Legal and Regulatory Report on Blockchain, published in October by GBBC by Raffaella Aghemo
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Exactly one week ago, the Global Blockchain Business Council (GBBC), in collaboration with the World Economic Forum, produced and published a Report, Global Standard Mapping Initiative (GSMI) 2020, to provide guidance and an overview of global standards in blockchain technology.
The GSMI includes two reports, one on the Technical Overview specification, and another, which is the subject of this editorial, investigating the Legal and Regulatory Overview, to conclude with an interactive world map of legislation, regulation, and guidance on blockchain and digital assets.
Three distinct areas are identified in this Report:
- technical standards;
- legislation and guidance of sovereign and international bodies; and
- best practices and industry standards.
The results were provided on a long survey covering 185 jurisdictions, 379 industries, and 30 industry bodies. It reads in the introductory section: “This report is dedicated to outlining the general framework of guidelines and regulations by sovereigns that impact digital resources and technology chains. By mapping existing standards globally, we hope to identify key gaps, inconsistencies, and conflicts. It is important to note that the legal and regulatory landscape is constantly evolving; in the final days of writing this report, the European Commission adopted the Digital Finance Package, which includes “Digital Finance Strategy, a Retail Payment Strategy, legislative proposals for an EU regulatory framework on crypto-assets, and proposals for an EU regulatory framework on digital operational resilience.”
THIS REPORT FOCUSES ON TWO KEY ISSUES:
First, what is the current landscape of global legal, regulatory, and industry standards?
Second, how can we shape global standardization and regulation in a sustainable, informed, and effective way?
Surveys of the 185 jurisdictions examined, clearly including our own, have identified 10 issues that need to be addressed:
- Consumer protection: alerts issued to consumers, investors, and businesses about digital resources.
- Financial supervision (anti-money laundering, KYC, and anti-terrorist financing): laws, guidelines, and regulations established by sovereign bodies to ensure the legality of transactions conducted with digital assets
- Regulation of digital assets (including regulation of securities and commodities and regulation of initial coin offerings (ICO)): regulatory and legislative instruments used by governments to respond to the growth of blockchain, digital asset, and ICO technology.
- Taxation: tax issues related to the use of digital assets, including trading and mining.
- Central Bank Digital Currency (CBDC): Digital currencies issued by central banks; CBDCs are not necessarily blockchain-based.
- Banking: Regulations on banks interacting with digital assets and digital asset activities, as well as pilot projects in the banking sector.
- Prohibition (Ban) of cryptocurrencies: jurisdictions that have taken measures to ban cryptocurrencies.
- Sovereign strategies: strategies implemented by jurisdictions to develop and implement blockchain technology at the national or regional level.
- Regulatory sandbox: frameworks implemented by regulators that allow financial technology companies and other firms to conduct live experiments in a controlled environment and under the supervision of a regulator.
- Government Projects and Services: use of the blockchain for both internal governmental use and the provision of government services.
The first point, consumer protection, states: “There are no specific regulatory protections to cover you in case of loss if a platform trading or holding your virtual currencies fails or closes down. While the EBA (European Banking Authority) is currently assessing all relevant issues associated with virtual currencies, in order to identify whether virtual currencies can and should be regulated and supervised, it is advisable to familiarize yourself with the risks associated with them.”
The only country that defines virtual currencies that are not supported by the state as legal tender, i.e. that they must be accepted as repayment of a debt, is Lichtenstein, which defines virtual currencies as “digital currency units, which can be exchanged for legal tender, used to purchase goods or services, or to preserve value and thus take on the function of legal tender.”
On the second theme, it reads: jurisdictions throughout Asia, Latin America, and Europe have sought guidance from the Financial Action Task Force (FATF) to define their strategies. The FATF’s latest action was the announcement of the Travel Rule in June 2019; this regulation is an update of the current FATF Recommendation 16, which covers cross-border and domestic transfers, according to which originators and beneficiaries of all digital fund transfers must exchange identifying information. In addition, originators and beneficiaries involved in a transfer must be able to guarantee the accuracy of the information they send. The rule applies to all virtual asset service providers, financial institutions, and obligated entities.
A number of findings emerge from reading the Report that somehow identifies the points that need to be addressed and implemented in order to follow up on the correct technical and regulatory application of block technology. It is necessary to overcome this regulatory fragmentation and find a general regulation because gaps and functional silos frameworks block innovation. For these reasons, it will be necessary to use regulatory sandboxes and innovative hubs in order to benefit from and follow the new paths already traced by technology.
Some jurisdictions are particularly noteworthy for their thoughtful and innovative approaches to creating blockchain frameworks. Australia launched its fintech sandbox, under the direction of the Australian Securities and Investment Commission (ASIC), in 2016. However, it was reported that only seven companies took advantage of it in the three years that followed, which is why the government passed legislation to extend its duration in February 2020. Canada expanded its sandbox in 2020 by signing a cooperation and data sharing agreement with the Financial Supervisory Commission of Taiwan (FSC), which will give fintech companies access to both markets.
On item 10, it says: “44 per cent of Estonians vote online, 98 per cent of tax returns are filed online, 98 per cent of Estonians have a digital ID and 99 per cent of health data is digitised and stored on a blockchain system. The Estonian Ministry of Justice has also used blockchain technology to create the e-Law system, an online database that allows the public to read every bill introduced since February 2003. As a result, Estonia is the second-fastest court system in Europe, with the second shortest time needed to resolve civil, commercial, administrative, and other cases.”
Section V of the document is very important because it draws up the concluding observations and analyses the next steps, which will be preparatory to the correct application of block technology:
EDUCATION: Education is essential to ensure that regulators and other stakeholders understand the value of assembly line technology. However, as with any new instrument, the potential of blockchain, as well as its benefits and risks, cannot be fully or correctly understood or anticipated at this early stage. The creation of platform-agnostic regulatory frameworks that focus on uses instead of underlying technology will enable regulators to build better and more sustainable models that remain relevant as technology continues to evolve. Many jurisdictions have embraced the idea of regulating the uses of technology, but have refrained from regulating the technology itself. But to build on this trend, decision-makers need to be educated with thoughtful, accurate, and digestible information.
TAXONOMY: Regulators are rarely technologists, which makes the construction of functional regulatory frameworks for new technologies a challenge; something as seemingly simple as the definition of technology becomes complex. Over the years, many blockchain taxonomies have emerged, but so far none have been universally accepted or adopted, making it difficult to achieve consistent regulation across (or within) jurisdictions. During the drafting of this report, we were asked to clearly differentiate digital assets from encrypted assets from cryptographic and virtual currencies. Taxonomies are beginning to move towards a common set of definitions through industry bodies. However, confusing language remains a sore point. The wider community must prioritise the search for greater consensus on common definitions and taxonomies.
FRAMEWORKING AND INFORMATION AT SILOS: the fragmentation of approaches, both globally and within certain jurisdictions, is both indisputable and unsurprising. Existing efforts to coordinate jurisdictions have been fragmented at best and chaotic at worst. The multiple fragmentations that exists adds unnecessary confusion and complexity.
Use cases and applications of technology should be the primary focus of regulators seeking to provide clarity to innovators and comfort to consumers.
Cross-sectoral partners should come together to inform the way forward.
STANDARD COLLABORATION: As global players build new solutions to address society’s most difficult challenges, shared standards are needed to facilitate responsible innovation. There are both gaps and overlaps in the current landscape of blockchains and standard TLDs. This can be alleviated through increased collaboration between entities.
On the other hand, there may be aspects of the TLD that are not yet mature enough for standardization. Moving to standardization too early can stifle innovation or lead to distorted or negative incentives. As such, the time frame in which standards are developed is crucial. These aspects need to be carefully analyzed to identify a projected timeline for revisiting the issues.
ORGANISED STRATEGIES AND PLANNING: Organizations should proactively assess their strategies for their involvement in standard creation, both through ecosystem collaboration and independently, and how to implement them.
DYNAMIC ORIENTATION: Much of the existing regulation and standardization focuses specifically on digital assets, as opposed to blockchain or DLT technology more generally. As new uses of technology continue to emerge, dynamic or principle-based guidance will be better suited to adapt. Regulators should take advantage of regulatory sandboxes and innovation centers to create more effective regulations.
For further details here the link to the full report: https://gbbcouncil.org/wp-content/uploads/2020/10/GSMI-Legal-Regulatory-Report.pdf
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Raffaella Aghemo, Lawyer
