This presentation by Vedat Akiray from Boğaziçi University took place at the Workshop on Digital Financial Assets at the OECD in Paris on 16 May 2018. Find out more at http://www.oecd.org/finance/2018-workshop-digital-financial-assets.htm

1. Regulating business on blockchain
ICOs, cryptocurrencies, tokens
Vedat Akgiray
Boğaziçi University
This is continuing a presentation made to the Corporate Governance Committee of the OECD in April.

2. History and concept
• TCP/IP, HTML, HTTP produced the Internet to transfer information about assets
on centralized platform – based business models, which have already been
disruptive and transformational
• Cryptography, smart contracts, distributed ledger design are producing the
blockchain to transfer values of assets on decentralized open business models,
which will be disruptive and foundational
• Technology is changing the way we think about business
• While law has not yet been able to catch up even with the Internet, we now have
to regulate businesses on blockchains... tough but urgent task!
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3. Blockchain technology
Decentralized P2P network of transaction
confirmations and ownership transfers
without intermediation and central
authorities
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Node 1
Node 3 Node n
Node 2
Assets
AssetsAssets
Assets
Decentralized network
Node 1
Node 3 Node n
Node 2
∑ assets
Central
authority
Centralized network
Blockchain = {distributed ledger design, cryptography, smart contracts}

4. Blockchain design
Strengths
• Reduced need for intermediation via
crypto-protected public ledgers:
• Who can do what with the ledger
• Who did what and when
• Reduced cyber risks because no single
point to attack
• Smart contracts
• Code is law
• Tokenization
• RegTech and maybe ‘’LegTech’’
Challenges
• Scalability
• Decreasing throughput and increasing
latency
• Storage capacity is a barrier to entry
• Privacy
• Identities are secure (~)
• Transactions are transparent
• Governance
• No framework yet
• Standards are not developed
• Absence of legal clarity
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5. Market outlook
• 60% of large firms planning deployment in 2 – 10 years
• 80% of large banks have initiated projects
• More than 30 governments and 90 central banks are exploring
• More than 135 start-ups since 2013
• 80% of people have heard of blockchain but have no idea
• Almost all cryptocurrency traders think «blockchain is bitcoin»
• Financial institutions are the biggest customers of blockchain tech providers
• More than 2,000 ICOs to date (as expected, many are failures or scams)
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6. Cryptocurrency and ICO markets
• Bitcoin is the first blockchain, and still up and running (‘’killer app’’)
• More than 1,500 cryptocurrencies
• Bitcoin, Ethereum and Ripple constitute about 75% of $380b market cap
• Trading volume in 2018 is estimated to be around $3.2 trillion
• ICO funding expected to cumulate to more than $14b by yearend 2018 (to
compare with VC and equity funding of about $2.5b and $1b, respectively)
• Very volatile; high correlation with each other but no correlation with other
assets; high market liquidity  useful for portfolio risk management?
• Prior knowledge of investor demand in ICOs may increase start-up returns
beyond traditional equity financing. But how about secondary offerings?
• Still too small to have any impact on financial stability
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7. Industry landscape
• Securities exchanges are quite active
• Trading platforms for illiquid and/or private equities and debt
• Clearing and settlement systems (DTCC is about to move all CDS trading on a blockchain)
• NYSE and NASDAQ issued ETFs of blockchain tech companies
• NASDAQ, NYSE, CME and CBOE trading of bitcoin futures
• Issuance of OTC bonds (Daimler, Fisco, Megafon, Commonwealth Bank, Lomard Odier IM, etc.)
• Payment systems (B2B, B2C, P2P)
• RippleNet as an example of a potentially disruptive crossborder B2B money transfer system
• SWIFT has expressed intent to move operations to blockchain (why?)
• Trade finance (several project are about to be finalized)
• HSBC and ING have recently completed a small implementation
• Access-to-finance projects such as BitPesa and BitSpark in Africa
• New «cryptoexchanges» and increasing ICO activity in friendly territories such as Estonia and Switzerland
• Several projects on KYC and AML rules
• A popular blockchain event in NY these days is expecting more than twice the size of last year’s crowd!
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8. Criteria for future applications
• Disintermediation is technically and economically feasible
• Transaction and data verification is required
• Multiple users need to share the data
• Business model needs trust in transactions and certainty in output
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...limited only by imagination but legal clarity is lagging and technology is still evolving

9. Regulatory landscape
• Unlike the early days of Internet, global dialogue seems to be in place this time
• There are uncoordinated attempts to regulate parts but a comprehensive
response to blockchain business as a whole does not exist
• Current typology of regulatory approaches:
• Wait and see
• New regulation for parts (cryptocurrencies, ICOs, issues of KYC, AML and CFT)
• Guidance and sandboxing
• Absence of standardization:
• Terminology
• Architecture
• Governance
• Absence of a proper taxonomy of digital and crypto assets
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10. Examples of lack of coordinated response
• In the USA
• Bitcoin is not legal tender but no regulatory approval is required to use or
issue bitcoin (i.e. spot trading of bitcoin is not regulated). Bitcoin is traded on
exchanges licensed as money transmitters (FinCen) in some states but the Fed
does not count it as a deposit money.
• SEC says Bitcoin is not a security but ICOs may be treated as issuance of
securities (i.e. tokens are securities). CFTC says it is a commodity and hence
bitcoin futures are subject to regulation. IRS says Bitcoin is a property subject
to capital gains taxes.
• In China, cryptocurrency trading and ICOs are illegal and access to
such websites are blocked.
• In Japan, Bitcoin is treated as legal tender and exchanges are licensed.
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11. Challenges for regulators
• Regulators must know ‘enough’ about the technology because
• Blockchain is foundational
• Predicting future business models is more difficult than ever before
• Digitizing legacy processes is not good enough, and regulators must be able to
use blockchain for their own purposes ... RegTech 2.0
• Reconceptualization of financial regulation is necessary:
• Traditional paradigm is much dependent on the presence of intermediaries
• How can a market without intermediaries be regulated and supervised?
• Case in point: “We need banking, but not banks” (Gates, 1994)... Okay but
• How can banking be regulated without banks?
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12. Challenges for regulators
• Contracts cannot be complete and the role of law is to intervene with default rules when
contractual gaps occur. It is not clear how the law will fill in the gaps in the smart
contracts of the blockchain business model.
• The protocols and smart contracts of blockchain in general and ICOs in particular imply a
form of business organization that does not fit into the traditional legal definition of the
firm. A new legal personhood has to be defined for the ICO ecosystem (maybe, the
business trust model may be a good start to thinking.)
• Since an ICO does not imply any shareholder rights, where can we look for the principles of
corporate governance in enterprises funded by ICOs?
• Since the business model implied by the underlying technology is global by construction,
the geo-politics of jurisdictive power will be a difficult challenge.
• Regulatory competition to be more ‘money-friendly’ is a potential moral hazard.
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13. Puzzles to take away
1. One explanation of financial crises is disregard for good governance and integrity, which is
largely due to a complex web of intermediaries on the untraceable distance between households
and corporations. Blockchain’s promise to eliminate some or all intermediaries is therefore great
news. Then, can the principles of corporate governance be the guide to adapt financial
regulatory paradigms to new technologies?
2. Are cryptocurrencies money? Or, what is money? In search for an answer, it may be good to
remember Innes’s words from 1913:
“The use of money does not necessarily imply the physical presence of a metallic currency, nor even the existence
of a metallic standard of value. We are so accustomed to a system in which the dollar or the sovereign of a definite
weight of gold corresponds to a dollar or a pound of money that we cannot easily believe that there could exist a
pound without a sovereign or a dollar without a gold or silver dollar of a definite known weight.”
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