Ian Taylor of CryptoUK spoke to Oliver Tonkin of BCB Group about Swiss and UK approaches to regulation and how DeFi is challenging regulatory bodies across all jurisdictions.
Oliver has two decades of experience as a UK solicitor with a corporate and commercial regulatory focus. He set up BCB Group with Oliver von Landsberg-Sadie in 2017, starting as an institutional corporate brokerage firm, but BCB has evolved to operate in the payment rail space as well.
BCB has raised several million pounds from VC funding in February. The reason for funding was a mixture of growth capital and to increase the balance sheet in terms of regulatory capital requirements in the UK and Switzerland, said Oliver.
New Market Products
(5:31) BLINC, a new offering from BCB, is an extension of their payment rail business and allows customers to transfer funds to each other on the BCB platform instantaneously. It’s mainly GBP and CHF focused, but the company is expanding its range of currencies over the coming months, stated Oliver.
(6:59) BCB Treasury is a more recent launch, with the product created in response to the increasing visibility of cryptocurrencies with the aim to move away from fiat currencies. This product is geared to cater to firms that want to use assets on their balance sheet in a more productive way than focusing on fiat, especially in the current climate of low interest rates, said Oliver.
MicroStrategy, Tesla and Square are three prominent companies investing their assets in the crypto space and have therefore significantly raised awareness of this kind of investment as a corporate strategy, said Ian.
New Market Products
(10:28) The Swiss embraced crypto regulation early. Their approach is based on the KYC, KYT model and under VQF, a body which operates under FINMA, a supervisory authority that governs traditional trading. The financial intermediary licence that BCB uses has effectively been extended to include crypto trading and settlement. Switzerland has clear, robust rules for digital asset operations compared to the UK, said Oliver.
(12:21) In the UK, there has been a large number of applications for digital operating licences and the FCA have set the bar extremely high. The process for ratifying these licences has been slow, and it would be a shame if companies were deterred from operating in the UK and moved to another jurisdiction because of these reasons. A more open dialogue would be beneficial to this process, noted Oliver.
(17:54) Only four of the 200 applications have been approved to date, reiterating the need for clarity and movement, said Ian.
Inconsistent Regulatory Messaging
(20:28) “The reality is that it’s very hard to make money if you’re a bank (with current interest rates being where they are), so any segment that is expensive to supervise is basically unprofitable. Unless you’re a vanilla business [where] a bank can make some kind of profit from the assets you hold, it’s hard for a bank to make money,” said Oliver.
(22:32) Ian quotes the letter sent by the FCA in June 2018 to all of the UK bank CEOs, where the first paragraph states: “As evidence emerges of the scope for crypto assets to be used for criminal purposes, I am writing regarding good practice for how banks handle the financial crime risks posed by these product.”
(23:03) A month before that FCA June 2018 letter, the FCA sandbox team put a report out about blockchain innovation criticising the banks, in essence saying that the banks were killing this market because they were not offering banking services to the digital asset markets. “On the one hand the blockchain team were saying come on banks, sort yourself out; and then not a month later the FCA – another department I guess – wrote to banks warning them that this was a risky space. That frankly is poor because you’ve got divisions of the same regulator with a very different view,” said Oliver. That perception of crypto equals money laundering hasn’t really changed in peoples’ minds. Elliptic’s analysis states that 1% of onchain activity in bitcoin has some link to illegal activity, which in a broader context is not large, most likely less than the same figure for illegal activity in fiat flows in the general economy.
(24:34) “Banks are being squeezed and it’s hard for them to make money out of customers. I think it’s economics as much as it is regulation,” said Oliver.
(25:00) The obvious concern is that many companies offering digital asset services may simply relocate to different jurisdictions and offer services to UK customers. The UK is falling behind other jurisdictions such as the US, said Ian. It’s possible to count the number of banks on one hand across Europe who are crypto friendly, said Oliver.
(26:34) The Financial Action Task Force recently issued guidance on risk, with the key amendment being a change to its perspective that decentralized exchanges are now considered to be virtual asset service providers (VASPs) and that operators involved with dApps may also be considered similarly, said Ian.
(28:19) “I think the biggest issue here is in the true DeFi space…I mean true decentralized finance platforms that are smart contract enabled. There’s a lot of money moving about those [platforms], billions of dollars and some very fat yields being paid and charged. Once you’ve got your coin from an exchange, you can basically stick it onto one of these platforms, earn a very good yield and it’s really completely out of scope or scrutiny of anyone, whether it’s a corporate or regulator,” said Oliver.
(29:34) These DeFi spaces are very difficult to regulate, rules are hard to uphold and the answer might be to make sure that those gateways are properly enforced, said Oliver.
“I think to expect a sponsor of a DeFI product to become the VASP and become the policeman of the protocol right now is not realistic.”
(33:13) There needs to be some form of regulation around this issue, as without it, there is potential to kill off innovation, Ian said.
(32:23) It really would drive regulatory issues underground if they’re not dealt with. Either you embrace it and try and shape its direction, or pretend somehow that it’s possible to eliminate it, which has its own consequences, said Oliver.
More information on BCB Group is available at [email protected]