‘Blockchain-Based Compliance Is The Future’

SEC	2018-7-26 23:34

A leading blockchain-focused law firm believes that compliance will soon be baked in to the very blockchain systems that the companies are based on.

Zach Fallon is a former Securities and Exchange Commission lawyer and is now the Principal at law firm Blakemore Fallon. He is also a co-founder of Ketsal Consulting, which provides legal and regulatory advice to outside clients.

Fallon has first-hand knowledge of the Wild West days of cryptocurrency and he believes the waves of regulations that have come in the past year will help the industry go mainstream. He also holds the popular opinion that Blockchain-based compliance could be the final push the commercial world and public sector needs to jump over to the blockchain.

Mass Adoption: It’s Always Next Year

Despite recent progress, we have yet to see that mass adoption of blockchain technology and the tipping point keeps moving. South Korea, Estonia, Russia and several other nations are looking into State coins. Banks, online payment systems and more are looking to incorporate cryptocurrency in to their payment systems. Estonia has moved government records, and even public services and voting to the blockchain.

They are the pioneers, though, and every year we hear that next year is the year when cryptocurrency and blockchain-based business goes mainstream.

Compliance Must Come First

For that to happen, Fallon believes the answer is simple. Compliance must be baked in to the spine of the company – the blockchain system that it is built on. It must simply be the case that the system cannot operate without complying with local and international regulations and standards.

“The most important takeaway from the past year should be a market-wide appreciation for the fact that the SEC is not going to abdicate its regulatory responsibilities in light of recent technological advancements, or the investment opportunities they present,” said Fallon. “Nor should it.”

“This means that the market will now enter into a phase of compliance where securities laws, issues and other regulatory concerns are baked into digital asset business models from the get-go, as opposed to grafted in post hoc. Once regulatory issues are addressed, the potential for distributed ledger technology and any related digital asset will finally begin to be realized.”

The Rules Change All The Time

Regulations are changing all the time to accommodate an industry that is yet to realize a fraction of its true potential. The SEC often has to make complex rulings and issues new guidelines and advice on a regular basis.

Most of these guidelines are simply new interpretations of the existing laws and clarification of how the basic laws of the securities world apply to the ever-changing cryptocurrency landscape. The SEC did recently launch a fake ICO as a honeytrap to show investors how to identify a fraud in the making, and it has been active in bringing a relatively young and aggressive industry to heel.

“There have been at least twenty instances of formal public commentary by the SEC, its Chairman,
Commissioners, and staff on digital asset-related matters since the issuance of the DAO Report in July 2017,” Fallon said. “To say that these issues have been a regulatory priority for the SEC this past year would be an understatement.

“Yet, the vast majority of SEC guidance was in the form of largely basic reminders as to the fundamental reach and application of the federal securities laws. Even the recent remarks by CorpFin’s Dir. Bill Hinman – while incredibly helpful as way to conceptualize issues like decentralization – reinforced, rather than altered, the most basic securities laws concepts.”

What Is A Security?

The SEC has had to distinguish when a cryptocurrency become a security, and it recently clarified that Bitcoin, Ethereum and Ether simply didn’t qualify as securities. That was a victory for the industry and it was the true decentralized nature of the currencies that meant they escaped much tighter regulations.

We’re going to see more judgement calls and clarifications in the months ahead. That’s the nature of the beast in a fast moving and new industry that is writing the rules as it goes. But as those rules can be set in stone, so they can be built into the blockchain foundations of the next generation of companies.

That, will be a massive step forward when it comes to mass adoption of blockchain technology.

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