Blockchain Was Supposed to Set Us Free. So What Happened?
Threatened by the blockchain revolution, traditional financial institutions are hindering regulation that could decentralize the financial system, writes fintech regulation lawyer Saul Adereth
Saul Adereth : 2019-04-25T10:16:02..
Last year we read a lot about the big promise of blockchain. The technology was supposed to take us from bondage to freedom–at least financially speaking. In its interim report from March 2018, the Israel Securities Authority (ISA), noted that the distributed ledger technology (the technology at the core of blockchain) has the potential to turn the financial world into a more efficient ecosystem, both locally and globally. implement blockchain into its systems, back in early 2018. In its interim report, the ISA said that one of its goals is to increase confidence in the finance sector while balancing the promotion of technological innovation with the protection of the public of investors. However, it seems that the ISA is leaning towards what it deems as public protection, adopting the rhetoric of the U.S. Securities and Exchange Commission (SEC) by saying that (almost) all distributed ledger technology projects should be regulated subject to securities laws. The ISA points out some of the most basic features of blockchain technology, such as the existence of a secondary market, the recent hype that caused a surge in speculative investments, and the fact that blockchain companies openly state that over time they will upgrade, evolve, and provide newer and better products. Another key regulator is the Bank of Israel, which authored a 2014 public statement, pointing out the lack of supervision over the trade of what is colloquially known as cryptocurrency, as well as the increased risks of fraud, money laundering, and terror financing. These suppositions were not updated in over five years. Perhaps it is time to challenge these assumptions, by looking at more advanced markets, such as Japan–by far the global leader in cryptocurrencies activity. A recent report by the Japanese police, studying all suspected incidents of money laundering in the country, indeed pointed out a 10-fold increase in the number of cases of crypto-related money laundering. But such an increase is the stuff of headlines. In fact, these crypto-related cases amounted to 1.6% of all researched money-laundering cases.
Facts aside, as indicated by the FATF, there is one risk bigger than that of crypto-related money laundering: de-risking. It is the responsibility of the Bank of Israel to take a lead and assist the financial sector in breaking through the walls put up by banks. And as for the problem of fraud–a cause for concern and a major reason for the drop in the blockchain-related hype–one could only hope that better regulation and the maturity of the market will drive out all fraudulent projects and allow for real honest entrepreneurs to flourish.
Saul Adereth is a partner in the Israeli law firm Shibolet&Co, where he serves as head of blockchain and smart contracts practice and fintech regulation.