This week, the V20 Summit convened crypto industry leaders and the Financial Action Task Force (FATF), and industry regulators, in a three-day virtual conference to share views and feedback on the progress of the implementation of the Travel Rule in advance of the November G20 Riyadh summit.
The engagement is a global use case for industry and regulatory collaboration and agile execution of policy in the crypto asset sector. G20 ministers might wish to take note.
David Lewis, Executive Secretary & G20 Deputy at FATF commented, “I am at the V20 Summit today to hear about all the innovative ways this growing sector is rapidly developing, including to comply with global standards.
“We need to work together to protect virtual asset service providers from crime and terrorism, and to enable safe, reliable and cost effective payment options for us all.”
Following the inaugural V20 Summit in Osaka last year, industry came together to deliver the IMVS101 data payload standard. The standard was delivered in a record 18 weeks by an independent joint working group (JWG) comprised of 130 technical industry specialists brought together by the three global members associations, the Chamber of Digital Commerce, Global Digital Finance, and IDAXA and independently co-chaired by Sian Jones, a senior partner at X-Reg Consulting, a regulatory advisory firm.
The standard has been globally adopted by Technical Service Providers (TSPs) delivering solutions to Virtual Asset Service Providers (VASPs) to help them meet the Travel Rule Requirement most of whom are up and running report out being on the last mile to meet the June 2021 deadline for implementation.
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A common criticism of policy makers and regulators of the crypto industry is that it has no single voice and is a fragmented and disparate group of factions. For a sector that now serves a global client base across many asset classes, this is a bit of a glib assessment given the diverse and competitive nature of digital finance, however, the industry recognised this criticism and responded.
The global crypto industry can come together with a unified and single voice when it needs to, and IVMS101 has demonstrated this in spades, to the surprise of many.
FATF and regulators reported that the majority of participating countries are on track for the deadline, though COVID-19 may still create some delays. Sunrise issues concerning how and when jurisdictional regulators around the world will adopt and implement the Travel Rule are still being worked through, and this is a cause of concern for VASPs keen to seek the equal application of requirements across jurisdictions they conduct business.
“Both the industry and regulators have one thing in common – rid dirty money from the system. The difference between industry and regulators is that we know the tech more than them. And from face value, this technology is very disruptive, and it is the industry’s ultimate responsibility to work with regulators to come to an understanding.” Said Anson Zeal, IDAXA chair and V20 co-convenor.
There is speculation that more regulatory headwinds are coming for the sector for global stablecoin regulation. This is not surprising given the Financial Stability Board’s 2020 Consultation and the Bank of International Settlements whitepapers.
The DeFi sector is also under the gaze of global authorities given the rapid growth of the sector with estimates of $14 billion locked in the DeFi market, a figure that has doubled since July 2020. Issues around the risks to consumers are being raised with the P2P lending segment, and the role of non-custodial wallets are again in the spotlight.
G20 ministers would be advised to look at the success of the industry regulatory engagement model with FATF, and seek to engage a wider selection of the industry specialists even earlier with DeFI to deliver better data and fact driven evidence in advance of reaching early conclusions.
Retrofitting the last industrial era regulatory thinking and policy onto the 21st century digital world and its new and innovative solutions is not always helpful and may be a hinderance, or worse, wholly ineffective in a world where digital crime can scale as quickly if not faster than digital innovation with great social utility.
The DeFi sector will also have to step up the maturity of its engagement with policy makers and regulators. Rolling out the same platitudes as the early days of the blockchain is unlikely to influence policy makers. Tim Berners Lee set out to democratize knowledge with the world wide web for the benefit of society. I doubt he intended for social media to run a business model that profits from incentivizing social division through user generated content delivered by anonymous identities and fracturing western democracies.
Policy makers and regulators are well aware of the advantages that digital technologies can deliver, but remain optimistically cautious about the unintended consequences of all of the digital goodness on offer for society, especially when it comes to retail customers, or risks to the overall financial stability of the system.
Malcolm Wright, GDF Advisory Council Chair and Chief Compliance Officer at 100x Group commented, “Above all, this year’s summit was a good reminder that we need to continue to further engage with regulators in this space.
“We need to work with regulators to deepen the mutual understanding of various technical topics, including DeFi, while working as an industry to be solution-focused when it comes to our regulatory responsibilities. As the industry and regulations evolve, we have a shared interest in responsible innovation in order to realise the full potential of this sector.
Very often, the principal focus on the development of policies, perimeters, and regulations is overly consumed with a shift of responsibilities – to be able to hold a single entity or entities to account for culpable wrongdoing, liability, and punishment.
Every now and then, the development of new (and innovative) policies, perimeters, and regulation result in a meaningful form of compliance that is focused on risk transparency for financial services products that work universally for everyone.
The industry regulatory engagement established between the global crypto sector and FATF, through open dialogue and mutual respect, is on the road to creating meaningful compliance. There is still a long way to go, but what an outstanding start in just over a year.
Says Lewis, “As a policy-making body, the FATF needs to understand the implications for business on the ground. It is in our interests that businesses operate under reasonable standards that work in practice. To achieve this, we engage in continuous dialogue with each other.”
G20 minister should take note of this successful model. Regulators should scale-up their industry engagement and come together and make room in their digital sandboxes to scale up the crypto and digital assets sector, a sector that offers great promise for financial services into the 21st century that benefit everyone.