Insights and Calls To Action from V20 Summit 2020
It was a very fruitful, insightful and honest 3 days of the Virtual V20 Summit 2020. I would like to thank all the delegates for attending, and I sincerely hope you have some takeaways to bring back to your organization to contribute to the growth of the ecosystem.
A very special thanks to David Lewis, Sandra Garcia and Takahide Habuchi from FATF for speaking at the conference. Without your participation, V20 would be missing the core essence of its magic – the honest and open dialogue between the Regulators and the Industry.
Since V20 Osaka, the Industry has witnessed some great progress. We have a new messaging standard called InterVASP Messaging Standard (IVMS), and many of the compliance service providers that have implemented the Recommendation 16 guidelines into their solutions are IVMS101-compliant. But the most important achievement for the Industry is the continuation of the dialogue between the Industry, FATF and Regulators. Last year, we were honoured to have the presence of Tom Neylan, Senior Policy Analyst of FATF, and Roger Wilkins, Ex-FATF President, to speak and do a question and answer session for the delegates. This year we had David Lewis, FATF Executive Security, to do the keynote, and Sandra Garcia and Takahide Habuchi, the Co-Chairs of the FATF Virtual Asset Contact Group, to do the opening and closing remarks respectively. This year’s question and answer session with David and Sandra, was as meaningful, if not more, than last year.
As the nature of the blockchain ecosystem is decentralised, one of the challenges of this which most will expect is the immensely fractured communication. The V20 Summit has proven this to be wrong. When the Industry needs to come together to solve critical issues and challenges, the Industry will oblige, and so we did. Once again, after the V20 Summit in Osaka, and now in 2020, new initiatives have emerged and will continue to emerge.
This year has proven to be an interesting year, to say the least. The unprecedented growth of Decentralized Finance (DeFi) and stablecoins has led to many opportunities and challenges. But one thing for sure is the large volume of scams lately in DeFi, ranging in the tens of millions of dollars. This needs to be dealt with, not with a clampdown or excessive regulation, but with a well defined approach that takes into account the industry as well as regulation. With respect to stablecoins, I believe the challenges are much easier to solve, and IDAXA will work with Regulators on this. But I would like to elaborate on the learnings and insights from V20 on DeFi a little further.
For DeFi, there is indeed a huge education and communication gap, and this is where I believe IDAXA can add value. Regulators are still not 100% familiar with how DeFi works today, and it is the responsibility of the Industry to bridge that gap. However, DeFi practitioners are not used to having to communicate with Regulators, thus the information being passed back and forth triggers emotions and worse, is miscommunicated.
With respect to the communication channels between the various stakeholders, we have a triangular communication problem. This is not new as we had experienced the same problem before when Regulators were just getting to know what Bitcoin is about. So what is the triangular communication problem? Let me illustrate.
Mt. Gox, the largest bitcoin exchange in the world in handling more than 70% of all bitcoin transactions in 2013/14, crashed. It heightened the fear of many Regulators around the world. The bitcoin entrepreneurs of those days were very active in engaging with the Regulators to educate and communicate with them regarding the state of affairs of the ecosystem and the benefits of the technology. However, the Regulators went to the Banks to get their second opinion about the technology, which most still had no clue what the technology was about. The most critical point here is the second opinion heavily outweighed the first for two main reasons: 1) bitcoin entrepreneurs, while active, still had very little experience in speaking with Regulators, and 2) the Banks were the Regulator’s core communication channel with regards to the financial system. This triangular communication problem led to misinformation, misunderstanding and miseducation about the ecosystem. This continued for years until the bitcoin entrepreneurs matured in their ways of communicating with Regulators.
We are also experiencing something similar right now. Many centralized blockchain/cryptocurrency service providers have very mature communication channels with Regulators, and the DeFi practitioners are in the same position as the early bitcoin and blockchain entrepreneurs. The lack of communication this time will cause a much bigger problem than many will anticipate. The question and answer session with Regulators on Day 1 of the V20 Summit was a déjà vu moment for me.
The mission of bitcoin and the use of blockchain technology is to decentralize and to disintermediate. The intent is not to go around regulations to launder money or to finance terrorism. But the current regulatory regimes treat the latter as the premise. However, there is a silver lining to all this. Both the Industry and Regulators have one common goal – get rid of dirty money from the ecosystem. Scams and theft in the ecosystem cause concern for both Industry and Regulators. With respect to the Industry, DeFi scams dampen confidence to both Industry enthusiasts as well as the innovators. What’s worse, it hurts the reputation of the Industry. The Industry needs to find ways to remove this from the system. Regulators on other hand, are here to protect the investors and consumers in their respective jurisdictions. Even within the traditional financial institutions, scams are prevalent and money laundering is in the trillions of dollars. Naturally, it is not surprising to see Regulators fearful of what DeFi can potentially do. Industry should mitigate this fear and work together with the Regulators as there is a common enemy – dirty money.
We need to look at this with a whole new perspective as the current regulations are heading towards more friction and most likely, a dead-end. The current regulatory regimes are looking for intermediaries (or key personnel) to be held accountable and liable for such illicit activities. The question we should be asking is, “How do we regulate and prevent illicit money flows in the virtual asset sector when the owners of the addresses are unknown?” When we can accept this and move on from this angle, then I believe we can really progress regulation in this sector.
The aim of this is not to dive into the detailed aspects of DeFi but to ring the bells again from what I heard at the V20. Compared to V20 Osaka last year, where the Industry had the guidelines imposed upon them without any consultation, this year we are helping the Industry start the conversations early and not have the elephants build up in size. Dis-intermediation saves cost for consumers and investors. Decentralization prevents hacks and vulnerabilities that centralized systems have. As I have said countless times, it is pure stupidity to assume centralized entities will never experience a breach. It is a not a matter of “if” but “when” a breach will happen. Regulation is a must as it is in the interest of both the Industry and Regulators to remove dirty money flowing through the financial system. Let’s continue the engagement, and see you again at the V20 Summit in 2021.
Chair of IDAXA