Have there been any recent governmental or regulatory reviews or consultations concerning blockchain technology in your jurisdiction and, if so, what are the key takeaways from these?
Data61, the digital research network of Australia’s national science agency (CSIRO), partnered with the Australian Computer Society to release a report titled Blockchain 2030: A look at the future of blockchain in Australia (Report). The Report notes that blockchain has grown in popularity and use over the last decade and has been used to create vast opportunity in many sectors across the economy but there are key trends that will impact whether there is mainstream adoption of blockchain.
While blockchain has become more efficient and user-friendly, the Report states that it shows signs of limited scalability. Similarly, while there is great demand for blockchain developers, there is a short supply of talent, which may inhibit blockchain adoption. The Report highlights the opportunities for more transparent and efficient governance methods using blockchain particularly where consumer trust has been eroded in traditional institutions but there are also increased risks associated with scams and illegal activities.
Examining eight scenarios for future adoption of blockchain in Australia, the Report concludes that Australia should leverage its competitive advantage in blockchain with respect to talent and transitioning industry and business. The Report suggests Australia should develop the appropriate skill mix, grow the information technology talent pool, address the blockchain knowledge gap and resolve digital infrastructure bottlenecks. The Report also suggests that the Government should play an active role in regulating the blockchain sector while both the Government and businesses should adopt a rolling strategy approach to implementing blockchain, develop a plan to manage cybersecurity and use research and data to drive decision-making.
The Report’s publication follows two earlier reports produced by Data61 for the Government on blockchain use cases for government and industry in Australia. The findings from the three reports will be used to inform the Government’s national blockchain strategy (as discussed at section 4 above).
Numerous parliamentary, governmental and regulatory reviews and consultations have been carried out over the last three years, and are being pursued. One of the most recent contributions consists in a Report from French Senators (members of the Sénat – the French upper House of Parliament), dated as of 1st October 2019 and relating to “digital sovereignty”. Such Report concludes notably (citing the interview of an AMF representative) that “blockchain provides perspectives for all sectors of the economy”.
In spring 2019, the government launched an online consultation in order to develop the Blockchain strategy. The strategy came out as a result of the broad consultations with the industry and involved 158 experts and company representatives, who submitted 6,261 responses. The consultation has revealed that many participants consider the tokenisation of assets, and in particular securities, as one of the central Blockchain applications in the future. With the issuance of securities on a Blockchain the number of intermediaries required could be reduced. A Blockchain can serve as the “trust” agent in a transaction, thereby cutting out the intermediaries and allowing true peer-to-peer transfer of assets, the benefits of which include reduced transaction costs, reduced transaction time, and increased privacy and security.
Therefore, the government intends to open the German law to electronic securities. It should also be possible to issue electronic securities on a Blockchain. The federal government launched a consultation process on this issue with the publication of the key issues paper. It intends to publish a draft legislation on this matter by the end of this year.
The Discussion Paper, discussed in question 2, is the most prominent governmental publication on blockchain. The key takeaway from the Discussion Paper is that the DOF is of the opinion that the risks and opportunities of blockchain cannot be comprehensively addressed by one policy measure or State agency. To evaluate these issues and to develop policy measures that encourage innovation while addressing risks to consumers, investors and businesses, the DOF believes that the Irish government must engage the expertise of multiple State agencies such as the DOF, the Revenue Commissioner (Revenue), the DPC and the Department of Business, Enterprise and Innovation.
Currently, only CONSOB launched a public consultation on initial coin offerings adopting blockchain technologies. In particular, Consob highlighted that this technology should allow the identification of the holder of the rights relating to the investments embedded into crypto-assets (see in detail question 10 and 11).
METI has conducted the “FY2017 Infrastructure Development Program Concerning Data-driven Society in Japan (Survey on Technology and Institutes Related to Distributed System)” to uncover core technologies and legal systems that are required for the public implementation of distributed systems (such as blockchain technologies), and compiled the survey results into the “Report on the Survey on Technology and Institutes Related to Distributed System” , on July 23rd, 2019 (the “METI Report 2019”).
It is stated in the METI Report 2019 that METI chose the following three usage areas as targets for the evaluation of distributed systems, with the aim of (i) showing case examples of how distributed systems work in practice (which may vary greatly from case t0 case) and (ii) promoting their utilization:
(i) medical and healthcare industry: clinical trial data management platform;
(ii) logistics, supply chains and mobility industry: EV battery life-cycle management platform; and
(iii) smart property industry: smart token platform.
In the process of evaluating the practical usage of distributed systems, METI recognized the existence of many challenges to the commercialization of distribution systems (such as blockchain technologies), because the approaches taken under these systems (which are based on trustworthy centralized databases) are different from the approaches under conventional systems. METI has made it a priority to overcome these challenges and is exploring core technologies for purposes of doing so.
The Financial Market Authority of Liechtenstein has issued reviews on a multitude of aspects in the blockchain realm. The FMA has provided guidance October 15, 2019 on the obligation of security token issuers (FMA-M 2019/2), who issue security tokens to the public through the publication of a securities prospectus, as well as guidance on the approval process with respect to securities prospectuses.
Furthermore, the Financial Market Authority of Liechtenstein has issued a factsheet on virtual currencies like bitcoin, which was published on February 16, 2018, stating that virtual currencies are generally defined as a “digital representation of a (cash equivalent) value that is neither issued by a central bank or a public authority.” Further, the fact sheet stated that these tokens do not constitute fiat currency (legal tender). However, it is pointed out that virtual currencies are similar to fiat currencies when they are used as a means of payment or traded on an exchange.
The FMA also issued a factsheet on ICOs on September 10, 2017 (last update on October 01, 2018). Depending on the specific design and the function of the tokens, the guidance explained that tokens may constitute financial instruments if they have characteristics of securities or other investments. Furthermore, activities relating to financial instruments are subject to licensing by the FMA, and the FMA assesses Token Offerings (ICOs, TGEs, IEOs or STOs) on a case-by-case basis.
The foremost representation of governmental review in relation to blockchain technology is provided by the Liechtenstein Blockchain Act, which is accompanied by a government consultation report that explains precisely why the Act was drafted the way it was, and how the new law will interact with different aspects of the token economy.
Attention is given to the legal implications of blockchain technology at both European and national levels. At the European level, for example, reports on blockchain and the GDPR discuss issues, such as "the right to be forgotten" and the designation of roles under GDPR (see question 20). At the national level, a good example of this "attention" is a joint report, issued by the AFM and DNB, with recommendations for a regulatory framework for cryptos. It is worth noting, this joint report also includes an overview of potential legal impediments and the efforts required to tackle these impediments at the European level.
The main key takeaway of these reports: the rules and regulations for blockchain applications depend largely on the sector and on the specifics of the application, and do not depend as much on the technology used.
The Сentral Bank of the Russian Federation prepares from time to time various analytical reviews and advisory reports concerning blockchain technology.
At the beginning of 2018, the Central Bank of Russia published a document stating the main directions of fintech development in Russia for the years 2018–2020. The primary attention is given to such areas as: Big Data and information analysis, artificial intelligence, robotization, biometrics, distributed ledgers (as well as blockchain technology) and cloud technologies.
According to this document financial technologies modernize traditional areas of financial and other services, such as:
- payments and money transfers (online payments, online money transfers, P2P currency exchange, B2B payments and transfers, cloud cash register and smart-terminal);
- financing (P2P consumer crediting, P2P business crediting, crowdfunding);
- capital management (robo-advising; programmes and applications on financial planning; social trading, algorithmic exchange trading; and special purpose savings, etc.).
Other reviews are about cryptocurrency (“Review of cryptocurrencies, ICO and regulatory approaches”, published in December 2017), smart-contracts (“Analytical review of smart contracts”, published in October 2018) and the use of cloud technologies (“Cloudy technology application in the financial market”, published in December 2018).
Moreover, it should be noted that the Expert Council on Digital Economy and Blockchain Technologies was created under the State Duma Committee on Economic Development, Industry, Innovative Development and Entrepreneurship in 2017. This Council is responsible for legal, expert and advisory support of the Committee on the issues of digital economy development and implementation of blockchain technologies. The Council already published several digests dedicated to different problematics and controversial issues, discussed during the meetings of the Council’s experts.
Major government institutions including the FSC, the Ministry of Justice, MSIT and the Office for Government Policy Coordination convened a Special Committee Meeting for the 4th Industrial Revolution in June 2019 to discuss blockchain technology.
The key agreements from the meeting were:
- The government will promote flexibility in adopting appropriate policies for blockchain technology, but will clearly distinguish blockchain from cryptocurrency;
- The government will invest in blockchain technology and expand its application in the public sector;
- Initial coin offerings (“ICOs”) still lack an international regulatory framework and pose substantial risks to investors; and
- The government will take additional steps, including amending existing anti-money laundering regulations, to protect the retail investors.
The Swedish Competition Authority recently issued a report which analysed blockchain technology from a competition perspective. It looked into whether blockchain technology could have potential anti-competitive effects, but also whether it could facilitate the Competition Authority’s supervisory work. Mainly, it found that while risks exist that blockchains are used for anti-competitive practices, today such risks are mostly of a theoretical nature. It pointed out however, that whatever risks there are could be reduced by giving competition authorities insight into private blockchains which are developed within consortia of companies, either voluntarily or through legislative measures.
At the level of the Swiss federal government, crypto currencies, their legal qualification and potential risks were first specifically addressed on 25 June 2014, on which date the Federal Council issued a report in response to two separate postulates by members of the Swiss federal parliament. This was followed up in 2018, when the Federal government conducted a more in-depth study of blockchain technology and its current and future applications, in particular in the financial sector. The results of the study were compiled in a report of the Federal Council published on 14 December 2018 under the title "Legal basis for distributed ledger technology and blockchain in Switzerland".
The report was prepared on the basis of certain principles and convictions, in particular that (i) policymakers should merely provide an framework conducive to innovation, while the preferences of the market and society in general should determine which technologies will prevail; (ii) Switzerland should not fundamentally call into question its proven and balanced legal framework, but should swiftly make targeted adjustments as needed where there are gaps or obstacles with regard to blockchain applications; (iii) Switzerland should continue to pursue a principle-based and technology-neutral legislative and regulatory approach, but should allow exceptions if necessary; (iv) Switzerland should position itself as an attractive location for blockchain businesses, but not tolerate any use of innovative technologies for fraud or circumvention of the regulatory framework; (v) Swiss authorities should position themselves as open towards new technologies and innovations and engage in an ongoing dialogue with the industry.
In the report, the Federal Council identified a need for specific amendments to certain federal laws in order to enhance legal certainty and remove hurdles for practical applications of blockchain technology in the financial sector on the one hand, and, on the other hand, limit the risks of technology being abused for fraudulent or other undesirable purposes. These findings were subsequently developed into the DLT legislative proposal presented on 22 March 2019 (see question 5).
Two developments are worth noting here. On April 19th 2019, the President of Uganda inaugurated the National Taskforce on the Fourth Industrial Revolution. This multi-sectoral task force is looking at blockchain closely alongside other new frontier technologies and will likely shape the government’s position moving forward. The Taskforce has six working groups, with blockchain technology being a key focus area for two of the five working groups. Members of this taskforce are from both the private and public sectors, including regulators.
On October 10th 2019, the central bank hosted a workshop on cryptocurrencies and the law. The workshop was intended to share the central bank’s perspective thus far and to solicit the views of stakeholders and industry participants on blockchain, cryptocurrency and the law.
The FCA has recently consulted on and published guidance in a Policy Statement (FCA Policy Statement 19/22, (“PS19/22”)) seeking to clarify the regulatory perimeter for market participants carrying on activities in the cryptoasset market. The aim of the guidance is to enable participants to be clear on where they are conducting activities that require authorisation. The guidance examines three different categories of cryptoassets—exchange, utility and security tokens—and considers whether they can fall within the established regulatory perimeter. As explored in further detail below at questions 7 and 8, it concludes that security tokens are within the regulatory perimeter, and that utility tokens may meet the definition of e-money in some circumstances and so fall to be regulated. It also observes that the Payment Services Regulations 2017 may apply to international money remittance where exchange tokens are used.
The FCA also published research in March 2019 exploring consumer attitudes to, and awareness of, cryptocurrencies. The FCA identified four main findings: many consumers see cryptoassets as a fast-track to easy wealth; many consumers may not fully understand what they are purchasing; there are signs that cryptoassets are accompanied by risky behaviours; and that anecdotal evidence about cryptoassets may overstate harm.
The BoE published two papers in 2014 considering the nature, risk and economics of digital currencies. These included reflections on the role of DLT in the dissemination of digital currencies, their potential threat to financial stability and the extent to which they can be considered money. More recently, it has released research questions which it is considering in the context of its seeking to better understand the implications of a central bank issuing a digital currency, while emphasising that it is not planning to create such a currency.
These are in addition to the consultations and reviews referenced in the responses above, that is: the UKJT’s legal statement considering the ability of cryptoassets and private keys to be characterised as personal property, and the circumstances in which a smart contract is capable of giving rise to binding legal obligations; the FCA’s consultation concerning the prohibition of the sale of investment products that reference cryptoassets to retail clients; and HMT’s review of the regulatory perimeter. Much of this work has been informed by previous FCA discussion papers, as well as a paper published in October 2018 by the Cryptoassets Taskforce (which brought together HMT, the FCA and the BoE in order to develop an approach to cryptoassets and DLT) and an inquiry into digital currencies and DLT launched by the House of Commons Treasury Committee in February 2018 culminating in a report published in September 2018.
The federal government has been swift to create various task forces to address the various blockchain issues, ranging from the specialized Cyber Unit created in 2017 by the SEC in charge of securities violations pertaining to cryptocurrency and digital assets, to the more recent working group within the Department of Commerce to define blockchain in 2019. Consultations have also taken the shape of calls for public comment, such as in the context of the Disclosure Sandbox. For the more recent projects, the takeaways are still to be seen but from the analysis to date, blockchain does not escape the existing legislative and regulatory framework and the agencies are keen to avoid possible issues of fraud and manipulation that can be caused by such technologies.
The consultations since November 2017 relating to the payment services regulatory framework, which culminates in the PS Act, highlighted the regulatory concerns relating to digital tokens (please see further discussion on the licensed activities under the PS Act in our response to question 3 above). These consultations highlight MAS’ broad concerns, namely – money-laundering and terrorism financing, user protection, interoperability and technology risk. Notably, MAS has reiterated that digital payment token services are considered to carry higher money laundering and terrorism financing risks due to anonymity, speed and cross-border nature of their transactions. This view is consistent with the Financial Action Task Force (“FATF”) and MAS plans to be in line with FATF standards for “virtual asset services providers”, which would include entities performing exchange of digital tokens, virtual assets custodial services and financial services related to offering and sale of virtual assets.
The MAS also recently consulted on the RMO regime through the RMO Consultation. In this regard, the MAS identified trading facilities that make use of blockchain technology as an emerging model and is proposing to expand the RMO regime from a single tier to three separate tiers. Under this proposed tiered regime, RMO Tier 1 will target market operators with limited access to Singapore-based retail investors but with no restriction proposed to be imposed on access to non-Singapore based retail investors, RMO Tier 2 will target market operators that qualify under the current RMO regime under the SFA, and RMO Tier 3 will target market operators that have a significantly smaller scale of business compared to established operators under the current approved exchange (“AE”) and RMO regime under the SFA. This is to better match regulatory requirements to the risks posed by different types of market operators.
The HKMA commissioned ASTRI to conduct an in-depth and open-minded research project on the deployment of DLT. ASTRI delivered the first stage of the results of the project on 11 November 2016 with the publication of the first ‘Whitepaper on Distributed Ledger Technology’ (the “First DLT Whitepaper”). The First DLT Whitepaper introduced the technology in detail and described three PoC projects on which the HKMA had worked with ASTRI and five leading banks, namely Bank of China (Hong Kong) Limited, The Bank of East Asia Limited, Hang Seng Bank Limited, the Hongkong and Shanghai Banking Corporation Limited, and Standard Chartered Bank (Hong Kong) Limited, and their progress. It further reflected on a number of issues relating to governance, risk management, compliance, security and privacy, and legal matters that were identified during the PoC projects.
The Second DLT Whitepaper, published on 25 October 2017, provided an update and overview of the development of DLT and outlined lessons taken from the three PoC projects. It also suggested some key principles relating to issues of governance, control measures and security management for DLT, and described common legal and compliance issues encountered when deploying DLT, along with some possible steps to address these issues.
The HKMA received professional input from Deloitte and PwC in relation to issues of governance, control measures and security management in the deployment of DLT, as well as professional contributions from The Law Society of Hong Kong and academic input from law professors Dirk Zetzsche, Ross Buckley and Douglas Arner dealing with the privacy and legal issues identified.
The HKMA noted in its concluding remarks in the Second DLT Whitepaper that the HKMA has always adopted a risk-based, technology-neutral approach to regulation, with its goal for the two Whitepapers being to help the industry better understand the specific potential of DLT as well as related issues surrounding its implementation. Finally, the HKMA reminded individual organisations deploying DLT that they have a responsibility to strike the right balance between innovation, customer protection and risk management.
The Second DLT Whitepaper confirmed the promising nature of DLT, whilst acknowledging that it cannot be a universal solution for all financial applications. The HKMA noted on its publication that the experts taking part in the research had confirmed that the issues identified in the first whitepaper are valid and that many of them would need new thinking to overcome. Whilst the HKMA noted that the solution will depend on the precise application in question, the Second DLT Whitepaper nonetheless provides broad advice in areas such as the importance of governance structure and its implications on the level of control and liability acceptable to participants, how a hybrid model of DLT and traditional database may be used to resolve the immutable nature of DLT in the storage of personal data, the limits of smart contracts, and the need of adequate security and controls over the operating environment of DLT.
The HKMA sees the next step as being for it to work with the banking industry and the Fintech community to turn the findings and advice in the Second DLT Whitepaper into a set of practical guidelines for the use of DLT in the banking sector in the future.