Crypto Industry Report #17
Balzers (LI), 28 January 2020
This week, our blockchain experts assessed the following headlines:
Our weekly Crypto Industry Report news ticker provides you with the latest information on the global crypto industry – picked and analysed by our blockchain experts.
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The Financial Market Authority of Liechtenstein (FMA) approves the first fully regulated tokenized real estate fund in Europe
Last week, it was announced that the first fully regulated tokenized real estate fund in Europe was approved by the Financial Market Authority of Liechtenstein (FMA). Each token represents one share in the fund, therefore each token is a tokenised fund unit, and there is not a special purpose vehicle (SPV) involved. The fund, called AARGOS Global Real Estate Fund, was approved as an alternative investment fund (AIF) and it provides exposure to a global real estate portfolio through the security tokens, which are based on the ethereum blockchain. In order to ensure that only compliant transactions are allowed, the security tokens are linked to an on-chain whitelist managed by Bank Frick, which is responsible for the onboarding process involving anti-money laundering (AML) and know your customer (KYC) requirements. In particular, investors are only added to the whitelist if they provide all the necessary information, which includes transparency about the source of their funds. Ahead Wealth Solutions created the fund and Token Factory was the technology provider for the project.
Implications
In order to achieve the approval from the FMA, a significant requirement was to ensure the security of the code and also that only legally compliant token transactions are allowed. These requirements were met through an audit of the code and a whitelist ensuring that only investors that successfully complete the KYC and AML processes are allowed to hold or trade the tokens. Ethereum and the erc-20 standard were chosen for the project, due to certain advantages such as the access to the growing decentralized finance (defi) ecosystem for example. Through the whitelist maintained by Bank Frick, and integrated with the security tokens, the regulatory compliance is ensured.
An important advantage of the tokenization of the fund is the improved efficiency and automation through the transmission process. While this pioneer project represents the first regulated tokenized real estate fund in Europe, it could allow to demonstrate the advantages of blockchain tokenization and therefore other regulated tokenized funds may be launched in the future. In addition, the project could show that public blockchains may add value to the financial and other business sectors, in particular when they are combined with permissioned blockchains.
Alternative investment funds (AIFs) are regulated financial vehicles in the European Union (EU) that raise capital from investors and then invest the funds to generate a return. While Liechtenstein is not part of the EU, it benefits from access to the European Economic Area (EEA). The AARGOS Global Real Estate fund is a subfund of AARGOS Funds SICAV, and it is used to back the security tokens with a global real estate portfolio. By successfully completing the onboarding process of Bank Frick and by being added to the whitelist, investors, both private and institutional, are able to have access and get exposure to a diversified portfolio of real estate assets through the security tokens, with each token representing a share in the fund directly without any SPVs involved as intermediary. The main innovation of the project compared to other similar projects is that the tokens represent the fund’s shares directly and not the shares of an intermediary SPV. Furthermore, in addition to this pioneer project, the Blockchain Act came into force on January 1, 2020, making Liechtenstein the country globally with the most comprehensive blockchain regulatory framework, covering the different service providers and the tokenization of any rights with a token container model. Liechtenstein is confirming its pioneer role in the blockchain industry, which may attract additional companies looking for regulatory clarity and an innovative and fast growing blockchain ecosystem.
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Six major central banks and the Bank for International Settlements (BIS) announce a collaboration to research central bank digital currencies (CBDCs)
A collaboration announcement was released last week regarding the joint research group about CBDCs by the central banks of Canada, the UK, Japan, Sweden and Switzerland, and also the European Central Bank (ECB) and the Bank for International Settlements (BIS). The central banks will collaborate to identify potential use cases for CBDCs and to select design choices regarding functional, technical or economic factors. In addition, the group will also coordinate with other institutions like the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI). The group will be led by Benoît Cœuré, who is the head of the BIS Innovation Hub and Jon Cunliffe, a Deputy Governor of the Bank of England and chair of the CPMI. Moreover, senior representatives from BIS and the central banks will also be part of the group.
Implications
The interest of central banks regarding CBDCs is gradually increasing. Before the announcement of Facebook’s Libra project, central banks were not considering CBDCs seriously or researching in detail pilot programs or testing. However, the Libra global stablecoin project accelerated central banks’ interest in CBDCs. The BIS launched the BIS Innovation Hub and it was initially collaborating with the Swiss National Bank to research CBDCs. The ECB’s head, Lagarde, claimed that due to the raising demand for fast and low cost payments, the ECB should lead in the development of CBDCs. Some central banks, like those of China, Sweden or France, announced the upcoming testing of a CBDC, however the initial focus will be mainly on financial institutions and not a CBDC for the general public, since this would require increased regulations and risk analysis. In addition, lawmakers in Japan are claiming that a digital yen is needed with the upcoming potential launch of Libra or China’s digital currency.
Regarding the US, the Fed’s chairman previously said that while they were following and researching the progress about CBDCs, there were no plans for a CBDC in the US. However, the previous Commodity Futures Trading Commission (CFTC) chairman announced recently the Digital Dollar Project to develop a framework and to accelerate the development of a digital dollar. He claims that this will be important for the financial stability and for the attractiveness of the dollar compared to other digital currencies. Nonetheless, the digital dollar would need to be backed and supported by the Fed, so this project aims to create the framework and design in order to accelerate the development of a digital dollar.
The BIS carried a survey of over sixty central banks, both from advanced and emerging economies, and although only 10% said that they are considering issuing a CBDC, this is twice the amount of respondents compared to the previous year. Also, there was not significant evidence found by the BIS regarding the shift of CBDCs from research to the testing phase, although some central banks previously announced an upcoming testing in Q1 2020. Central banks of emerging economies mentioned the reduction on cash reliance as the main reason for CBDCs, while central banks of advanced economies said that improved efficiency for cross-border payments was the key motivation to develop a CBDC.
Moreover, the World Economic Forum (WEF), in collaboration with some major central banks, has created a CBDC policymaker toolkit to support with the understanding of the design and the advantages of CBDCs. The framework recognises certain advantages such as reduced costs and faster cross-border interbank payments, and also the reduction of settlement and counterparty risks. The framework also organises CBDCs into three categories. The first category is wholesale CBDCs, which could be used by commercial banks and other financial institutions for transactions, and these institutions would have access to the reserve of the central bank. Retail CBDCs would allow the general public to hold digital currency accounts, and the third category called hybrid could allow certain financial institutions, which do not have central bank access, to hold reserves at the central bank.
Therefore, the developments regarding CBDCs are accelerating, and in 2020 the first successful tests could be completed and in addition the first CBDC may be launched.
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Three SIX Digital Exchange (SDX) executives, including two founding members, leave the project due to strategic differences with the SIX Group’s board
Three executives have left the SIX Digital Exchange (SDX), and two of them were founding members of the project. The SDX is owned by the SIX Group, and its goal is to become a pioneer of crypto asset trading. Ivo Sauter and Sven Roth helped to launch the project, and their positions before leaving were SDX’s head of clients and products and chief digital officer respectively. They supported the project from the beginning with the former CEO Martin Halblaub, who also left in August 2019. Alex Zinder, who was an architecture lead at SDX, has left the project as well. Differences with the SIX Group’s board regarding the strategy of the SDX influenced their decision to leave the project.
Implications
The SDX project is significant for the SIX Group since the estimated costs are around $100 million already, which is an important amount compared to the recent net profits of the SIX Group. The former SDX CEO, Halblaub, left due to strategic differences, in particular he wanted to launch SDX as an independent company while the SIX’s board preferred the SDX project to operate under the SIX Group.
Following the departure of Halblaub, Tomas Kindler provisionally became the CEO. However, Kindler claimed that he prefers to join the SIX Group in a senior position instead of continuing as SDX’s CEO. Therefore, a new CEO is being searched for the SDX, with three candidates shortlisted and a decision expected to be made in the coming weeks.
The reasons mentioned for leaving the project are related to a shift from the initial vision of the project. While it initially started as a more innovative project, with a certain separation from the SIX Group, the executives that left claim that gradually SIX increased its influence on the project. As a consequence, there was an increase of reporting and risk assessment requirements, adding additional complexity and slowing down the processes. Therefore, it seems that initially the project began with a more innovative or startup approach and it shifted to a corporate project with less flexibility and more requirements in terms of reporting and risk assessments.
The SDX platform was expected to launch in the summer of 2019 but it was announced that the launch would be delayed to late 2020 instead. The main issues causing the delay are the post-trade processing and custody and the connection to the Swiss interbank clearing system. Since this is a pioneer project, it is possible that major challenges could be encountered during the development, with potentially large costs involved or further delays.
Moreover, the initial tokenization plans of the SDX changed also. The initial focus now is expected to be the tokenization of assets like art or real estate, and then more traditional banking assets. However, the original plan was supposed to be the opposite, with art or real estate tokenization for the future. A similar crypto asset trading platform is being developed by Deutsche Börse, Swisscom and the crypto focused bank Sygnum, which indicates an expected demand in the near future for crypto asset trading platforms, in particular with the upcoming raise of tokenized traditional assets and security tokens.
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Vodafone becomes the first company to quit the Libra Association since its formal launch in October
As reported last week, Vodafone left the Libra Association and became the first company to quit the association after its formal launch and the signing of the members in October in Geneva. Companies that previously left the Libra Association include Paypal, Visa, Mastercard, eBay and Stripe among others. The Libra Association is the governing council of the Libra global stablecoin. Vodafone mentioned that, unlike the previous members that quitted the association, their decision was not due to regulatory concerns but to focus on their own project, which is similar to the goals of Libra.
Implications
Previously, it was announced that Libra would launch by June 2020, however it was later mentioned that the launch date may be delayed by a quarter or two until obtaining full regulatory approval. Following the previous withdrawal of key Libra Association members, including now also Vodafone, there does not seem to be a concern that this may have a major impact on the project since a large number of other companies have shown interest to join the Libra Association.
Despite some Libra Association members leaving, a technical steering committee was organised recently to coordinate the technical roadmap, the design and the codebase of the Libra stablecoin. It was announced that by March 2020 a governance framework will be published in order to build and develop an open source community to propose technical changes and to evaluate those proposals.
Regarding the attitude of the Swiss government towards Libra, a recent note mentioned that the project is being monitored and that the government is open to projects that reduce cross-border payment transactions and improve financial inclusion. In addition, it was mentioned that the regulators have not rejected the possibility that the Libra project could be approved eventually. In contrast to these comments, the previous Swiss president, Ueli Maurer, recently said that Libra in its current form had failed and that the regulators would not approve the project. Therefore, the recent comments of the Swiss government provide again a more positive attitude towards Libra, in contrast to the remarks made by the former Swiss president Ueli Maurer.
Moreover, FINMA’s CEO said before that the regulators were not aiming to make Libra impossible but to regulate it as required. In addition, he said that Switzerland welcomed the Libra Association established in Geneva.
During the World Economic Forum (WEF) in Davos, the Global Consortium for Digital Currency Governance was announced. The goal of the consortium will be to create a framework and policy approaches for the global governance of digital currencies, including stablecoins. Both public and private entities, as well as developed and emerging economies would be covered and involved in the consortium. Moreover, David Marcus, who is leading the Libra project, said that discussions about digital currencies and stablecoins are important to improve the issues of the unbanked and to develop more innovative cross-border payments. Therefore, it seems that the interest and the awareness about stablecoins is accelerating and becoming a major topic of discussion among governments, regulators, central banks and other authorities. Given that the underlying technology of global stablecoins like Libra is based on blockchain, the discussions about stablecoins are also positive for the growth of the blockchain industry.
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Hearings at the Supreme Court of India, following petitions from the crypto industry, regarding the Reserve Bank of India (RBI)’s cryptocurrency ban
As reported last week, the case against the Reserve Bank of India (RBI)’s ban of cryptocurrencies continued with further hearings in the Supreme Court. The ban, which began on April 2018, restricted financial institutions regulated by the RBI to provide services to entities or persons involved in virtual currencies due to certain potential financial, legal and reputational risks. The Internet and Mobile Association of India (IAMAI) is leading the case on behalf of the companies and institutions affected by the RBI’s ban. The RBI claimed that they had not banned the general use of cryptocurrencies in the country, and instead they only introduced a restriction for banks dealing with crypto related companies. The Supreme Court is hearing the arguments regarding the ban, with the IAMAI leading the efforts representing the crypto industry in the country, in order to reduce the limitations of the blockchain industry in India due to the RBI’s ban.
Implications
The current hearings and the case against the RBI’s cryptocurrency ban indicate that the blockchain industry in India has been significantly affected since the ban started on April 2018, and it seems that they are aiming to improve the situation. With the restriction of financial institutions to provide services to crypto related businesses, the development of the blockchain industry was affected and the innovation slowed down. The recent hearings at the Supreme Court show that a number of crypto businesses are aiming to improve the regulatory situation in India instead of relocating to other countries. The hearing of this case had already been delayed and, with almost two years since the ban was introduced, it seems that the blockchain industry in India is increasing their efforts to improve the regulatory situation regarding the RBI’s ban.
While the RBI claimed that they had not generally banned virtual currencies in the country, by banning regulated entities such as banks from dealing with crypto related businesses, additional difficulties were introduced for these companies since banking services are necessary for their growth and development.
It seems that the RBI ban has significantly affected the blockchain industry in India since its introduction, with some crypto exchanges shutting down because their users could not fund their account with fiat currency for example. One of the risks mentioned by the RBI regarding the ban was the potential use of cryptocurrencies for anonymous cross-border transactions. Moreover, Indian lawmakers drafted recently a bill that could introduce a more restrictive ban of cryptocurrencies in the country called “Banning of Cryptocurrency & Regulation of Official Digital Currencies”. This draft bill was expected to be introduced in the parliament during the winter session, but finally it was not considered by the Indian government. The draft bill aims to introduce a complete crypto ban in the country and also to create a digital rupee issued by India’s central bank RBI.
However, despite the proposed draft bill and the RBI’s ban, there are some positive developments of the blockchain industry in India. For example, recently the Prime Minister provided an award to a blockchain entrepreneur and the Indian IT Minister asked the National Informatics Centre (NIC) to develop a blockchain based solution to improve the quality of government schools. Moreover, the chairman of the Security and Exchange Board of India (SEBI), which is the securities market regulator of the country, has also requested to analyse the best use and application of the blockchain technology in the securities markets.
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