As counsel for Washington, DC law firm BuckleySandler LLP, Amy Davine Kim advises clients in the areas of US regulation of international business and financial services, with a focus on AML/BSA compliance and digital payments. Kim has been increasingly active in the digital currency space, recently working with North Carolina lawmakers to shape state regulation.
Here, Kim outlines the biggest stories from 2015 with a focus on how regulation is affecting the strategies of both startups and incumbents in the bitcoin and blockchain industry.
It has been said that if bitcoin had first focused on its underlying blockchain technology rather than its payments capabilities, it may have gained wider adoption sooner.
2015, it seems, has been the year to confirm that theory.
State and federal regulators have spent most of 2015 focused on the risks attendant to the use of virtual currency. These include the lack of consumer protection and anti-money laundering (AML) risks; a continued struggle to define virtual currency (is it “currency”, “money”, “property”, “security”, “commodity”); and how to create a workable regulatory framework due to its unique attributes and decentralized nature.
Still, technology companies and financial institutions have pressed forward.
Some companies have focused on providing a global payment and remittance network with the blockchain to expand financial access for the unbanked and underbanked.
Global financial institutions, consulting firms, and investment funds, in turn, have spent most of 2015 sidestepping the regulatory debate, instead investing dollars and manpower into the study and rollout of blockchain technology in a broad array of applications beyond payments.
Private ledger push
Underpinning this investment is the belief that a distributed ledger, whether private or public, can be part of a solution to a number of inherent problems in the current financial system at large, including efficiencies of cost and time in transferring all asset types.
Indeed, several companies have begun to market these potential advantages to banks through consortia and pilot programs.
For example, we’ve seen the introduction and rapid expansion of R3CEV and its consortium of 42 banks reportedly focused on developing standards for blockchain technology to be integrated by financial institutions, such as streamlining trades in US treasuries and other securities.
Other financial services institutions, including Visa, Citi Ventures, exchanges and clearing houses are also exploring ways of utilizing the blockchain to set up private share trading platforms with blockchain technology companies. To date, the most prominent example is Nasdaq’s pilot program with Chain, announced in May.
Back-office potential
The blockchain has also been touted as providing enhanced value to back-office infrastructures because of the prospect of enhanced speed, security, lower costs and improved error reduction.
To this end, Digital Asset Holdings made headlines this past March when it appointed former JP Morgan executive Blythe Masters as CEO.
The company has been fine-tuning its product offerings through a number of acquisitions, such as those of Hyperledger and Bits of Proof in May, and Blockstack in October, to focus on financial infrastructure and back-office processes to achieve settlement efficiencies and reduce counterparty risk.
More recently, the Open Ledger Project, overseen by the not-for-profit Linux Foundation, was formed to develop custom ledger systems and, potentially, smart contracts.
The initiative, led by a number of companies including IBM, the London Stock Exchange Group, SWIFT and Digital Asset Holdings, sees the custom ledger system as providing a secure way for banks and businesses to use blockchain technology to transfer value and assets such as titles to certain types of property.
Payments still prominent
2015 has seen a significant shift in bank mentality with respect to the blockchain as a technology, separate and apart from its initial use case as a payment method.
Nevertheless, the use of the technology for payments continues forward.
This past July, Citibank was reported to have piloted its own blockchain distributed ledger technology in which it developed “CitiCoin“.
Other banks, such as UBS and Bank of New York Mellon, are also reported to be piloting similar programs, thereby leaving open the possibility that global financial institutions may not only adopt the blockchain as a technology, but virtual currency, for use in some form, as well.
Regulation takes shape
While many banks and other financial institutions are seeking to partner with, invest in or purchase technology companies to facilitate the business of banking, technology companies are seeking to become financial institutions.
We have seen this through applications for a BitLicense from the New York State Department of Financial Services (as of 22nd September, 25 companies have filed an application for a license according to NYDFS, with only one, Circle Internet Financial, receiving such a license) or applying for and receiving a state trust company charter as did itBit Trust Company and Gemini Trust Company, LLC.
While it remains unclear whether this state trust charter model will be recognized by all 50 states, or if separate money transmitter licensing will be required, it is an important industry development that may be a harbinger of things to come in 2016.
Some states have made significant strides in clarifying their regulatory posture in 2015, with New York developing its BitLicense regulations and, more recently, North Carolina publishing FAQs describing its interpretation of its money transmitter statute with respect to various types of blockchain technology companies.
Recent efforts to promote uniformity among state regulations by the Conference of State Bank Supervisors (CSBS) and the Uniform Law Commission (ULC), through a model framework and draft uniform law, respectively, may bring regulatory developments in 2016 if states choose to adopt them.
Legal challenges
Of course, not everything has been positive in 2015.
The development of the virtual currency industry has also stumbled, including the settlement agreement and enforcement actions involving Ripple Labs Inc, as well as the sentencing of Ross Ulbricht, Shaun Bridges, and Carl Force IV in relation to Silk Road, among other enforcement activity.
In an effort to help industry and law enforcement to combat criminal activity on the blockchain, the Chamber of Digital Commerce and Coin Center joined forces in October to create the Blockchain Alliance.
The public-private forum aims to bring together industry expertise to serve as a resource for law enforcement.
Looking ahead
Thus, the year as a whole has seen a significant shift with respect to the way in which the blockchain, as well as virtual currency payment systems, are perceived by incumbent financial institutions and technology companies alike.
Banks are no longer dismissing the technology out of hand and are open to exploring its use consistent with the current Federal Reserve Board mission to achieve relevance, speed, and cost-effectiveness in the payments infrastructure.
What 2015 showed us is that the blockchain as a technology (and even as a virtual currency) has gained serious interest and support. We can expect that these trends will continue to shape the future of global asset value transfer.
Want to share your opinion on bitcoin or blockchain in 2015, or a prediction for the year ahead? Send ideas to news@coindesk.com to learn how you can join the conversation.
Stepping stones image via Shutterstock