreed, that right now the technology is moving much faster than the regulators, and the objective of major players should be to trigger sufficient responsible behavior happening internally, so that the external regulators wouldn’t feel obligated to step in.
The panel on regulation was represented by Matthew Spoke (board member of Enterprise Ethereum Alliance), Miko Matsumura (Limited Partner, Pantera Capital), Carol Van Cleef (Partner at BakerHostetler), Chris Ferri (board member of Blockchain Compliance Alliance), Bradley Rotter (Vice Chairman at Rivetz), Michael Golomb (Co-Founder of The ICO Governance Foundation) and Chris Martin (Executive Director of Wall Street Blockchain Alliance).
The Genuine Interest Is Already There
Almost every government agency today is looking at the blockchain in some way or another. From one point, they try to figure out how the technology is going to affect traditional industries and the way businesses are run. From the other, regulators evaluate how the blockchain is going to impact their role in “actually monitoring and performing regulatory function”, says Carol.
Matthew, having an inside peek at the topic, as he sits on the Advisory Board to the Ontario Security Commission, the Canadian equivalent of the SEC, agrees with her. Regulators are not just looking at “enforcement, and regulations, and guidelines for how this can fit into the their framework”. They are also really interested “in what way they can get more real-time access in the data rather than force complaints as the secondary process.”
The Dream Technology for Regulators
Compliance today is a historical retrospective on what businesses are doing rather than real-time view on transactions happening and trades taking place, Matthew states.
«From regulators' perspective there's an enormous opportunity of the blockchain to enable them to put themselves out of business. It's like the dream: the regulation and enforcement can be programmatically written and algorithmically enforced rather than human-enforced with auditors and all these layers and layers of government regulators that have to come in and verify that you're actually being honest and forthcoming with your activities as a business,” he explains. This can remove all the inefficiencies.
Matthew went on to talk about the weaknesses, that human-enforced agencies have, compared to strict and sufficient software. If people working in such agencies have to spend all day long verifying that all the transactions and business activities are honest and forthcoming, they are bound to make a mistake at some point. People can simply miss out on transactions that are financing terrorism or dealing with money laundering. That would have been impossible with technology involved in the process.
Full analytical system on blockchain would be much more effective because it will be able to track the origin of all transactions and coins. It will make it possible to track the history of all the wallets. The levels of confidence will boost exponentially. This is an enormous opportunity for regulations to become much more secure and swift, Matthew concluded.
Examples are Already There
There are already examples of projects trying to improve their relations with regulators with the help of blockchain. Valentin mentions ABN Amro’s decision to implement the blockchain into their commercial real estate leasing platform. The project allows the Dutch regulators to oversee the portfolio quality in real time, and helps to save up to 200,000 working hours.
Miko has also provided an example — the Crypto-ruble. “Crypto-ruble actually has 13% tax fracture that is essentially programmatically developed inside of it. These are precedents that are going to become impactful in the total value of ICOs system. It is an extremely logical and sensible approach to do so. There are actually about 6 blockchain analyst firms including Chain Analysis that do hard core blockchain forensics. I think, we are moving in that kind of direction where there can be a regulatory container within which certain currencies operate”.
Need for Standards
Standards are a vital part of any industry. But the question stands: who should design them — regulators or industry leaders? Chris Ferri expressed commonly accepted opinion that “Self regulation is better than external regulation. We have to come down to a standard that the industry accepts.”
Matthew also agreed that the goal is to have a sufficient responsible behavior happening internally in the industry so that the external regulators wouldn’t feel obligated to step in. «You look at mature niche technologies, like Ethereum, like Bitcoin, like somebody’s longer lasting networks that are out there, I think it’d be inappropriate for them to be treated as securities or commodities, and I think we need to create a new framework for ourselves that implies a new set of rules. If not, we’re going to put ourselves in a really tight corner,” he explains.
Miko added, that the industry’s usual standard at the moment, unfortunately, is nondisclosure done in darkness. The primary focus has to deal with disclosure of proceeds, declaration of governance as well as custodial chain that is responsible for flowing those proceeds, he stated, adding that “one area that has extremely high importance at this moment is the custody chain.” The ability for institutional capital to move in at scale is gated by custody, he explained.
We Can Handle it Ourselves
Michael in his turn has raised a question of verifying the information that ICOs disclose: “The problem that we’re facing right now is that when people actually disclose something, who’s going to verify the quality of it? And if people do submit fraudulent information, what’s going to happen to them? Are they going to go to jail?”
But other panelists didn’t see verification as a necessary element of regulation. “I think it’s our subconsciousness that we always associate compliance with having somebody to control us, a central point of authority. Blockchain is the first opportunity to have a community to self-control itself. Everyone within the space are reading the whitepaper, investing in it, deciding what matters and what does not,” Chris said.
Bradley mentioned that the contributors in ICOs can get an amazing amount of information about the principles and what’s going on, the use of proceeds and so forth through Telegram and Slack channels. “It’s quite fascinating. Unlike any information you would have ever gotten in IPOs,” he said.
Matthew added that the market forces already tend to solve a lot of the problems. “You look at the ICO market today versus even 3 months ago, and the expectations placed on projects has gone up dramatically. What you could have gone away with at the beginning of this ICO acceleration in the last 6 months, you wouldn’t get away with anymore. Now you’ve got projects imposing on themselves with or without self-regulatory organization frameworks. It’s good that we start creating that structure, because now everybody’s making their best guess at what should I do.”
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