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Regulations and tokens: regulatory support

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"Cryptocurrencies future/regulation" conference held in Gibraltar (on 9th May 2017). Speaker: Adam Vaziri from Diacle

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Regulations and tokens: regulatory support

  1. 1. Regulations & Tokens Regulatory Support DIACLE.COM
  2. 2. Introduction ● Blockchain applications and regulatory matters ● First application digital currency ● Second application crowdfunding Initial Coin Offerings (ICOs) ● Blockchain Securities ● Tellochain Method ● Compliant ICOs ● ICOs and Policy making
  3. 3. From currency to crowdfunding ● First application is digital currency ● Bitcoin is the first ● Success meant replication, the so-called Alt-coin explosion ● Pre-mining of tokens. Ripple as an example ● New protocol layers - Counterparty. ICOs started to become commonplace ● Mastercoin ICO, Maidsafe raising millions
  4. 4. Types of tokens ● You have the ‘access token’ this is to access services or software provided via a network ● Virtual Securities token. This: ○ Share of profits or revenue stream or clear investment proposition ○ Not actual shares on a blockchain ○ Nor structured as a traditional financial instrument ● Virtual Securities subject to tighter regulations
  5. 5. Substance over form ● Ethan Burnside set up a ‘Virtual’ Stockmarket ● It was intended as a game ● Bitcoin accepted ● Could issue ‘virtual’ securities on the site ● The securities were not supported by a legal structure ● Shut down and SEC fined Ethan
  6. 6. Virtual Securities regulations ● In the US securities are required to be registered with SEC ● In the EU there is the Prospectus Directive ○ Requirements of registration of a prospectus for a security offering under certain conditions ● Virtual Securities are also ‘bearer assets’. ERC20 a standard Ethereum token is completely transferable. Regulations prohibit bearer assets in many countries
  7. 7. 2 Types of Virtual Securities ● Model 1: not defined by Issuer as a security ● Model 2: explicitly acknowledged by the Issuer as a security ● Lykke and Blockchain Capital had done best efforts to issue a Model 2 Virtual Security
  8. 8. Virtual to Blockchain Securities ● Shares are typically issued in ‘certificated’ form ● There is a share register and share certificate ● For stock market trading paperwork would be impractical ● Regulations introduced to make legal transfer of a security possible without paperwork ● Uncertificated Securities Regulations 2001 (USR2001) ● Uncertificated Securities can only be held by approved Operator
  9. 9. Blockchain as an ‘Operator’ ● In Delaware proposal to allow for the issuance of Blockchain shares ● For the EU it would require an existing Operator such as CREST to use blockchain ● Cannot dispense with role of Operator without primary legislative change ● Euroclear who owns CREST is fairly keen and have been advised that no further permission is required for them to use a blockchain
  10. 10. Blockchain Companies ● The direction we are heading that companies will be incorporated on the blockchain ● Model Articles exist today to facilitate incorporation of companies ● Model Incorporation, Issuance and Transfer Smart Contracts will be created by a country for download ● Once the incorporation published on-chain the company now exists ● Sounds ambitious but only from a legal point of view. May take a while before the law can catch up
  11. 11. Immediate Leverage of blockchain ● Factom uses blockchain’s feature of immutability to make records immutable. Strong business model. ● My thoughts are that you can leverage immutability to make counting immutable ● This would have no regulatory consequences whatsoever and so can be done today ● Tellochain Method: numbers are abstract. Originally counting was done with physical tokens. With blockchain we revive the use of tokens for counting.
  12. 12. Tellochain & Share Registers ● Issue 10 tokens representing shares ● They now existing onchain and are permanent and can never be destroyed ● Create addresses for the shareholders in your blockchain share register ● Transfer the tokens to them ● Allow them to transfer the tokens to other people ● Tokens would be completely valueless ● Just an administrative tool for counting ● No need to wait for the law to catch up
  13. 13. Regulation of ICOs ● Regulation of ICOs ● US requires a licence with FinCEN ● Ripple fined for issuing XRP without a licence ● EU - ICOs likely to be regulated by 4AMLD. Exchanges and custodian activity regulated ● Japan digital currency are now regulated completely
  14. 14. ICO Havens ● Switzerland and Singapore are the hotspots ● Swiss route is non-profit foundation ● Singapore route is the perceived pragmatism of MAS
  15. 15. Trends in regulation ● There is NO AML on ICOs at the moment ● Position is unsustainable ● 4AMLD will force registration requirements ● Singapore and Switzerland will most likely follow suit ● Swiss authorities made clear that blockchain companies should enter SRO and comply with AML ● In Singapore, DigixDAO has since suggested that they will do KYC on their clients ● ICOs will be subject to standard AML
  16. 16. Towards a Compliant ICO ● Reviewed a lot of the ICO contracts ● No compliance whatsoever ● Freeze function added due to theDAO loss ● Simply need to add a ‘Whitelist’ function in the smart contract ● This is not complicated ● Purchasers pre-register their ETH address and does basic KYC. ICO then starts and they have a pre-allocation in the ICO.
  17. 17. Policy making ● Doing an ICO will be the equivalent of setting up a Wordpress ● In the next 2 months there will be 2 ICOs that will make ICOs easier. I love the irony of this industry. ● We suggest a basic AML registration framework for ICOs ● In the Isle of Man this is already in place ● This should apply to digital currencies and also Virtual Securities ● Virtual Securities should NOT be regulated
  18. 18. Policy should be proportionate ● Scaled regulation is important ● Define all the Virtual Securities as digital currency and require AML ● When the industry reaches critical mass then enhance the framework ● This is the stance of Singapore
  19. 19. Conclusion ● Crowdfunding is the biggest application of blockchain at the moment ● So many tokens ● Needs lighttouch AML laws imposed ● Sufficient for both ‘access tokens’ and Virtual Securities ● Use the tech - Tellochain Method no regulation required whatsoever ● Work on long term policy - Blockchain Companies and Blockchain Shares