Compliance aspects of the Blockchain technology Prepared for the Swiss Banking Open Forum
Sophia Bantanidis Vice President, Regulatory and Market Strategy, TTS May 2016
Citi Treasury and Trade Solutions | Global Regulatory and Market Strategy
2 Compliance aspects of the Blockchain Technology
Agenda
• Introduction
• What is Blockchain?
• What does Blockchain mean for financial services?
• What are the compliance issues?
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Introduction: Role of Citi’s Regulatory and Market Strategy Team
Identify Regulatory Priorities via the Impact on these Criteria
Payments Regulatory Expert Group Chair, and Information Security Working Group
Regulatory Affairs Committee and Intraday Liquidity Monitoring Working Group
UK Payment Systems Regulator
EPC and UK Payments Councils
Advocacy and Industry Engagement
Citi TTS’ Global Regulatory and Market Strategy function aims to: monitor emerging regulatory change; perform advocacy; support the development of appropriate business strategies around those changes; provide client support via insightful communications; and enhance communication flow and house timely, accurate information and resources globally. We also work with our innovation labs and engage with regulators, central banks and authorities on the ‘digital agenda’ and new technologies for the financial services sector
Organisation Structure Reputation
Reputation Revenue
Technology / Blockchain Clients
Compliance aspects of the Blockchain Technology
Compliance aspects of the Blockchain Technology
4 Compliance aspects of the Blockchain Technology
Poll Question 1
How familiar are you with blockchain?
•Expert
•Good working knowledge
•I have heard the word
•Too embarrassed to say
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Poll Question 2
To what degree is your organisation addressing blockchain technology?
•We are actively addressing it
•We have started thinking about blockchain
•We are not looking at blockchain
Compliance aspects of the Blockchain Technology
A distributed ledger database based on a cryptographic P2P network providing a “single source of truth”
Disintermediates the transfer of digital assets, digital property and digital money
Provides near real-time settlement on a relatively cost effective and efficient network
Irrefutable proof of existence, proof of process and proof of provenance
What is Blockchain?
BLOCKCHAIN WHAT IT MEANS WHY IT MATTERS
Distributed Database
P2P network built with cryptography
Self-executing with high uptime and reliability
Irrefutable Ledger
Irrevocable and immutable entries
Proof of existence, process & provenance
Programmable Ledger
Embedded business logic
Self-executing contractual terms
Inbuilt Consensus
Single source of truth Reduced friction + near real-time settlement
Customized Transparency
Public,Permissioned Or Private chains
Tailored levels of control and openness
6 Compliance aspects of the Blockchain Technology
FINANCIAL FLOW
BLOCKCHAIN
Blockchains distributed ledger model has the potential to take steps, time and cost out of Financial Flows
Blockchain is a key technology with key benefits for financial services
8 Compliance aspects of the Blockchain Technology
Blockchains are platforms upon which many Fintech applications beyond cryptocurrencies can be built
Blockchain is bigger than Bitcoin
9 Compliance aspects of the Blockchain Technology
2013 Global Startup Funding 2015
$1BN
ESCALATING! VENTURE CAPITAL ACTIVITY IN BLOCKCHAIN IS
$99MM
Increasing VC Activity
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A federated blockchain system provides control and visibility
Compliance aspects of the Blockchain Technology 11
• Requires trusted, centralized intermediaries • Batch clearing and settlement • High fees and costly infrastructure
• No (or fewer) intermediaries required • Near real-time processing and management • Low fees and reduced infrastructure cost
Financial Intermediaries (Today) Financial Protocol (Emerging)
What does it mean for Financial Services?
12 Compliance aspects of the Blockchain Technology
The blockchain technology raises questions and challenges from a compliance and regulatory perspective:
•What approach have regulators taken to date?
– Fragmented and no formal rules
•Should the technology be regulated and if yes, who do you regulate?
– Unclear
•Can blockchain be accommodated within an existing legal framework / regulations?
•How can using blockchain technology make it easier for participants and regulators to comply with rules?
•What approach are regulators likely to take in the future?
Compliance issues in blockchain technology Part 1
Compliance aspects of the Blockchain Technology 13
Compliance issues in blockchain technology Part 2 Financial institutions are investing significantly in blockchain technology, but regulatory landscape unclear
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Compliance aspects of the Blockchain Technology 14
How can using blockchain technology make it easier for participants and regulators to comply with rules?
Blockchain provides compliance benefits both to regulators and to ‘the regulated’
•Proof of existence: increases transparency
•Proof of process and control: to demonstrate compliance with processes
•Eliminates single point of risk failure
•Enables the creation of a digital asset
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Compliance issues in blockchain technology Part 3
Compliance aspects of the Blockchain Technology
Can block chain technology be accommodated within an existing legal framework / regulations?
•Existing regulatory framework could pose limitations / make the deployment of blockchain distributed ledger technology less straightforward in certain cases
– For example where regulation stipulates the use of certain market infrastrures like the use of CCP’s as per EMIR
– Impact of regulations imposing product intervention powers for regulators (MiFID II)
– Privacy law issues
• In contrast, the activities / parts of the financial services markets that are less regulated would allow for an easier implementation of blockchain.
What approach are regulators likely to take in the future?
•Current: Little formal regulatory guidance on the use of block chain technology by banks and other financial institutions. Open policy questions
•Future: We could imagine any future regulation addressing the regulator’s key concerns: application of consumer protection, AML and ABC measures.
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Compliance issues in blockchain technology Part 4
Compliance aspects of the Blockchain Technology
•Blockchain presents an opportunity for banks, regulators, authorities, FinTech firms and governments to collaborate, to evolve together and to build on the positive synergies that are in line with the objective of delivering a sound service that is financially stable
•Firms continue to develop ‘use cases’ , authorities and government continue to explore the how blockchain and underlying DLT technology can be deployed
– Flexibility, adaptive to new market events
– A regulatory and supervisory response with the right balance between support and protection
•With the increasing investment in blockchain technology and increasing deployment it is likely that more formal regulatory guidance be given in the next couple of years
•Requires global regulatory collaboration and coordination like we have never seen before
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Conclusion
Compliance aspects of the Blockchain Technology
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