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G20 Crypto Regulations Could Unleash Real Blockchain Change

Jonathan M. Padilla is a Schwarzman Scholar at Tsinghua University where he wrote the dissertation “New Regulations for the New Economy: A Proposal for the G20 on the Regulation of Cryptocurrency,” from which this article was adapted.

He has advised major e-commerce and natural resource companies on blockchain integration and has a background in government and politics.


In March of this year, G20 central bankers and finance ministers met in Buenos Aires to discuss everything from international trade to investment in global infrastructure. Among the topics covered was the regulation of cryptocurrency, which has attracted the growing attention of government regulators and political actors as blockchain adoption becomes more widespread and cryptocurrency markets gain a broader following.

Since then, the G20 has begun to intensely study ways to de-risk cryptocurrency markets and craft regulation that will not stifle the innovative potential of blockchain. While many entrepreneurs and investors in this space fear that compliance with government will hinder future growth, the reality is that engaged cooperation offers the best possible path toward a potential tipping point that accelerates adoption of blockchain technology by major enterprise-grade users and brings in far greater institutional investors.

With central bankers and finance ministers slated to discuss cryptocurrency this summer in Argentina and with the full G20 to meet in late November, action or inaction here will impact cryptocurrency markets. How the blockchain community chooses to engage between now and then has the potential to set the tone of how governments and entrepreneurs develop a long-term relationship.

As Mark Carney, Governor of the Bank of England and Chair of the G20’s Financial Stability Board, noted in March of 2018, blockchain has “the potential to improve efficiency and inclusiveness of both the financial system and the economy,” but unleashing this potential will require substantial work.

An ideal forum

The G20 was originally formed as a forum for finance ministers and central bank governors after the Asian debt crisis of 1997. It’s since become a body for cooperation among heads of state to address challenging economic issues of the time.

In the wake of the Great Recession, the G20 created the Financial Stability Board to better coordinate prevention of and coherent responses to financial instability. Since its inception, the FSB has been critical to enhancing banking regulations through the Basel Accords, an opt-in transnational framework designed to strengthen the resiliency of global financial systems, and to promoting good economic governance policies.

The G20, along with the FSB, provides the best opportunity for a global regulatory framework as they 1)  convene the most relevant stakeholders and decision makers, 2) can craft a framework that is transnational in scope, and 3) are already studying cryptocurrencies and their impacts to a number of different fields.

Any regulatory framework will require cooperation from heads of government who possess the political power to move legislation and balance domestic considerations, from finance and economic ministers who have the technical ability to craft good policy and execute laws, and from central bankers who have a huge impact on the regulation of commercial banking within their respective states.

Additionally, the G20 can ensure whatever framework does take shape is transnational in nature as issues such as tax evasion, money laundering, and investor protection transcend borders. Such a framework would also minimize the risk posed by regulatory arbitrage to nations where firms can exploit loopholes in order to gain advantages based on geography.

Lastly, with G20 member states and FSB staff already working on these issues, there is attention, focus, and a desire to craft policy that will not stifle innovation.

The agenda

Different nations have taken different approaches to the regulation of cryptocurrencies and related fields. While a comprehensive framework is likely years away, there are a few key points that stand out in crafting a regulatory setup.

The simplest issue that the G20 and FSB can mediate is deciding on a working definition of cryptocurrency. Several nations such as Switzerland through FINMA and Israel through the Israeli Securities Agency have taken steps to do this in a way that classifies cryptocurrency into payment tokens, utility tokens, and security tokens.

Clarity on this front will not be easy but defining cryptocurrency will allow entrepreneurs and investors much firmer ground on which to build projects and governments more guidance on how to regulate.

Accepting that all the information required to regulate does not yet exist is another important point. This thought lends support to the creation of sandboxes like what the U.K.’s Financial Conduct Authority is doing on fintech that will provide both flexibility and capacity to evolve to meet the demands of the industry as it matures.

On exchanges, the leadership shown by Japan, with the Financial Services Agency requiring licenses and working with self-regulating organizations (SROs) to help police the space and mainstream cryptocurrency should be lauded.

Exchanges will be critical to figuring out how banks interact with cryptocurrency and how taxes will eventually be collected. As the value of the cryptocurrency market increases more and more attention to know-your-customer (KYC) and anti-money-laundering (AML) compliance will follow.

Industry impact

Collectively, some of the issues above could be woven together to mirror efforts that G20 has taken on banking regulation. A Zug or Valletta Accords, comparable to Basel, could create an opt-in framework where nations agree on basic tenets for regulating cryptocurrency with active input from the industry.

Increased regulation, however, will not mean that blockchain and cryptocurrency projects die. On the contrary, increased regulation, as long as it is done with the cooperation of industry stakeholders and with the aim of de-risking the broader market, will hasten blockchain adoption by large enterprise users and reassure institutional investors.

Numerous large firms have already begun to explore blockchain applications and potential use cases to streamline costs and gain a competitive advantage with their peers. With a regulatory framework in place, the internal and external compliance requirements of publicly traded companies can be met and the true growth stage of the traditional S-curve can begin.

Working with regulators, industry stakeholders can help craft rules where both entrepreneurs and governments win. Such a framework by the G20 could be just the action required to help unleash the long-term creative potential and promise of blockchain.

G20 flag image via Shutterstock.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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UK Financial Regulators Are Preparing for a World of Crypto Assets

Blockchain crowdfunding ideas may be ten-a-penny these days, but seeing the concept tested out by a financial regulator and a major stock exchange is pretty unique.

Still, that’s what’s happening now in the U.K. where the London Stock Exchange Group (LSEG) and U.K. financial regulator, the Financial Conduct Authority (FCA), are working with distributed ledger technology startup Nivaura and 20|30, a UK company building a blockchain platform for corporate equity issuance.

One of the more exciting projects within the fourth cohort of the FCA’s regulatory sandbox (some 40 percent of the cohort use distributed ledgers), the project will target institutional as well as accredited investors using the LSEG’s Turquoise, the hybrid exchange platform for European equities that allows trading both on and off traditional exchanges.

The aim is to demonstrate for the first time in a live deal that equity in a U.K. company can be tokenized and issued within a fully compliant custody, clearing and settlement system.

As such, the first company to test out a primary issuance of tokenized stock will be 20|30 itself in September of this year, a launch to be followed by a one year lock-in period according to Tomer Sofinzon, co-founder of 20|30.

20|30 says that as soon as the first testing phase is complete, there exists a pipeline of dozens of young companies looking to try the tokenizing process out. These include medical device makers, firms in the pharmaceutical space, agricultural companies, and software providers.

Since the equity tokens being issued will be built on ethereum, trading of these will presumably start to happen, at least on an OTC basis, once the lock-in period has passed.

“That’s absolutely possible,” said Sofinzon. “After the lock-in period, we can begin the next phase, to really test the tradeability.”

The test follows a number of similar efforts to make more liquid markets for equity crowdfunding using blockchain tech, including the Korea Exchange which launched the Korea Startup Market for trading tokens on an over-the-counter (OTC) basis back in 2016.

The London Stock Exchange said in a statement to CoinDesk it is exploring blockchain as a way to help SMEs and to “innovate the issuance and tokenization of securities enabled for execution and settlement within the LSEG Conduct of Business framework.”

“This project with Nivaura is exploring tools to help companies raise capital in a more efficient and streamlined way,” said the LSEG.

Equity tokens

But while a big step for incumbents, the project is also a boon for the startups involved.

Taking a gradual step-by-step approach Nivaura has shown that debt securities can be tokenized in a regulatory compliant manner and cleared and settled on a public blockchain such as ethereum. Nivaura has, in fact, executed three issuances in the FCA sandbox as a participant in two previous cohorts.

The ramifications of tokenized equity being distributed via an exchange are weighty, but the initial problem the project set out to solve is the inefficiency of equity crowdfunding, which essentially operates a bilateral relationship between the share issuer and the investor.

But, institutional investors don’t work like that. They require a trusted market infrastructure, supplied in this case by Nivaura, leveraged by the LSEG’s network and ability to generate sell orders and buy orders on a grand scale.

Speaking exclusively to CoinDesk about the project, Dr. Avtar Sehra, CEO and chief product architect at Nivaura, said: “Someone can use our technology to do all the legal documentation, tokenize these assets and execute them. LSEG has then been forward-thinking enough to help get these orders out to the existing market”

That said, tokenized equity is a tough nut to crack. Oftentimes, people talk about equity tokenization that’s just tokenized digital certificates which are not transferable, explained Sehra.

Debt is more straightforward, he said, because the token is the bond. “Equity is driven by legislation and the legislation makes it very hard for the token to be equity itself.”

Looking ahead

Designing the legal structure around the equity token meant creating a legal markup language and ensuring compliance with Central Securities Depositories Regulation (CSDR), which Nivaura has been working on with law firms like Allen & Overy and, as part of the latest FCA cohort, Latham & Watkins.

Once there is a certain legal structure around the token, that gives the holder of that token the right to the equity and the right to all the beneficial interest in that equity, said Sehra, permitting a forward glance at the next possible phase of the project.

“If we can guarantee this is the most commercially viable way to do this, it will not only allow efficient primary distribution but it’s also going to potentially allow very simple secondary trading as well.”

“There is a possibility that we are going to be launching that next year.”

It’s worth mentioning that since the settlement layer is the ethereum public blockchain it would be bounded by a throughput limit of about 15 transactions per second, for the time being at least until the technology improves.

Sehra acknowledged that throughput and latency are huge issues for public blockchains, but said that for the purpose of this project over the next two to three years it’s sufficient.

He concluded:

“The industry is going to become a world of tokenized assets – that’s inevitable. We don’t really care if it’s ethereum or bitcoin, the underlying infrastructure isn’t that important. But it is going to be a blockchain.”

Bitcoin image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.