Global and Local Regulation: Challenges in Web3 | European Blockchain Convention 9

[Music] hello everybody yeah I think this works all right we're going to kick it this off um just to briefly introduce myself as well I'm a policy expert at the European crypto initiative and I have a really wonderful panel with me today um I think we're all eager to address some of the most um important topics when it comes to the regulation and we're not just going to be focusing on the EU we are also going to be focusing on the US UK and the global regulations so first we have Joshua with us uh who is the US head of fintech and head of blockchain and digital assets at link leaders uh where she also is co-head of the Global Tax sector she is one of the best known blockchain and digital lawyers in the US and globally and has been in digital asset space since 2015 which is quite a long time ago Josh is the director of The Wall Street block blockchain Alliance and chairs its legal working group in addition she is on the board of senior advisers of the war Hall schools cyer accelerator and is a member of the world Hall R taging tank then we have Elsa who is the general manager for Europe at the verifi ASP verify asasp as you may know uh they have a boot out there is a travel solution that recently crossed the 5 million transaction threshold Issa has an extensive background working for trade five banks and exchanges and the blockchain industry 5 years ago as a consultant specialist and goto Market strategy and execution she has been working with various projects on the Trevor wo for several years years now then we have joavan who is a chief exe executive officer at Gate Mt the EU crypto regulated exchange part of the group gate IO he has v executive experiences in the crypto industry and the evolving crypto regulatory environment and last but not least we have Juan Who is the chairman of The Advisory Board of alastra the largest blockchain platform here in Spain his main activity is leading the digital policy of sander group he has 25 years of banking experience in strategy Business Development and digital and is coordinating the positioning of digital identity MAA digital eura and cbdcs projects so thank you so much for being here today with me and thank you so much for buing with these introductions normally when we open the panels um in crypto space we would go with when was the first time that you purchased the Bitcoin here because we are talking about the regulations we're going to Tweet tweak um this question a bit and I'm going to ask you when did the crypto regulation and compliance um turn out to be important for you and your professional path so maybe Joshua we can start with you sure thanks for having me um so before I got into digital Assets in 2015 for about a decade before that I was a leverage finance and securities lawyer I had no idea I'd do anything with tech at all and I started hearing about big banks beginning to think about using something called a smart contract to reduce the amount that they spent on lawyers and so because I was working on loan agreements for large Banks and others I was immediately concerned that this was going to be the end of my job so I started looking into it um and so that's how I first came into the space was with a very skeptical view which changed quickly go ahead okay my turn hi so my background was very much traditional Finance I worked for a bunch of different investment Banks my last corporate role was with a leading derivatives exchange and I was handholding um clients through the Amir Dodd Frank changes um that uh uh mandated Central clearing of um OTC derivatives and then I got assigned to an internal blockchain project where believe it or not in 2016 that exchange was looking at tokenization and I got the bug um and I quickly left the exchange after that realizing that what I knew about regulation and how it could really be a tital wave for how the business was being transacted was going to arrive into crypto sooner or later so that was my trigger fun as so as you mentioned in the introduction and uh first of all uh thank you Victoria I see her all there for having us and for inviting me uh I've been all my life uh into the investment banking so uh in the trading floor Capital markets uh and specifically in equities so back in 2010 I would say um we heard about the Bitcoin uh in the trading floor hey this is a very fancy stuff you should have a look at at it and uh as practitioners in the in the portfolio designing and into asset man management and from the Sal side perspective we started having a look into into this very specific asset class now uh fast forward to where we are now we see a more mature Market very promising interesting getting adoption and we're looking into uh different opportunities mainly in the institutional space so maybe we can touch on later on in the panel if we have time but this was maybe 2010 very early early days nowadays of course we've been we've been figuring it out we've been struggling to take it to the mass market now with this new regulation that we're going to enjoy at least here in Europe we'll have more chances to uh to go mainstream and to design the a true uh asset class in itself thank you thanks Ana so my background is more In classical Finance but I moved to to crypto around 2018 when Malta was one of the first Juris ition in Europe that start to open to the the framework I start to realize pretty much there that you know even if this was a green field everything seems to be new and available there was a total lack of Regulation at the time and we had some little uh glitches let's say some small level scandals that just brought us to the point yes this is a completely new but there is one aspect that no one thought before you know just to tell you I was in touch with from the beginning from few of the people that were part of the the Cyber Punk movement on which the papers that led to the creation of blockchain was created so lots of excitement this is completely new completely for everyone but then we realize when we start to move to the market glitches in the systems were there few issues start to come and then we had to take a step back no there needs to be some regulation and slowly we start to build on that side together from the business side together with the regulator I think there is still a lot long long way to to come but we are on the right direction now all right so from Smart contracts and us being afraid that we're going to lose jobs to The Regulators today um knowing that MAA is coming um joavan can you take us just a bit further on like you you mentioned Malta and Malta in Europe was really one of the first countries to introduce the regulation so what happened since then what happened in between so that now we have this overarching European regulation and how does it look like and it looks like let's say promising let me keep on a positive note it looks promising again there is a big a long long way ahead of us till to to be completed but again I can see Micah from two perspective from one side is a point of arrival from the people that start from the beginning they started to put the the framework together and as we say us in Malta where among the first one lots of suggestion were put in to work but then now there is the second part because the market is much more mature as it was at the beginning there are more issues that are coming as we say ma is coming in place are all the single Regulators of each country going to react and be ready at the same time with the same Pace are we going to have all the the escalation that we we pass to regul to the regulator implemented I'm not sure is a good starting point but there is a long long road that still needs to be completed from that point and Han would you say that this regulation now helps traditional Market adopt the blockchain technology or do we need more regulations do we need more laws what does traditional Market actually need right now uh I would say what from what I get from from members of our of alria of our organization and the advocacy that we do um that regulation is pretty much needed uh there's been lots of time of illegal I wouldn't say of course illegal but illegal environment a legal activity the first piece of Regulation that always comes into a market is taxation we don't care what you're doing but you have to pay taxes yeah so this was the first it's a bit unfair but of course you have to pay the whole you know things that we have to pay as a common common common uh um common goods in the in the in the society this was first second one of course is AML whatever you do you should do avoiding any anti-money laundering and the compliance piece now that it goes in serious ly like big adoption when you look at the numbers in terms of adoption in certain countries and specifically here in Spain if you read the chaly report every quarter you see that this is growing it's more than the 12 to 15% of the population that recognizes that had used to have had or already have in their portfolio cryptocurrencies now this is 15ish percent now you need to regulate there's no other way so there been an effort in the digital package of the the European Union uh con jointly with Dora maika and Dora we have to be get better in names because these names are a bit you know when you look at them uh looks like cartoons uh but um uh there's been a big effort in taxonomy and also big big effort in um in establishing Vehicles new licenses but let's be let's be honest this effort has been um uh boosted by the urgency of regulators to defend them defend themselves from the stable coins these combined with the pilot regime which touch on the financial instruments both together with maika which deals more about the monetary instruments makes a nice environment you know to play with and the traditional prayers are going to are going to enjoy these two pieces of Regulation and I think I'm sure it's going to scale up a lot so Juan mentioned that we are getting more and more people adopted uh in this market and using crypto crypto assets and all these technology now whenever we purchase the crypto assets there's normally some sort of a kyc off ramping on ramping and what I heard before was the travel Rule and I'm pretty sure that not everyone in this room actually knows what the traval rout presents so Issa could you Enlighten us please on that topic and tell us what it stands for I would be happy to so the travel rule for those of you who don't know is a um is a regulation that's being rolled out across the world the background to this is that in 2019 the financial action task force which is the regulatory Watchdog the anti-money laundering Watchdog um apped that what was the case the travel rule which is an American terminology um the uh uh mandated transfer of a certain amount of personal information that travels with wire transfers in traditional Finance was now to be applicable to the crypto industry as well and so since 2019 all each individual regulator has been tasked with creating and implementing regulation that that um follows the travel rule so what you have is something that we call the sunrise period And this is this kind of limbo period where some jurisdictions are alive with the travel rule others are not some haven't even started so the FFF isn't thrilled about this um they really are urging especially on the back of geopolitical events they are urging Regulators to come up with legislation and implement it and big word here enforce it there's just literally been virtually no enforcement to date so what we have today is we have the travel rule live in countries like Singapore Korea we actually have it live in the UK um we have it live in the US but it's absolutely not being enforced uh MAA um has along with it the AML package the transfer of funds rule will govern the travel Rule and that will come live at the end of next year as well so from a user perspective it means that going forward yes you had to do your initial kyc but at the point of time of the transfer you may actually have to give that information again or a certain amount of information um and uh the virtual asset service providers the the vasp so the exchanges the custodians are going to be responsible for ensuring that remember this is private information this is very highly sensitive information that they have the right types of solutions to you know fully encrypt and make sure that data travels secure so just one more kyc and that's it from now on I think it's a little more complicated cool um yeah I saw you previously smiling uh when the taxes were being mentioned and I really wonder what is the current situation in the US as well uh Joshua can you lead us through the landscape of the US what is the current situation both with Texas what are the case laws what's happening with Sam bankman freed where is the case law right no wow okay so that's pretty broad um pretty ambitious I will say I'm not a tax lawyer I'm also not a litigator so let me just say that what I would say in the US from from a broad perspective is that I think the industry um is finally being heard by the courts right for the longest time we had the SEC and other Regulators saying everything is absolutely clear it's clear it's clear and some of us have tried to you know go along with that in VAR ways um but we're seeing a a wave of enforcement that's actually been going on for for quite some time and that The Regulators said they were going to do in response to uh basically reports that they sent in response to an executive order by um President Biden I believe last year and what we're seeing though is that The Regulators aren't always winning in court and this is a big change so you may be aware for example of the secv tripple case right I won't go into the details here but you know this was really a sort of mind blown moment um for many in the space and probably for The Regulators as well that it came out that way and we have of course judges with differences of opinions even within the same um District right so we have um judge raikov in another case which is SEC versus do Kuan which came to a different sort of rationale from the Ripple case but at a different stage on different facts we're seeing things um whether it whether it relates to defi um you know where where judges very important judges in fact the same judges that are hearing the torado cash case and also secv coinbase where in a private action against uniswap Labs right and some various other parties they said actually SEC you're behind in defi this is a matter for Congress and also why would we hold some a company like for example a provider like PayPal or venmo liable for acts that occurred by Third parties using their systems so it's a very interesting space just even staying with insecurities some other quick highlights of course with tax yes um the IRS wants you to to pay taxes and for a few years there has been a sort of check the box where you have to acknowledge you know that you were trading in crypto buying and selling crypto um on your tax forms but more broadly there's a focus on things like d and frankly and this goes to National Security and and related things how to hold liable and who to hold liable and what to hold liable to stop certain flows of funds or flows of tokens in or out um to what the government may call Bad actors now there's many other things at play there's legislation um some of it very promising very comprehensive but given what is happening in our Congress right now that we don't have a speaker um really nothing is getting done so so it'll I think I'll wrap it up but one of the things people have been saying is you know maybe it's a matter for the courts and it's really um it's really interesting to see what the courts are deciding because it's not always what the regulator wants and I would credit those who've been writing amicus briefs um many well-known lawyers in the space and others and even Congress people submitting to kind of educate the judges but so wait and see and is that something that actually very much helps the amicus briefs what like personally what is it that you can contribute to the regulators and to the courts so that they know what they're dealing against like previously we heard this is very novel technology and we are afraid of it so I cannot expect from The Regulators to know all the needy G greedy details of the technology and what risks it posed how do you educate them what do you do so I would say within the US the major the major Regulators many of them understand the technology pretty well by this point like the SEC cftc others they have a a pretty strong grasp I mean we've been fortunate that at finhub at the SEC there hasn't really been turnover in that group so the knowledge is there I think the challenge is educating Congress people so our lawmakers and educating the judges right because just as bad facts we say make bad law sometimes a lot lot of the learnings um that may take a judge and his or her clerk a long time to try and and look through I mean there you may be familiar with a chapter by someone named Lewis Cohen um and others at a firm called DLX where they did an exhaustive analysis of of case law over the years about how to interpret the Hoy test and made some arguments relating to secondary uh sale transactions that sort of scholarship a judge can't do on facts in the moment so I think that's that's key and for example Cynthia lumus the um one of our Congress people she contributed to a m brief that someone named Kavon sadiki who's also had another firm called Jenner um who I'm plugging all the firms but these are important people um and important thoughts and basically said like yes these are matters for Congress and guess what Congress is working on them right now one thing I didn't say I'll just wrap it up for a second about SPF I mean that trial continues to go on we haven't yet seen the defenses side the prosecution side I sat in for a day it seemed quite strong to my mind um but certainly we don't know what what the defense lawyer may pull out of uh well the defense lawyers may pull out of their hats let's see we're going to give you a call whenever that happens um and going just back to the understanding of The Regulators um Elsa would you say that f for example or the UK Regulators have a really good understanding of how the technology is being used right now for transferring all these data informations and would their main concern be perhaps privacy um I think absolutely a main concern is definitely privacy I would Echo what Joshua just said which is they are you know leap years ahead of where they were two three years ago so um we were talking about the European commission for example that brings in very very knowledgeable experts on on a temporary contract basis um the FCA does the same thing so I I do think that the level of knowledge is increasing but we have to have a dialogue with them you know the only way that we can I was having this conversation earlier today somebody was asking why are you regulating this I'm not regulating it but why are we regulating this when there should be Technology Solutions because technology firms and Regulators have not to date worked hand inhand enough um certainly not for product development once the product is there of course but for actual product development I think you know we have a long way to go one you're traveling back and forth to Brussels you've been to Madrid you're going to Lisbon what is the work that you do there do you also sit down with The Regulators do you educate them do you speak to them how do you approach them yeah pretty much so um um specifically in Brussels I would say we we we do a great effort the Outreach there has been important uh but the political will has been always there as well which is which is helpful uh trying to develop the market trying to be competitive as Europeans we are most of people here but we we are lacking growth so we need new Industries to grow and uh we need Innovation to flourish so the political will has been always there what the people you find in the Dig connect for example is technical people this is engineering people these people that have the skills that understand the technology um and the digital package comes with this part of competitiveness and also self-sufficiency in terms of technology and not to be in h in the hands of other jurisdictions of other geography providers so this is this is on one side um of course the regulation that came up is not perfect we all know it comes in chapters and it comes in priorities as in a company as in an association that we run we have priorities priority was um sovereignty monetary sovereignty there was this this fear of a new monetary instrument coming into the market and wiping out the Euro yeah uh now the challenge uh in the in the European regulation which is the one I'm more familiar with is the level two regulation we are in the middle of the RTS its process maybe for the non- lawyer people here um you have the final text of MAA but it's not enacted until the mid of 2024 in this period of time from now to June uh actually before June we're going to have these level two how we connect how we make it consistent with the current regulation how the grandfathering is going to work how all the procedures are going to be put in place how the supervisors not The Regulators how the supervisors are going to do their Duty they don't have the tools they don't have the people they don't have the processes in place now they have to figure it out and they're going to use European funds in order to build these new supervisory mechanisms of course connected with all what the FSB is recommending with all the eosco new recommendations this is truly important International harmonization but this level two regulation needs lots of detail but we still we're still lacking in the ecosystem that is why maybe traditional prayers are not jumping into this specific market for a while just because you mentioned the io definitely want to touch that um topic as well I see Joshua already nodding um do you know anything about iosco they just issued a report that they were um Gathering all the responses what's your opinion on that so the report by askco that focused on defi that came out um in September um the point for those who may not be aware of iosco it's the international organization of Securities commissions right so it covers about 95% of the Securities markets around the world and I think 130 jurisdictions they have have had a a task force um or a group that's focused on this one thing I I would point out maybe I'll point out three quick things because I know others have thoughts about this as well one is and this goes to the international harmonization piece as well as the us a lot of people will say okay I don't like hypothetically someone might not like what the SEC is doing in in the US or some other regulator and they may say Okay I want to go somewhere else but also we want harmonization and this will sort of align things and the SEC won't be able to keep its hard line but it's important to remember that for this there were nine recommendations in the report um and hopefully this will be finalized by the end of the year um that's their goal but it was led by the SEC the key drafts person um is the head of finhub from the SEC Val Panic who is very knowledgeable about about digital assets but there's very much a focus on some of the same approaches that we've seen from the SEC in cases that it's brought against digital asset trading platforms um for example saying how do you map this how do you map digital asset world and defi to trfi and the various functions right so that's important there's I believe recommendation too focuses on whom do you hold responsible who is it and it it operates from this idea that there's always somebody responsible right and it sort of comes at things from an idea of at least to my mind that this is my personal view things are never really truly decentralized enough that somebody's not responsible so I would say um yeah the the final thing I'll just say about this is interestingly and also the cftc was another contributor as well um so it's it's both of those two big agencies as well as many other groups from around the world governments from around the world but this idea is look at your own laws so even though it's harmonization it points governments back to their own legal um regimes to find answers and just to go to that point fully decentralized it might be a spectrum it might not really be something that Regulators um see as a clearcut thing jaavan I do have a question for you you have an exchange here so what is the plan here how are exchanges supposed to react to MAA um and their requirements around stable coins especially if the stable coin is actually provided by a decentralized platform that's a very good question we are just doing things just one step at a time as you say we're trying to interpret what MAA is requiring at the moment from us and we're just going to implement one step and just get things done there are still some things that needs to to be clarified this point about the the the stable coin the F that are going to be the listed we need to receive a little bit more clarity from the regulator is going to be packed to the euro and if that's not going to be the case our we going to lose some competitive Advantage toward other jurisdiction because you know of course we are going to compete with Asian market with American market and this is going to be working in other ways I I see that we need to continue this discussion with the regulator have a little bit more clarity on what's going to to happen and one step at a time the The Exchange we are going to to adapt and you know for sure we are going to follow what needs to be done um I just kind of want to gather from you um from you all what are going to be the steps that we all do in 2024 let's say so that The Regulators perceive blockchain and crypto assets as having some social background some social impact as well is there even a possibility to achieve that or is it always going to look like a fight I mean I have an idea if no one else has has one so this it would be an indirect social impact right but as we see AI the proliferation of different kinds of AI generative AI Etc and we have things like deep fakes that are getting better and better and other kinds of you know developments I think one of the things that we can point regulators and others back to is this idea that holding aside digital assets and any kind of Finance use case a blockchain provides for secure data sets and actually maybe a real life use case would be authenticating so do you know when your government or a particular person says something and people have been saying this for a long time about you know battling so-called fake news and stuff by using blockchain but I think we're entering a phase I I believe that there's one jurisdiction or another um it was mentioned to me that that was requiring water marks for the use of AI I actually think that's a bit backwards because to me assuming this is a real law somewhere it would seem that sort of the good people the compliant people would comply and the Bad actors are not going to Watermark that they used Ai and so I actually think the other way having credentialing through a blockchain could be very helpful and it certainly um in in many in many instances yeah thank you for you asked you asked about the crypto of the blockchain because I see crypto as a good for the society in terms of banking the unbanked and getting to certain parts of the world where maybe Fiat is not able to do so so or maybe a bank a traditional Commercial Bank is not willing to do so because it's not profitable but this is the classic Financial inclusion thesis uh but I see more uh good for the society in the infrastructure itself I see ESG use cases more and more surrounding us like you know the carbon credits or measure measurement of the of the quality of air things like that also the the the this world coin concept of the of you know uh uh every single computational power you put in an AI that is disrupting or this intermediating labor should be offsetting should can be upset by this world coin concept you know for the people that maybe is not able to to upskill or to Res skill at a at a proper Pace I see these ones but I see definitely and for sure more um more Goodwill for the society in the infrastructure itself rather than that rather than into pure crypto but this is maybe my my my thinking no for sure I mean even looking at the chain analysis reports for example um the ones that were recently published and the blog post that came with them we can see that there is not really a lot of percentages of crypto assets being used for illicit transactions and that the crime rates that we normally see in reports such as iosa and everything is perhaps a bit a of a misconception in this space so I really wonder Ela do you have um any opinion on how for example this technology can be used to tackle crime as well um to maybe even help police or Interpol or uh people investigating crime um so I I know from speaking to actually US Financial crime investigators um that the trafi side drools at the tools that we have on the blockchain right they say wow if we had ways to track the dollar the way you have to track blockchain addresses Etc it would make our lives so much easier so on the one hand yes there are you know politicians that will push the agenda of crypto has no use and it's just used for for crime and and terrorist financing there are the the reality is actually the traceability of of you know crypto generally makes it much much more useful for for financial crime Fighters um and I think we're just at the very early days of that I think that will along with digital identity and you know regulation um we will get to a much more interesting place for crypto and I think in in light of a lot of the debate around I'm sorry Joshua dollarization right it's not so much that another currency would replace the dollar it's that some countries may want to have choices and crypto does offer a choice that's wonderfully said um I know that we only have a bit more than 2 minutes so I'm going to give you a round of opinions or maybe maybe just a statement that you would like the audience to be left with um when they leave the room uh what is it that you think is it going to be the regulatory challenges are going to be even um worse in the future or what is that one thing that you really want the audience to to feel or to have from this conversation and I I think that is is again is just the the importance to continue to work with with a regulator not to get frustrated on things that are not going to come in the in the short term But continuing to build this this this conversation for the the long term I would say that Innovation is a Continuum which is good and uh technology goes of of course faster than regulation this is a state in the obvious um and it's it's happening in every single place you you look at I take care not only of the blockchain piece I also take care of the the AI piece the data the quantum Computing everything that has to be regulated or should would be regulated in the next five to 10 years time and blockchain is not an exception when you look at AI for example AI act in Europe is a dosier that has been in the oven for from 2019 they were about publishing it and all of a sudden the generate the generative chat GPT and the rest they came over so now the those is totally obsolete you have to rewrite again so the challenge here is coping with the phenomenon uh being being update being up to dat and uh react to every single phenomena that is out there that you can see in congresses like this ones and we are already late uh in Europe we are not covering defi we're not covering daos we're even not covering nfts I know there's been a kind of a sule effect in this world but we're still not there we're in consultation process so maika again 1.0 looks nice but we need a 2.0 even a 3.0 as we had Mii one Mii 2 we'll have Mii 3 is a Continuum coping up with it is a is a difficult one thank you so much I'm going to take it from the point of view of the virtual asset service provider so if you are an exchange a custodian you think you might qualify as a virtual asset service provider that's the first thing to do figure out where your legal entities are I hope you would know and and but figure out whether you are you qualify as a virtual asset service provider because you could be a vasp in one country and not in another if you are a virtual asset service provider look at your look at the legislation in that country are you're going to have to be licensed or registered FFF has announced from an AML perspective that is either licensing or registration and then what those timelines are and work from there that's a huge challenge if you have a lot of legal entities you've got to get started now because you know it's it's happening but I I will end on this sorry just one last note it's not all bad I came from as I said a a listed a publicly listed derivatives exchange we promoted fair and efficient markets crypto markets today are not fair and efficient FTX was not fair and efficient so regulation is trying to create fair and efficient markets thank you go ahead Joshua so when I look back um at not the most recent European blockchain convention but the prior one one of the questions that was asked was Will SPF be the next JP Morgan meaning the lender of Last Resort and then at the most recent one before now it was oh wow look what happened with FTX like and now he's being tried as we speak right and yet Builders keep building crypto keeps moving um the law keeps getting figured out and I I think I'm just very optimistic about the space let me just say I think we may not have said none of this was legal advice investment advice anything other than our personal views and certainly not tax advice um but I would say you know speaking of the US for just one moment because that's where I'm I'm from you know it's looking like we'll get a crypto ETF right the SEC had a ruling against it saying that it acted arbitrarily and capricious which is a really high standard um with respect to its denial of grayscale um we're beginning to figure out the law even though it might be very messy in the US but I think usually you know in past years I'd say go outside the US but I think um you know it's looking promising and it's looking like we're going to get some answers thank you so much with that I hope you got a lot of answers and if not you can approach the panelist at any time I think they have more um don't one answer par uh thank you so much for your attention and thank you the panelists thank you [Applause] [Music]