By: Fred Jankilevich – Lawyer and Consultant
© All Rights Reserved – March 2018
1.- Financial Regulatory Sheets
Decentralized digital asset based systems in global capital markets continue to cause concern among lawmakers, regulators, central banks and financial industry participants. The underlying fundament for such concern are the appeals for removal of trusted parties across the industry. As a result of the above-stated its important to review the application of “decentralized asset-based systems:”
Under the first parameter, the system can be open software or not and is constituted of utility tokens where “dynamic financial products and services involving traditional and crypto assets are offered and delivered directly to consumer balance-sheets in a hybrid self-custodied model” (Corliss S.: Online: 2018)
Thus, the decentralized digital asset-based system functions like a regulatory asset in the sense that: 1.- Its cost-specific 2.- It’s a form of service recovery 3.- It permits the defer of a balance sheet. Therefore, if a decentralised digital asset based system constitutes a regulatory asset, it must be understood within the parameters of regulatory accounting.
2.- Dodd-Frank and DDABS
Even if there is no unified Federal Act pertaining crypto-currencies yet, based on the above definition and the presently working bodies of written law pertaining the matter, it’s possible to infer that the pertinent regulation surrounding this subject should be extrapolated from the U.S. Commodity Futures Trading Commission.
Furthermore, the governing rule should be based upon the present norms that regulate swaps in the marketplace. Presently, these are a result of the 2008 financial crisis. Specifically, the CFTC has written rules based upon the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The regulation of crypto-currency transactions can be based upon the five main categories related to the regulatory requirements of the CFTC pertaining Dodd-Frank: Final Rules and Orders; Guidance, Advisories and Questions; Staff Letters; Open Meetings and Public Roundtables; Proposed Rules, Orders and Advance Notices of Proposed Rules.
Even though the specificity of the rules exceeds the scope of the present article, the present stance of the CFTC pertaining Crypto-Currency was recently highlighted in the media in a recent Forbes Article (Aitken R.: Forbes: 2018)
The article cites the Bank of England Governor Mark Carney, who affirms that “the crypto-asset ecosystem must be held to the same standards as the rest of the financial system” in order to combat illicit activities, promote market integrity and protect the safety of the financial system.
Based on the above-stated, it’s possible to establish from the Dodd-Frank Reform:
Pertaining Financial Stability (TITLE I – FINANCIAL STABILITY) Financial Stability pertains to the Oversight Council of the CFTC (S. 111). Stability is enforced through the supervision and regulation of nonbank financial companies (S. 112). Supervision and regulation is enacted based upon the registration of nonbank financial companies supervised by the Board of Governors (S. 114). Enhanced supervision and prudential standards for nonbank financial companies is also supervised by the Board of Governors and certain bank holding companies (S. 115). The efficacy of such-said supervision and regulation is the determined by the reports generated, audits performed and market efficiency studies carried out as a result by the above-stated institutions (S. 116-123).
In this sense, the present legislation is applicable only to an extent. As Carney’s article highlights, there’s much higher volatility in crypto-currency than traditional currency. To date, a review of XBTUSD for BGN reflects a 0.59 percentage change for the intraday. Likewise, XBTA for CBOE reflects an intraday spread of 0.15%. As a place of comparison for traditional currency, to the present day the SEK CMPN lies at 8.2503 (Bloomberg: Online: 2018).
3. Consensus Rules
Technologically speaking, transactions in crypto-currency are settled using federated consensus.
Federated consensus is a mechanism that ensures that all participants in a network agree on a single transaction log. Federated consensus is more secure and efficient because it prevents “double- spending” and history from being edited. The blockchain validation rules specify whether a given blockchain is valid and the consensus protocol makes sure there is only one valid blockchain on a given network. The above-stated can be confirmed with a formal live example from Chain (Online: Chain: 2018)
In formal terms, the protocol utilizes a generator state and a signer state. The block generator maintains a pending transaction pool, the last generated block and the generator’s signing key. It also holds the maximum issuance window, a configurable parameter that limits the maximum time field of a transaction containing issuances
The signer state, in turn, stores the last signed block, the generator’s verification key and the signing key required by the consensus program in the last signed block
Blockchain validation is constituted of five main algorithms: Initialize generator, join new network, accept transaction, generate block, sign block. “Initialize generator” starts the set up of a new network and “join new network” completes it. “Accept transaction” receives a new transaction and “Generate block” produces blocks of transactions at regular intervals. The “sign block” validates the blockchain by co-signing a block produced by a block generator
Federated Consensus is a form of Chain Protocol. Chain protocol can be defined as “a design for a shared, multi-asset, cryptographic ledger.” Chain protocol is an efficient and secure system for the ledger because it “supports the coexistence and interoperability of multiple independent networks, with different operators by sharing a common format and capabilities (Ibid.) For a further reading of the technical intricacies of the ledger, please visit the above-stated source.
4. Currency Design
Presently, according to Coin Market, there are presently 1582 cryptocurrencies in the market (Online: Cryptocurrency Market Capitalizations: 2018). The top five brands active brands currently in the list are constituted by: Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin. They encompass 3.39%, 2.22%, 3.06%, 1.21% and 1.36% of intraday trades per 24hrs respectively. Bitcoin’s market cap is presently close to $152 billion USD, and Ethereum’s is $53.
Purchasing crypto-currency is different from stock in several ways. Instead of a share of the market, the buyer is issued a digital token. The token is more valuable in terms of empowering the user because it permits the construction of a decentralized internet and host code on a decentralized platform. In this sense, they empower the consumer. The primary purchasing platform in the U.S. is Coinbase. Coinbase focuses on household names. Emerging currencies can be found more easily at exchange sites such as Bittrex, Poloniex or Livecoin. Currencies are transferrable over platforms just as a traditional currency can be exchanged at a bank (Inc: Online: 2018).
5. Crypto-Currency in the International Landscape
Traditionally, China has upheld a protectionist approach against ICOs. As the present headlines manifested earlier this February, American brands were recently under targeting efforts to ‘shutdown exchanges and eradicate trading’: “To prevent financial risks, China will step up measures to remove any onshore or offshore platforms related to virtual currency trading (…)” (Yu X. : Online: 2018)
However, the Chinese landscape might be impacted by change during the following months. As Yi Gang assumes the new appointment of the People’s Bank of China, the institution’s stance against American and European Crypto-Currencies may be favoured. As governor Yang expressed to Chinese media in late 2013, his stance is that “major crypto-currencies cannot be legally recognized by the PBOC.” As far as U.S. brands are concerned, governor Yi maintains an affirmative stance towards Bitcoin, in the sense that it empowers “ordinary people with the freedom to participate.”
(Partz H.: Online: 2018)
As far as Crypto-Policy is concerned, the Central Bank of Japan maintains presently a liberal stance as has been the current trend custom during the past two terms. The March 30th disclosure of the Japanese Financial Services Information Division recently published a summary Q&A that summarizes the general public Japanese Central Bank Policies pertaining Virtual Currencies. In this sense, Masashi Kuramoto, spokesman of the above-stated division explains that virtual coinage should not be banned, but exacerbated because it permits ‘cheaper remittance’ and the ‘support of socially significant activities.’
Furthermore, Kuramoto emphasizes that cryptocurrencies are useful to a nation’s fund allocation because when matured, they usher mechanisms which can improve individual and social lives. Specifically, the Japanese Central Bank discloses that “there is reason to believe [its maturity] allows the use of existing cryptocurrencies, accumulates use cases and promotes further technical development.” Contrary to criticism, the Japanese Central Bank dismisses the notion that “cryptocurrencies can be compared to fiat money like the yen or the dollar by claiming the latter are backed by central banks…”
Finally, The Japanese Central Bank highlights some criticism during the recent disclosures to the media regarding safety concerns pertaining fraud prevention safeguards as a result of the January heist. (Das S.: Online: 2018)
c) European Union
In terms of ICO Policy, the present European landscape remains uncertain as policymakers review the results of the Buenos Aires March Summit. The main reason for this is that Cryptocurrency policy is not a top priority for policymakers. As per the disclosure of the European Central Bank to CNBC back in February, ECB officers have stated that: “We scrutinize the issue in a regulatory perspective, we are ready to do something if it was needed…” Therefore, it can be inferred from the above-stated that the influence of virtual currencies for the European Economy has not become influential enough yet for policymakers (Meredith S. & Weisbach A.: Online: 2018)
In this sense, the decisions pertaining ECB policy and ICOs will require close attention to the media and Central Bank authorities in Europe within the next twelve to twenty four months.
1.- https://medium.com/ ethos-io.legal-framework-crypto-blockchain-financial-industry-participants-c1295880c1f3
3.- Aitken, Roger. Contributor. “U.S. CFTC Commissioner Says Cryptocurrency Exchanges Adopting ‘Self-Regulation’ Could Spur Standards” – Forbes. February 15th. 2018. 03:30 P.M. 4.- 111th Congress Public Law 203. From the U.S. Government Printing Office. “DODD- FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT.” Page 124 Stat. 13761. 07/21/2010
(Online: https://www.congress.gov/bill/111th-congress/house- bill/4173/text?overview=closed&r=1)
7.- https://www.inc.com/brian-d-evans/heres-how-to-buy-your-first-cryptocurrency-coins- ethereum-bitcoin-litecoin-rippl.html
9.- https://github.com/ethereum/wiki/wiki/Licensing – “Licensing” Luca Zeug. Sept. 4th 2016. 10.- https://www.gnu.org/philosophy/floss-and-foss.en.html
12.- https://www.scmp.com/business/banking-finance/article/2132009 (Yu X. : Online: 2018) 13.- https://cointelegraph.com/news/newly-appointed-pboc-governor-once-called-bitcoin- inspiring-praised-its-accessibility
15.- Chairman Jay Clayton. Securities Exchange Commission. Boston, MA, April 4th 2018