- The inherent differences in policy that result from country-specific priorities and demands lead to opportunities for arbitrage across borders. It is in the interest of all parties involved to prevent this from happening, even if that means compromising on certain rules.
- The input of drastically different nations on their experiences with regulating cryptocurrency can only be helpful, as it allows participant countries to get a handle on the status of crypto on a global scale, and utilize that experience to formulate new regulations that better oversee the industry.
- While Asia is a prime market for most things, with its considerable accumulated wealth and advanced technology, as well as its ambition and rise to the global stage, Europe or the US are more likely to take the forefront in raising capital for cryptocurrency, says Giles Ward, Senior Policy Advisor for International Organization of Securities Commissions (IOSCO), as the Western countries have a financial culture more suited for liquidity. It also has a more cohesive, cooperative market, while Asia’s “wide variety of large, small, medium-sized countries, that are applying their particular approaches,” might prevent it from “arriving at a consistent picture.”
Listen to the podcast version
In an unofficial, behind-the-scenes discussion following the on-stage conversation about the challenges of regulating cryptocurrency at Paris Blockchain Summit Week, our panelists consider how blockchain plays into each of their national or institutional interests, and how those interests relate to each other on a global scale.
Marius Jurgilas, Board Member of the Bank of Lithuania, explains why Lithuania’s Minister of Finance deemed ICOs to be a possible stimulant to the capital market, and how the Bank of Lithuania subsequently issued guidance on security token offerings, with input from parties with a stake in the move, such as NASDAQ. Representing the OECD, Caroline Malcolm, Head of the Organisation for Economic Cooperation and Development (OECD)’s Blockchain Policy Centre, expresses hopeful sentiments that Lithuania can become a case study for the OECD’s other member states, including the US, to examine and learn from.
However, Malcolm also specifies that cooperation will not be the only dynamic of international regulations – because of inevitable country-specific concerns and priorities, opportunities of arbitrage are bound to appear between jurisdictions. In order to avoid a “race to the bottom, which would ultimately undermine the work that all of us are trying to do in the policy objectives,” Malcolm emphasizes the importance of continuing dialogue among all regulatory bodies across countries.
In contrast to Lithuania’s proactiveness, Mike Gill, Chief of Staff and Chief Operating Officer of the US Commodity Futures Trading Commission (CFTC), reiterates the reluctance of the US to issue new guidance on ICOs. Despite having “put out a couple primers on virtual currencies” and an RFI on Ether, the CFTC appears to be adhering to the overall US stance on specially regulating cryptocurrencies; that there are “rules on how [one is] allowed to approach investors. And those rules apply, whether it’s a share offering, a token offering, or anything else.”
Asia, on the other hand, is agreed upon by all panelists to have remarkable potential to lead in the development of cryptocurrency. The substantial wealth and cultural proclivity towards risky, high-reward investment opportunities make Asia a prime space for blockchain to grow. With regard to regulations, Japan at least has been regulating crypto exchanges for some time, but the rest of Asia is more divided. Unlike Europe, Giles Ward, Senior Policy Advisor for International Organization of Securities Commissions (IOSCO), points out, in Asia, the adoption of legislation in one jurisdiction does not guarantee, or even point towards, its adoption across the board. The challenge of taking advantage of the economics and technology that Asia has is that of navigating its geopolitics, to ensure that all nations are working towards the same goal without allowing opportunity for arbitrage.
Recorded April 2019.
So we just wrapped the panel discussion on international regulatory cooperation in Blockchain and cryptocurrency. And half an hour was not enough, so we’ve invited the entire panel from OECD, from IOSCO, from Bank of Lithuania, from the CFTC. These incredible giants in this space, all in one room and confined space and we continue this conversation. Starting with you, Marius we talked about this being a product and we had just left off on jurisdiction shopping and you made the great point that as regulators, you are really trying to regulate or create structures that your specific economy requires and that is going to be very different than somebody else’s economy in vice versa. Is that jurisdiction shopping or is that just a fiduciary responsibility to your people, to your constituents?
Yeah, so picking up where I just left, you know Lithuania is not exactly the epicenter of the capital market. The depth of the financial market is so bad, we’re investigating market abuse cases where transactions of 200 on the Stock Exchange is moving the market and ridiculous things.
So then the ICO came into existence. Our minister of finance got psyched, saying that’s exactly what we need, it could jump-start our capital market and let’s provide legal certainty, and things like that. We as supervisors, we are very cautious to be part of that kind of communication, but it really jump-started the activity. Some of that really made our eyebrows raise. But right now what we’ve seen is that the market is really maturing enough, and that is exactly the reason why Bank Of Lithuania will be in the next couple of two weeks decide, depending on how fast our colleagues will manage to do that, we’ll be issuing a very detailed, you can say a manual on how security token offerings should be done. And then I say security token offerings, it is a security but being done in a distributed way.
We came to that document after intensive consultations with the market participants. The likes of Nasdaq, who see themselves being threatened by these innovations. How new way of raising capital, or issuing financial instruments could be done using better technology. So that’s what I meant and that could be completely at odds with our jurisdictions, which see that more as a risk type of phenomenon as an opportunity. Because we don’t need those particular type of innovation because the capital markets already saturated or the liquidity is there.
But that’s from the point that Caroline made from OECD Blockchain Policy Center. When it comes to jurisdiction shopping there, as Marius said whether or not that is the focus of one nation versus another and then providing the opportunity to the broader market to shop. So Marius is talking about STO’s and he’s gonna provide guidance. What’s the guidance coming from OECD when it comes to STO’s and your member states?
So obviously we have two of the members states here with us: Lithuania and the US. And at this stage, this is a conversation that’s still happening. And that’s, I guess, one of the core functions of the OECDs that convening power to bring people together and share those different experiences. So, Lithuania’s guidance that Marius just mentioned will be coming out in the next couple of weeks. We’ll provide excellent case study for the OECD to work with and to share with our member countries to say, this is one approach. And once they develop experience with that approach, say, this is what has worked, and those are the jurisdictions do the same, over time you can begin to see what might be considered is whether it be guidance or moving into best practice in a particular area. But I think Marius also makes a very good point, that you have a lot of these issues which are country-specific which need to respond to the demands of the local community. Now, the result may be that you then have from an industry participant point-of-view, opportunities to arbitrage between different jurisdictions. But that’s something that we need to keep in mind and that’s part of the conversation we have with our member countries to make sure that that race to the bottom, which would ultimately undermined the work that all of us are trying to do in the policy objectives were trying to meet does not actually occur.
“You have a lot of these issues which are country-specific which need to respond to the demands of the local community. Now, the result may be that you then have, from an industry participant point-of-view, opportunities to arbitrage between different jurisdictions.
But that’s something that we need to keep in mind and that’s part of the conversation we have with our member countries to make sure that that race to the bottom, which would ultimately undermined the work that all of us are trying to do in the policy objectives were trying to meet does not actually occur.”
Okay, so Mike Gill from CFTC, you’ve just heard from Bank of Lithuania. They’re coming out with policy guidance on STO’s. What is the STO guidance from the United States at this moment?
What is an STO?
Okay, so now we know the answers from CFTC.
So a different way of saying initial coin offering, initial Public Offering. So there is no guidance coming, I mean the SCC has, you know they’ve clarified things that I think the market’s already recognized by the fact that they came out with their Section 28 report on the Dao. They brought a few enforcement cases where ICOS were clearly public offerings to non-accredited investors and such. We put out a couple of primers on virtual currencies and we just put out our Ether RFI that we’re taking in comments. I just got the comment file back on that I have to read on the plane.
But I don’t know that the US is at a place where we’re gonna have guidance on initial coin offerings, or security token offerings. I think right now the US would say: we have rules on how you are allowed to approach investors. And those rules apply, whether it’s a share, offering a token offering or anything else.
“I don’t know that the US is at a place where we’re gonna have guidance on initial coin offerings, or security token offerings. I think right now the US would say: we have rules on how you are allowed to approach investors. And those rules apply, whether it’s a share, offering a token offering or anything else.”
Okay, it’s an incredible market. There’s no doubt about it, the United States, right. Access to 300 million potential investors, but Bank of Lithuania, Lithuania might be a small country also access to an incredible market called the EU. Alright, so if we’re gonna get guidance from this side playing devil’s advocate, we’re gonna get guidance from this side. Is the United States, kind of letting a country like Lithuania be first-mover advantage when it comes to defining the rules on STO’s?
I don’t wanna strongly argue that point because I think you’re correct, and this is greenfield as Giles was mentioning before. That being said, US investors will always invest under US rules and so if a jurisdiction doesn’t have compliant rules to the United States, United States investors won’t be in that market. So I think what’s interesting with what’s happening in this crypto space is that different European countries are taking the lead and sort of thinking of innovative ways to draw capital to have a capital markets of another form.
There’s deep liquidity in the United States and London for capital markets of the form we’ve known for the last 40-50 years. I don’t think it’s the United States place to say, “Don’t do that, do it the old way. By the way, you don’t have those markets.”
I think we should watch this innovation and if it’s successful, I think we’ll get, maybe with these types of products, where we’re at with where we’re headed with swaps. For a while, we applied US swap rules, all over the world, we fragmented liquidity, we are now recognizing that and ratcheting that back. So I think these markets evolve, but I think we watch, we will certainly not criticize it, but ultimately, whether US investors will be able to participate will be something that will take some time to decide.
“For a while, we applied US swap rules, all over the world, we fragmented liquidity, we are now recognizing that and ratcheting that back. So I think these markets evolve, but I think we watch, we will certainly not criticize it, but ultimately, whether US investors will be able to participate will be something that will take some time to decide.”
If I would just qualify your question and add a bit of kind of expectation management to that. Lithuania is part of Europe, so we are not individually creating or bending legislation or nuancing it, but within the legislative framework which is very clear and must apply across the board across all the European member states.
There’s still very technical questions, which sometimes are in the gray zone and no one actually knows the answer to it. Just to give a very concrete example, if we all agree that that particular type of an instrument is a security, let’s say we agree. It is based on the DLT meaning it is registered on a public ledger. Why do we still require, and we do require according to CSDR regulation, it to be registered at a depository. How does the public ledger interact with the central record-keeping entity. These type of things, they require guidance, and it’s not about, do you need a prospectus? What type of information do they need to disclose to the customer? How do you organize a trade facility? What is the organization of the second remarket? This is very clear and actually, maybe we should stay away from giving guidance there, but that’s what I meant.
No, that’s good, IOSCO, we don’t wanna forget about you over here, Giles. Alright, because you’re doing some very good work as well. What kind of guidance or thought can you provide our audience, listeners about STO’s? What is the thinking from your neck of the woods?
As I outlined, we’ve been doing our thinking in stages; the initial stage was setting up forms to exchange information on different approaches because as Mike just indicated it is useful for different regulations to see what everyone else is doing because that’s where they draw ideas, and if they say it’s a good idea that’s how consistency advises. We’ve also done quite a lot of work in terms of issuing back at the beginning of last year, public guidance about the potential investor protection risks that these raise. We hope we’re now moving forward into the ‘what’ and ‘how’ area of coordination. We will next month be issuing a consultation report on crypto asset trading platforms and what the issues that different regulators should be considering if they’re thinking about regulating those areas.
And so the intention there is in most of these markets the central functions are the issuance and the secondary market trading, and then out of that grows the other functions, whether it’s custodians, intermediaries or asset management. And so we’ll then possibly be thinking about the ‘how’ and ‘what’ in those areas down the line, I would emphasize that we are also cognizant that the market is maturing, but not necessarily mature and that also applies to regulatory approaches as well.
As you said, some jurisdictions are able to move ahead with some very concrete proposals such as Lithuania, Switzerland, France as you’ve mentioned. We’d hope that people can share experiences of those and we hope as they say, if it’s just the details that people draw on those in good faith, for consistency.
The second point I’d also make about this issue on the objectives of as you’ve indicated, there is the apple pie idea that everyone has an incentive to have screen field, everyone has an incentive to sort of move towards a consistent approach, but as you’ve outlined, different regulators within jurisdiction may have different objectives and smaller jurisdictions, tend to have more of a provider focus, whereas the large markets will be thinking about the consumers. And that’s not gonna change over the time. But I think the way that possibly people need to think about it is that if it’s a nascent industry even if you’re not a provider at the moment, you may be down the line and that’s where it makes sense to sort of maybe do on the provider lessons that people draw, and secondly if you’re a large consumer nation, I think it makes sense for people to look towards what the consumer nations are doing in terms of like if that’s a gap in your regulation. So I think what I’m trying to say is, by sharing information about different experiences people can think about it holistically, how would I play this if I’m just not both as a small provider nation, but also a large producer nation and bring consistency that way?
I wanna get a sense from all of you. How does Asia factor in specifically? And I’m not just talking about China, Asia, Japan, Korea, Singapore, Hong Kong, Vietnam, Thailand. How does Asia thinking from the regulatory end factor in for you?
Let’s talk economics here. The global saving imbalances are accumulating exactly in that part of the world, right. Due to the International Trade, the way that things have happened so far and that means that the savers are the people who have accumulated huge buying power, relatively speaking towards the other side of the world. They’re looking for investment opportunities and they’re looking for a lucrative investment opportunities and that exactly, what is the driving force, why the crypto community has developed exactly in that type of a world first. Because they have been offering exactly what people wanted, gambling type of activity, lucrative investment opportunities, promising the moon, which is a much more mature market, maybe have gone through 100 plus years ago.
So that’s exactly how I think the Asian markets with the huge accumulated wealth right now are featuring in this debate, and if financial institutions which are regulated by respective regulators here being approached by that type of investors, we don’t have the mandate to protect those type of investors. Maybe, I don’t know, but we have a mandate to protect the financial institutions, from that type of investors creating perverse incentives for our financial institutions to behave.
“Asian markets with huge accumulated wealth right now are featuring in this debate, and if financial institutions which are regulated by respective regulators here are being approached by that type of investors, we don’t have the mandate to protect those type of investors.
Maybe, I don’t know, but we have a mandate to protect the financial institutions from that type of investors creating perverse incentives for our financial institutions to behave.”
It’s interesting, what’s your thought?
Well, we’ve worked with Japan specifically and they had regulations on cryptocash exchanges I think for about a year and a half now, and we were very interested to know what kind of due diligence they were doing on those cast exchanges for cyber controls and such. Cause that’s where I think at least our agency is the most concern, is what protections are there for the wallets and the larger and larger entities are having custody of wallets and that seems to be a vulnerability and so we’ve worked with Japan on that.
I think overall I agree with Marius, there is an imbalance and that money is looking for other opportunities.
But I think when it comes to where this develops and if an STO type product develops, I think it’s gonna be in Europe or in the United States that sort of capital raising, we’ve always been more comfortable with money going out of our countries and money coming in on our countries, and that’s the kind of culture you need for liquidity, to develop these things. So we haven’t done a lot on crypto, with Asian jurisdictions besides Japan. Historically, we’ve registered clearing houses in Korea, Singapore, Hong Kong, as well as Japan, we now have a clearing house that’s on no action relief in Shanghai, but those are not cryptocurrency, those are specific swaps.
“When it comes to where this develops and if an STO type product develops, I think it’s gonna be in Europe or in the United States that sort of capital raising. We’ve always been more comfortable with money going out of our countries and money coming in on our countries, and that’s the kind of culture you need for liquidity, to develop these things…
I think the different perspective Asia has compared to the US and Europe, is that it’s a more fragmented market from a regular perspective. It’s got a wide variety of large, small, medium-sized countries, that are applying their particular approaches…
In Asia it’s harder to sort of see how Japan, China, Hong Kong, Singapore, how all these moving parts are gonna arrive at a consistent picture. But certainly, you’d have thought the economics and the thinking reside there, which is why we draw very heavily on our Asian members and the work we’re doing in this area.”
Yeah, I think as you both outline quite clearly in terms of the economics and the technology, in many respects the center of gravity lies in Asia that’s where the money is, and in many cases, a lot of the technology is more advanced there.
I think the different perspective Asia has compared to the US and Europe, is that it’s a more fragmented market from a regularly perspective. It’s got a wide variety of large, small, medium-sized countries, that are applying their particular approaches. Whereas the dynamics almost easier to read in Europe and the US, and the US as Mike outlined the main issue is different regulatory authorities with different objectives, how are they gonna coordinate or are they gonna coordinate. In Europe, the standard mechanism is the particular European jurisdictions take the lead and if it works, it’ll be rolled out perhaps the European legislation across board and therefore it’s easier to see the picture there, where as in Europe, in Asia it’s harder to sort of see how Japan, China, Hong Kong, Singapore, how all these moving parts are gonna arrive at a consistent picture. But certainly, you’d have thought the economics and the thinking resides there, which is why we draw very heavily on our Asian members and the work we’re doing in this area.
I wish this conversation could continue, and it should, and we will do this again. Thank you all of you from the top organizations in the world to provide this kind of really candid clarity is just a breath of fresh air in this space. So thank you all.