I had a chance to discuss the coming regulatory wave for cryptocurrencies with London-based fintech legal expert, Adam Vaziri.
Vaziri is the co-founder of a number of related ventures, including Diacle – a firm that helps fintech companies fulfill regulatory requirements in the UK, Merkle Tree – a website that tracks global regulatory developments in the cryptocurrency space, Coinstructors – a full fledge consultancy for building 100% compliant digital currencies, and Hackco.in – a Hackathon event for blockchain startups with events in London, Hong Kong, and Mumbai.
What made you decide to get into licensing and compliance support for fintech and cryptocurrency firms?
I qualified as a solicitor in technology, then moved into compliance and licensing of regulated firms. For me fintech was a natural extension. I set up Diacle with a highly respected payments/electronic money compliance firm based in the UK so that I could take that their compliance know-how, operational resources and apply it to more disruptive areas such as blockchain technology.
What is the specific mission of your firm Diacle and the Merkle Tree regulatory tracking site?
Diacle’s aim is to shape compliance in fintech. We want to make sure that highly disruptive ideas in tightly regulated areas stay legal and the founders can regularise their operations and the projects can reach scale. Often founders of fintech firms do not have an engagement strategy with regulators and that is where we can help out, to provide that bridge. We offer regulatory strategy advice, so that businesses can explore the pros and cons of locating in a certain jurisdiction for example. Our ultimate objective with Diacle is to have the most disruptive ideas on the planet licensed, regularised and accepted by the financial system and in fact compete one-to-one with the existing system.
Merkle Tree tracks the global regulatory blockchain landscape. We want to ensure that you can see in a snapshot what effects lawmakers, judges, policy makers, regulators are having on the technology. The site used to be called bitlegal.io but the idea behind the brand Merkle Tree is to take sources of information from all over the world in different languages, formats and ‘merkletree’ them up into one website. Also, Merkle Tree suggests branches and a network and shortly we will be launching a networking platform for people to share legal insights and obtain highly professional content/advice.
Can cryptocurrencies be regulated and compliant, and still remain decentralized and anonymous? Some fairly clever people have argued that these are mutually exclusive paths, and regulation and compliance go against the model.
You can’t regulate a decentralised currency and that is it. You can regulate the intermediaries of course. These types of decentralised currencies will run in parallel to the existing financial system. There will be gateways between the two and, at these gateways, traditional financial regulation will apply, including AML compliance.
Now, in my view, other more controlled currencies will eventually fall within the purview of regulation as there can be accountability with the issuer of the currency. Best example would be the Ripple fines which led to Ripple actually changing their protocol to add meta data on AML. This is just the beginning; I would expect more ‘controlled’ protocols such as Tembutsu or Stellar to gradually fall within the grasp of regulators.
There have been a plethora of legal cases involving cryptocurrency exchanges (e.g. Mt Gox, Silkroad) and firms (e.g. Ripple)? When is it legitimate law enforcement and when is it government overreach?
My main concern is to ensure that innovative ideas can find full legitimacy in this world and to increase competition. The implication is for challengers to adhere to the same requirements as equivalent systems/services. But you have to know what you are regulating and how to regulate, so there is an element of proportionality in finding the correct approach. For example, at the UK Digital Currency Association, we suggest a triple approach: regulate intermediaries such as exchanges under payment services regulations, apply AML requirements to intermediaries but leave the technology alone and allow industry standards to emerge. So, the point was not to regulate digital currency technology itself, leave it alone to thrive, grow and discover its potential.
I think a more interesting way to look at the area of law enforcement is to consider how blockchain technology makes the work of law enforcement agencies and regulators an easier task. Information can be ‘pulled’ from the blockchain rather than ‘pushed’ from the intermediaries; reporting is the way a regulator stays on top of the risks posed by an intermediary, but it is an ineffective way to assess risk, a more effective way is to have a decentralised ledger where all information could be stored and shared with intermediaries and multiple regulators. The point is that this technology has the potential of making everyone’s lives potentially easier, including the role of regulators.
What are the dangers or pitfalls of altcoins crowdsales, including those that have premined, burned, or loyalty characteristics?
Issuing securities is the main one. If you are going to issue a new coin then get clearance before doing so in particular speak to the SEC. Often issuers will try and fudge a definition of security, but a regulator will always look at substance over form. So issuers should be careful and have an engagement strategy BEFORE they jump up on stage and sell their coins. You need proper legal advice, time (at least 6-12 months to prepare the regulatory side) and a clear engagement strategy.
Are there differences in the legal complexities between digital tokens that are just currencies and those that are distributed application vehicles (appcoins)?
As said a decentralised token can not be regulated. A mined coin is pretty low risk and only illegal in a few countries in the world. An appcoin can be a currency, even though it is not its primary use so really the question is whether it is purely mined or issued.
What is meant by hardcoding compliance into protocols?
This is the idea that I have surrounding ‘totalitarian money’. The irony of digital currency is that it has unleashed the ability to program money. Of course it will be used by criminals, but it could also be used to program compliance into the systems themselves. For example, changing a protocol attribute to say that only transactions with an originator and beneficiary will be validated, which is basically enforcing one of the main FATF [Financial Action Task Force] recommendations. All of this could be automated and seamlessly programmed into the digital currency. This is the beginning of totalitarian money, after that you will be able to remote freeze assets if a person’s risk profile changes. Freezing assets at the moment is a tiresome, expensive procedure involving international coordination. A waste of time. All of this could be centrally controlled. To draw an analogy, you could have cash in your pocket that becomes tainted and unable to be spent anywhere. This is the biggest irony in digital currency and thus why most regulators will embrace digital currency with a passion when the penny drops. It is also pretty scary too.
You are a co-founder of the Hackco.in Hackathon events in London, Hong Kong, and Mumbai.
What are the objectives and dates of these events?
The reason I started these events was because when I started, founders of business were spending months coding up projects that were basically illegal but they didn’t know that. I thought a hackathon could be a good way to safely shape disruptive ideas in a tightly regulated field, so we ran the first one in London. This year the same objective is in mind but now it is all about fixing problems with real technology. Moving away from conceptual, vapourware projects, talk about what is out there and what you can build now, today. Next aspect is looking at what problems the blockchain can fix today that the legacy systems can’t fix. There is a default position out there that the blockchain can fix the world; not necessarily, look more discriminately at the technology.
Who are the founders and organizers of the hackathons?
Myself, Ajit my colleague at Diacle and my team at Coinstructors. Coinstructors is a fully fledged consultancy to build new coins that are 100% compliant. My partner in Coinstructors is trying to solve the Grexit using a digital currency. We are running an event on 20 May on this with Brian Kelly and some others: http://www.drachmae.money/expos/inv2/
Do you hope to introduce more of these events in other countries?
Sure. June in London with UBS, August at the Mumbai Stock Exchange then Barcelona in October.