The rapid rise of blockchain in areas like banking and beyond has resulted in regulators scrambling to keep up.
The word “blockchain” has almost overnight become incredibly commonplace in discussions involving virtually every industry in every country in Asia.
Blockchain technology, or distributed ledger technology, was originally designed as a public ledger to trace transactions of cyber currencies. As it evolved, the technology has proven useful in many other fields. Asian countries, especially the region’s financial hubs, have embraced the technology with open arms.
A blockchain is a type of database that takes records in blocks that are linked to each other by a cryptographic signature, which allows blockchains to be used as a public ledger accessible to authorised users.
“China, Japan, South Korea, Hong Kong and Singapore are already investing in blockchain technology, either through their private enterprises or publicly,” says Paul Haswell, partner at law firm Pinsent Masons. “Indeed, it’s safe to say that when one looks at private enterprise I would be very surprised if any Asian country is not exploring the uses of blockchain.”
Singapore’s financial regulator, the Monetary Authority of Singapore (MAS), has recently collaborated with a consortium of financial institutions to explore the use of blockchain technology for clearing and settling payments and securities.
“As a technology hub for the region, Singapore has embraced blockchain technology as seen in the proliferation of startups deploying blockchain technology but also in the adoption of blockchain technology by regulators such as the MAS,” says Jeremy Tan, director at Holborn Law in Singapore.
The MAS and the Association of Banks in Singapore announced on Oct. 5 that they have successfully developed software prototypes of three models of decentralized inter-bank payment and settlements that utilize blockchain technology.
“The project aims to help the MAS and the industry better understand the technology and the potential benefits it may bring through practical experimentation,” says Tan. “The eventual goal is to develop simpler to use and more efficient alternatives to today’s systems based on digital central bank issued tokens.”
The approach taken by MAS is also consistent with Singapore’s aim to become a “Smart Nation” by harnessing the power of technology and networks to improve the economy and society in the city state. And adopting blockchain technology is a part of this initiative.
REGULATORY FRONT
“At present, blockchain is typically equated to cryptocurrency, which is far too much of a simplification. However, it is the growth of cryptocurrencies in Asia that will lead to regulation, although this is likely to be restricted to cryptocurrencies only,” says Haswell. “Regulators are rightly concerned by the growth of cryptocurrencies, and the dangers to the consumer, particularly in light of the increase in Initial Coin Offerings, or ICOs.”
The challenges for rolling out blockchain technology in Singapore is probably no different from that in any other countries – that it’s still primarily technological in nature. From a legal perspective, according to Tan, there are no major impediments or roadblocks to the further roll out of blockchain technology in Singapore. In fact, the Singapore government has been very supportive of the use of such novel technology, offering incentives and grants to technology start-ups based in the country.
“There are no laws or regulations governing blockchain technology per se. There are, however, laws and regulations relating to how blockchain technology can be used,” says Tan. “The most obvious of these laws and regulations would be in the financial services sector.”
For example, the MAS requires blockchain-based virtual currency market participants to comply with existing anti-money laundering and countering the financing of terrorism rules.
“The major challenge for regulators is currently the prevalence of ICOs, and also the money laundering risk that is associated with the use of blockchain based cryptocurrencies and their exchanges,” says Tan. “The MAS is also currently working on proposed regulations to be introduced for such virtual currency intermediaries operating in Singapore.”.
Privacy issues are also often tied with technologies association with data collection, analysis and disclosure. According to a report by Baker McKenzie, a key feature of the privacy law in Singapore is its nascence- the country does not yet have as much history or precedent of data protection law.
Singapore’s Personal Data Protection Act was only implemented in 2013, questions surrounding the treatment of anonymous and pseudonymous data, and the de-identification and re-identification of data, may not have clear answers right now.
At the same time, these concerns are not exclusive to Singapore. Law and regulations regarding data protection in the rest of Asia is also undergoing rapid development in recent years.
“There are not yet new laws or regulations in Hong Kong that specifically govern the application of blockchain technology,” says Rocky Mui, senior associate at Clifford Chance in Hong Kong. “The regulators in Hong Kong have adopted a technology–neutral regulatory approach and are seeking to develop and implement a regulatory framework and requirements, utilizing existing legislations and regulations, based on the intrinsic characteristics of the relevant activities or transactions and the risks arising from them.”
Mui says one major challenge for regulators is to strike the right balance between encouraging innovation and ensuring consumer protection.
“The sandbox initiatives in Hong Kong are welcomed by industry stakeholders and it is important for the regulators to remain proactive in learning what industry stakeholders' objectives and challenges are to create the regulatory infrastructure that offers clarity,” he notes.
TO ICO OR NOT TO ICO
This September, the People’s Bank of China (PBoC) issued a ban on ICOs because they “are considered illegal and disruptive to economic and financial stability”.
The central bank said in its statement outlining the ICO ban that token fundraising is an unauthorized and illegal public financing activity, which involves financial crimes such as the illegal distribution of financial tokens, the illegal issuance of securities, financial fraud and pyramid scheme.
“Most countries are taking a wait and see approach to ICO,” says Haswell. “China has blocked it because it’s being used for capital outflow, other countries need to watch how ICOs are being structured as many look like nothing more than a high-tech pyramid scheme.”
“Unlike China and South Korea, Singapore has not issue an outright ban on ICOs,” says Tan. “However, the MAS has clarified in August 2017 that the offer or issue of digital tokens in Singapore will be regulated be a regulated activity if the digital tokens constitute products regulated under securities law also known as the Securities and Futures Act, or SFA.”
If the digital tokens fall within the definition of securities in the SFA, issuers of such tokens would be required to comply with the requirements under the SFA including the requirements to lodge and register a prospectus with MAS prior to the offer of such tokens, unless exempted. This is an approach broadly consistent with that adopted by other financial services centres.
NOT JUST BANKING-RELATED
Financial institutions have already started incorporating blockchain technology in their business operations, but they’re not the only ones that see the benefits of the technology.
Talking about the current trends in deploying the technology of blockchain, Haswell points out that more industries are actively getting involved.
“An interesting trend is the expansion of blockchain into other industries, with financial institutions, medical companies and governments investing in a distributable and incorruptible database,” he says.
“In terms of sectors, whilst it is the financial sector and banking that is typically seen as the primary market for blockchain technology,” Haswell adds. “The legal, energy and infrastructure sectors are investing in blockchain – any industry which needs a secure, accountable and reliable information flow can and will benefit from the deployment of blockchain technology.”
Haswell explained that the legal sector is using block chain as ways to regulate and automate contracts such as loan agreements. “Blockchain can also be used to regulate compliance matters and delivery of technology contracts – lawyers are only just started to grasp this,” he says.
Due to the scale of investments involved in experimenting with and adopting blockchain technology, the financial industry in Singapore is currently the leader in experimenting with blockchain technology.
Insurer companies in the country have started to use blockchain technology to develop “smart” insurance policies which manage complex international coverage including for facilitating the sharing of real-time information.
“There is also a growing interest in the use of ‘smart contracts’ based on blockchain technology for automating functions,” says Tan from Holborn.
“As a technology focused firm, we are seeing blockchain technologies being applied in a myriad of forms and industries,” he continues. “[Besides the financial industry,] there are many others, such as the logistics industry and pharmaceuticals industry, that are also exploring the application of blockchain technology, largely in in tracking of shipment and record keeping.”
“Blockchain can revolutionise the way we do business, and we are at the very beginning of this new frontier,” says Haswell.
