Thu, Apr 19, 2018

A Reality Check

Much has been said of blockchain’s potential to transform financial services. One early use has been in cryptocurrencies and initial coin offerings (ICOs). This has gathered massive media attention lately.
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As with investors, regulators are still feeling out how to best handle this. Cryptocurrencies and ICOs are a species of blockchain transactions recorded on distributed ledgers. The transactions are virtual yet apparently impossible to manipulate, eliminating the need for banks and other third-party custodians to hold cryptocurrencies or coins that have been transacted in order to safeguard investors’ assets or independently verify them. Theoretically, anyone can issue a cryptocurrency or launch an ICO. All you need is access to social media, messaging apps and a fast internet connection.

ICOs are also freely accessible by any investor with access to the same, and financial flows resulting from ICOs can move freely across borders. That means regulation is likely to converge on traditional norms, as national regulators around the world share a common interest in protecting investors in their respective jurisdictions and ensuring the stability of the global financial system.
For all the excitement, then, regulation of this area may well end up looking boringly familiar, with blockchain-related financial services regulated similarly to those housed in bricks and mortar. Materials offered to prospective investors will need to be accurate and complete; anti-money laundering measures will have to be in place; and cybersecurity will be required to protect investors’ investments and details.

Already, regulators in the United Kingdom, Singapore, Hong Kong and Australia have issued statements that ICOs involving issuing securities need authorization and require appropriate disclosures.

For blockchain entrepreneurs, putting controls in place to anticipate regulatory demands and seeking licences to conduct financial services activities will demand resources and potentially slow down speed to market. That will be a challenge for many. With current barriers to entry in the industry being so low, many run very lean operations.

There are two incentives to take a proactive approach, though. First, it is only a matter of time before we see enforcement action against blockchain businesses functioning without the appropriate regulatory status. You cannot “structure out” of regulation, as many may at first blush seek to do, if your business involves conduct of a regulated financial services activity.

Second, low barriers to entry also mean high levels of competition in the industry. Regulatory authorization and controls to protect investors could prove powerful points of differentiation for those blockchain businesses that embrace them, helping those businesses stand out from the crowd.

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