Digital Asset/CBDC Compliance
GBBC Panel on The 2nd annual BSN Global Partnership Conference
Introduction:
The total cryptocurrency cap exceeds two trillion dollars. More than 80 countries have engaged in CBDC research, development, or testing. Central banks and super nationals are also examining the implications of this new tool. As CBDCs and blockchain technology continue to evolve, clarification calls regarding regulatory and governance models have intensified. Decisions surrounding these foundational elements will shape the trajectory and potential of this technology for decades to come. We are privileged to be joined by several individuals who are actively engaged in building these solutions worldwide to discuss Digital Asset/CBDC Compliance in this webinar. Mercina Tillemann (Chief Operating Officer) of the Global Blockchain Business Council moderated this talk.
To begin with, please give a little background on the role you play in the CBDC domain.
Makoto: Soramitsu is a blockchain FinTech company specializing in enterprise solutions and permission blockchains. One of its clients is the Central Bank of Cambodia, and it has worked on a project for the last four years now called Bakong, a form of CBDC. The company learned quite a lot about digital assets and regulations during this time. Creating a retail payment system that lets people send money from one person to another is not so hard. However, doing it in the context of an existing regulatory framework and legislation is non-trivial, so Soramitsu worked with the Central Bank of Cambodia to make it happen. The work involved creating rules, building up processes to deal with criminal activity, and preserving privacy simultaneously. So that was an exciting project and a great use case for blockchain.
Jason: Stellar network is one of the large public blockchain networks. From Stellar's perspective, the most important thing is public and private collaboration, with CBDCs in particular. Not long ago, certain central banks wanted to focus on policy considerations and then pick the technology. Now though, most people understand the technology choices have profound implications for the policy like privacy and anti-money laundering. Therefore, the regulators and legislators will be the experts on the policy side, and technology companies can provide unique perspectives around the technology on the different possible rails.
Stellar has experience with Ukraine- it has been working with the Ukraine Ministry of Digital Transformation, which has been doing a lot of really forward-thinking about virtual assets and national digital currencies. They're' making a lot of progress.
Marta: The Filecoin Foundation uses blockchain technology to create a decentralized storage network. The basic idea is that if you have extra storage space on your computer hardware, you can rent it out to others, and they will pay you to store their files. Filecoin believes that this will serve as a foundational technology for the next Internet generation. Users combine all storage capacity and computing power on all devices into a supercomputer like a network. So far, Filecoin provides the incentive layer for people to contribute storage to that decentralized internet. Since Filecoin's' launch in October 2020, more than 3,000 file coin storage providers have contributed nearly 8 exabytes of storage capacity.
Laurent: He is the COO of Bitt. Bitt is the CBDC infrastructure provider and the Eastern Caribbean Central Bank (ECCB) provider with the legal tender, DeCash, digital currency that's now in circulation. Bitt has been awarded for being a Nigeria Central Bank contractor very recently. The interest expressed by the central bank to achieve a certain number of new use cases in the market helps understand the questions on introducing new payment tools to different jurisdictions.
The deployment of faster, cheaper, and more reliable payment rails from the market perspective has proven Internet native payment rails. The central banks are doing this to support economic growth and improve the effectiveness of their monetary policy. On top of it, establishing targeted social distribution in the last couple of years has triggered a massive influx of interest to bypass or improve the current financial infrastructure. This being said, it's' being done at a different pace by different regions and depending on if it's' a central bank or the other stakeholders of the economy. There is a difference between CBDC and stable coin, and think about the time horizon. Stable coins are used, especially when we put them in perspective with CBDCs, to harness the benefits of digital currency in a traditional, more traditional sense. And in the meanwhile, it needs longer time horizons to make it happen with central banks and deploy and harness such new technologies.
Jeff: While developing a curriculum on regulations and policy of blockchain and crypto assets in the spring of 2019, he was debating whether even to mention central bank digital currency at all. Because although there had been one seminal paper that he had put out the CPM, it didn't seem to be getting a lot of focus. Then in June of 2019, Facebook came out with the Libra announcement. According to him, they still have not been able to launch that, which has been a catalyst for action or reaction. He thinks that there was a recognition on many people's parts that payments needed to be improved, And that's been part of the work of his colleagues on the panel here and many in the digital asset space. Going back to 2008 and 2009, the will had been there- the technology was evolving and had been there. People were testing lots of different technologies and business models and ways to apply blockchain. But the notion, he thinks it was a watershed moment on the CBDCs side. Central bankers and finance ministers, and governments realized that a private actor with 2.6 billion users could potentially bring this to market. As a result, CBDCs were no longer seen as just a theoretical possibility.
Since that time, it's' galvanized with a lot of analysis, such as the different operating models of CBDC. He mentioned a conference in the summer of 2018 in New York where someone from the PBOC presented their 2-tier model, which sounds somewhat similar to Cambodia his colleague described earlier.
Before 2019 and after 2019, and the acceleration of CBDC was seen. The Covid-19 crisis also disclosed the challenges of getting funds to people who needed it has been another thing that's exposed some of the shortcomings of existing payments both domestically and internationally. According to him, the technology in the groundwork had been there, but the catalyst over the last couple of years between Libra and Covid has been an accelerant. It will bring us closer to the digital future.
Jason: He believes that central bankers and others are realizing more and more, and this is kind of a mantra that Stellar would like to talk about a lot that we do at SDF (Stellar Development Foundation). He thinks they realized that blockchain could supplement the financial system; it doesn't' have to replace it. Bitcoin maximalists believe that eventually, fiat currency will go away, and Bitcoin will replace fiat currencies. At the same time, he believes that people were already talking about blockchain and the Libra announcement acts as a vast precipitating event.
However, people are talking about- how you can supplement that, make it better, not get rid of the system but add to it and make it better. And that's exactly what companies like Soramitsu are doing, that's what Bitt is working on, that's what all of us, like Filecoin, are all novel ways of making the system better, not trying to get rid of fiat currency.
Considering the global perspective, I'm' wondering if, Mokoto, you can speak about the characteristics you look for when engaging a government, how you anticipate that one might be more open or willing than another.
Mokoto: Technology is a tool, and more technology providers make sense to analyze and find out. You know, given our limited time, where can we make the most impact. He thinks that developing countries that don't' have efficient retail digital payment systems make a lot of sense to focus on. And that's why Soramitsu is mainly focusing on Southeast Asia right now. It doesn't' mean that more advanced countries, like Japan, China, or the US, could not take advantage of the technology. Indeed, they can! He thinks that a long-term trend over decades would be an evolution of the model of correspondent banking to transfer value. That's kind of what Bitcoin hints at. When you're' sending the transaction, you're' not just sending a message to update some people's balance sheets; you're' sending the value itself. And it's' the third-party accounting method that's going on, so you can't' fudge the numbers or anything.
For certain types of transactions, that makes a lot of sense, and it's' a more efficient model than what you would have in the traditional thinking system. So he believes that at a long times horizon, stakeholders can see that European, large Asian countries, large American countries would kind of shift to that model. He thinks that in the shorter time horizon that developing countries that don't' have an excellent digital financial inclusion, and the digital transaction space, believe that these countries will start to evolve just because we're' all online now, right? So unlike ten, twenty years ago, now, there's a significant need to have an inclusive digital financial system, and that's kind of what we look for.
Considering the high costs of compliance, Laurent, can you speak about the cost of compliance when we're looking at traditional finance versus the cost of compliance in the solutions you're' building.
Laurent: Without looking at the direct, evaluated cost, Bitt thinks that new relationships are being created are entirely digitally built on top of each other's technology. Bitt is seeing deep tools and services around compliance distinguishing pure crypto from the digital financial infrastructure. Bitt experiences an acceleration of innovation and a vast combination of technology innovation and financial innovation. And so that compliance costs specifically are reducing or getting streamlined.
Jason: Mokoto already brought up correspondent banking, which is an example of where compliance costs can be eliminated, i.e., instead of sometimes needing multiple banks, correspondent banks in the middle can have a much more direct, much more straightforward path for cross-border payments. It's' also a win-win because correspondent banking for small-dollar or small transaction amounts is a decreasing business.
This is not a case of commercial banks being annoyed that blockchain could be disrupting that. Fewer and fewer banks want to be correspondent banks, and it is because it is so expensive for them. This is where the technology can intervene to simplify the flow. Still, for tremendous value, international transfers, banks probably will continue to make them a sense. However, these smaller, valued things like remittances, which blockchain helps with financial inclusion, can make that flow much cheaper and more straightforward.
Marta: In the United States, there's a myth that cryptocurrencies are somehow unregulated. However, the reality is that the on-ramps and off-ramps are where people buy and sell, and casting cryptocurrency and digital assets are heavily regulated. And that there are chartered banks or trust companies or state-licensed money transmitters that have minimum capital requirements and have to post bonds and open their doors to legal examinations. They register with FinCEN and do Know Your Customer Checks. She thinks that it's' imperative to note when it comes to regulation that existing laws and regulations are sensibly applied to the cryptocurrency space. Regulation is about activities, not about technology, so just as one example, if someone's committing fraud, it doesn't' matter whether they're' committing fraud using the phone or email or pen in paper or blockchain technology, right? Regulation can be applied to such activities in the digital assets space.
Jeff, I'm' wondering if you can speak a bit of the FATF travel rule and how that has impacted the digital asset space, whether you think it will be beneficial in the long term.
Jeff: The ''travel rule'' is the industry term for people who may not be familiar with it. For a policy that was introduced by the Financial Action Task Force (FATF), which is the international coordinated group for any money laundering standards. It's' similar to sending an international wire transfer; they need to provide originator information and beneficiary information. The travel rule was proposed to be rolled out and included in the FATF standards released in June 2019.
This did get a bit of a controversial reception, partly because that information is often not readily available, or even if it's' filled in, it's' difficult to verify. There was a lack of technical standards or standardization for implementing it. GDF worked with several organizations internationally to develop common standards for the message payload itself. Although this has gotten a lot of attention, and it's' a parallel to something that happens with non-crypto- it has only been implemented to a limited extent. FATF is pretty grumpy about this, he believes. Since that June 2019 plenary, they've' put out two annual reports, And the way FATF standards work is they need to be transposed into individual countries and laws. So you've' got a situation where people in the industry call this a sunrise problem: whoever goes first will be disadvantaged, relative to the other jurisdictions where this isn't.
FATF is due to finalize the next set of guidance in October, November and expand the scope of who the travel rule applies to and how it will work. The infrastructure bill defined expectations of 28 billion dollars of taxes from the crypto industry over the next ten years in the US. Lots of people are frustrated because of it. Still, it also creates a level of regulatory certainty in the sense that if the US government expects the crypto industry to generate 28 billion dollars in tax revenues, the government is now in partnership with the crypto industry rather than restricting it. So, even if it is not as well-tailored or calibrated, the travel rule could provide greater regulatory certainty or confidence for institutions.
Makato: Based on his experience in Cambodia, he thinks that Digital payment systems are not anonymous like Monero. But things like Bitcoin, Ethereum, CBDCs are typically very traceable. They are related to using Twitter to not lend themselves to illegal activity or tax evasion.
Unless there's some privacy tech involved, regulators would embrace the technology or hire a company because many of the regulators don't' have the technical knowledge, unfortunately. Regulators are being educated about the technology, which leads to inefficient rules that cost a lot and do not solve the problems they want to solve. Moreover, forcing individuals to be compliant may make them feel onerous.
How can digital asset-focused companies make compliance easier for users?
Jeff: One of the lessons of e-commerce is trying to make the user experience as painless as possible. He thinks that a platform or service provider considering how to manage it can reduce the burden on the user and make it as frictionless as possible for them. Those that have the expertise and resources to deal with the compliance are the ones who are doing it as supposed to individual, consumers who in most cases have the intention to comply but may not be steeped in the intricacies of some of these types of things.
Technology evolves faster than regulation, so what steps can companies or organizations take to work more closely and more effectively with governments and regulators to ensure thoughtful compliance is a priority. Whether it's' through organizations like GBBC or GDF and on the other side of this, as a senior official and a regulator, US Commodity Futures Trading Commission is responsible for the design and launch of LabCFTC, which is the CFTC'S' innovation hub. Most regulators now and government bodies now have these innovation hubs.
They have all sorts of different names. Even the BIS has launched its innovation hub -they do consultations, round tables, have office hours. He has been pretty surprised at the issues dominating the discourse among policymakers in the space, like the environmental issues (which should not be the central point of discussion). He thinks that technology is evolving faster, and the regulation will have more chances to catch up. Having an open dialogue with regulators is essential to learn more about what's going on and the trends.
Jason: He believes that education is the most crucial point to consider. Companies like SDF and others can continue educating and explaining how these different technologies work. This is the time for policy and technology to start to combine into a single conversation. The key for the private sector is to engage with regulators, engage with the people writing these laws, explain the technology side, listen to the policy side, and understand the regulatory side (e.g., counter-terrorism financing).
Laurent: Integrating the policy and regulatory perspective is of utmost importance and has successfully engaged and worked alongside the evolution of such a regulatory framework.
