This article in Forbes Community Voice hopscotches across multiple very complex blockchain and securities related issues and suggests banks need to immediately prepare for tectonic changes the author expects these technologies will cause:
“Enterprise technology is nothing new. But it could hold the key to one of the greatest economic opportunities in modern history: blockchain technology and its role in digital finance.
Over the last year, major software giants such as IBM, Amazon Web Services and most notably Microsoft Azure, have entered the cryptographic landscape.
The Need For Stability
Although 2017 was an explosive year for cryptocurrencies, many from the crypto community were primarily focused on price swings, hoping to get lucky and win big. Despite day traders cashing in quick profits, about $400 million raised in initial coin offerings was stolen by hackers, according to consulting firm EY (via Quartz). And this year, Bitcoin News reported approximately $9.1 million a day is lost to crypto scams — and that’s if you don’t include 2018’s outliers (the Coincheck, Bitconnect and Bitgrail scams).
Enter: Enterprise Software Standards
Meanwhile, a strong blockchain community is quietly emerging in the enterprise software space. IBM has spent millions on blockchain-related projects. Amazon Web Services allows anyone to spin up an Ethereum node in minutes, and, most notably, on August 8, Microsoft dropped a silent bombshell with its release of the world’s first-ever proof-of-authority (PoA) protocol for the Ethereum network on Azure.
The integration of Ethereum on Azure lets users expand and construct an Ethereum blockchain network within minutes of account creation, and Microsoft has expressed confidence in this development leading to an increase in both Ethereum and consumer enterprise adoption of blockchain applications. Enterprise adoption of blockchain can be private or consortium, but so far the primary enterprise applications have been restricted to private adaptations of various networks.
The excitement surrounding the PoA protocol extends beyond the Ethereum community and into the overall token economy because enterprise adoption means that things like cloud storage, electronic voting, employee compensation, supply chain oversight and more can all be enabled.
But this begs the question: Do equity token holders having voting rights? This question had been accompanied by vague answers until now: Enterprise software capabilities give issuers the means needed to implement governance at scale. While the ERC20 standard was a key aspect of the explosive growth of ICO projects, it alone does not address overarching regulatory issues.
To this point, the Enterprise Ethereum Alliance (EEA) has recognized the benefits of collaborating with other members of the blockchain community. For instance, Hyperledger and the EEA (formerly known as rivals) have teamed up to help further the development of blockchain technology. Hyperledger developers are now able to access the EEA’s certification programs as a way to demonstrate their use of quality code, as well as their ability to connect with larger companies.
Security token launch platforms have become the new face of initial coin offerings — and it makes sense. These platforms connect an issuer to a network of investors, tools and, in some cases, click-button deployment. Unfortunately, very few of them are able to operate legally. Those that try are often restricted from multijurisdictional operations, and as registered and reporting entities, they are agreeing to play by the rules.
Meanwhile, these businesses have to compete with rogue security token launch platforms that choose to ignore the rules, attempt to operate without being accountable to anyone and, in most cases, actively engage in promoting security token offerings to tens of thousands of investors
And not to mention the requirements from the SEC, CFTC, FINRA and FinCEN (and that just covers part of the U.S.).
As the CEO of a company that helps businesses maintain ICO compliance, I know that in order for legitimate ICO projects to be successful, they require a mechanism to manage the compliance of their tokens that addresses the jurisdictional variances in both regulation and corporate governance. Most of the projects in operation today are using identity verification tools that are hardly robust enough to be called KYC at all, and even if they do meet KYC standards in one jurisdiction, these requirements vary significantly around the world.
With that being said, there are groups that are working toward defining the rules of the ICO space to ensure best practices for global issuers and investors:
- Regulatory agencies are working on providing transparency. The SEC recently disclosed plans to create a guide in “plain English” for developers to assist with planning token offerings.
- Earlier this year, Switzerland’s financial authority, FINMA, also published ICO guidelines, with its top priorities being the establishment of anti-money-laundering laws and securities regulation.
- China announced its plan to ban all ICO activity in 2017, shutting down hundreds of exchanges and token offerings. The Shenzhen Court of International Arbitration’s recent ruling indicates how politically important it is for regulation to keep pace with innovation.
- A unique project out of Canada is the OSC Launchpad, a program formed by a securities regulator to help businesses navigate these challenges.
Despite these efforts, there are still gaps, especially around secondary trade processing, record-keeping and reporting, which is why so many companies are limiting themselves to investors in particular jurisdictions.
Failing To Prepare Is Preparing To Fail
From the perspective of the more traditional enterprise, pre-crypto employee access to insider information was easy to manage; but with the pseudonymity that cryptocurrency can provide, compliance policies related to issues such as insider trading could require a second look and the adoption of new policies.
Security tokens stand to transform private capital markets when they can be deployed safely, compliantly and efficiently. We must think about the solution not in how regulation can be skirted but how it can be adhered to in a way that does not undermine the efficiencies and security provided by tokenization.”
Securities are not Mercator’s area of expertise, but as the article states there have been a number of ICO failures that should give us pause. The idea that software contracts can account for every possible situation, or that consensus can be reached by voting if a flaw demands updates is optimistic to a fault. Witness the many virtual currencies that have forked because there was a lack of consensus.
Related to blockchain the reality is that blockchain technology is not the key consideration for partnering and data sharing. The first problem to be solved is deciding how data will be shared in a format that is flexible enough to address participants different perspectives and changing semantics (solved in ISO 20022 with business models that define how each data element is created) while also managing access to the data with permissions that change daily. These problems haunt database administrators today even in private implementations, but when this problem is opened up to trusted partners this data management problem becomes the first issue that everyone needs to agree on. Once that’s done, the evaluation of the appropriate technology to implement that data management approach can be undertaken. If the problem is evaluated in this order it wouldn’t surprise me if a more traditional cloud database model wins out in 95% of the cases.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group