The role of the regulator in enabling blockchain adoption
Journalist David Beach sat down with CEO of Smart Valor and ‘Bitcoin Queen’ of Switzerland, Olga Feldmeier. Olga explicitly outlines the real use cases of blockchain and digital cryptography and how smarter regulation can promote innovation. She also predicts the roadmap to bank disintermediation in the next two to three years.
Tell us about setting up a business in the crypto market.
Buy and hold bitcoin sounds like a simple business model, right? The trouble is the relationship with the regulators. When we first thought about starting Smart Valor we looked at Hong Kong, Singapore, Luxembourg and settled on Switzerland after spending considerable time with our lawyers. Switzerland is a small country with a very smart and very sophisticated regulator.
Starting out, things were further complicated by the fact that we were the very first bitcoin custody company the regulators had to deal with. The way that we work, with a cryptographic key controlling assets, we would be seen as a public deposit institution and we’d need a bank licence. In Switzerland, we would have needed at least $15m which is tough for a start-up to produce, and in any case, we felt we were different to a bank.
A lot of that was because we were using a new technology and an innovative business model that the regulator hadn’t anticipated. We spoke to members of parliament and showed them how we weren’t a bank and why we shouldn’t be held to the same regulation as banks. To hold us to the same regulation would have been a conservative approach and dangerous to innovation.
We had a lot of initial interest and pressure and went back to the regulator, FINMA, who looked over our case again, decided we weren’t a bank (and didn’t need the licence) and allowed us to go through self-regulatory organisations to be classed as a financial intermediary. This was a major boost to our initial setup as we didn’t have to comply with capital or the organisational requirements of a bank. Don’t think that we bypassed the rules, of course we had to comply with KYC and AML, but these are all possible things to do.
I think governments in small countries such as Liechtenstein, Switzerland and Singapore are very interested in facilitating crypto markets and bitcoin in particular, and are more flexible and nimble to move forward with appropriate regulatory solutions. Switzerland and Liechtenstein are particularly keen on developing fintech, as private, offshore banking is dying for various reasons. It’s a question of what will substitute this niche in the market, and technological innovation is the answer. Blockchain and bitcoin are at the very front of technological innovation in finance.
This is a similar situation to the UK separating from the EU being a big disadvantage for the financial institution landscape in the UK. Having said that, I think this presents the UK with an opportunity, and Brexit will act as a catalyst to prompt financial regulators to open up to fintechs. Technological innovation is nothing without the full open support of the regulators helping it through its early steps.
How do regulators reconcile development of this technology with established regulatory requirements?
Speaking from a blockchain perspective, data protection has many aspects, particularly when discussing a public blockchain like bitcoin. In a corporate setting we’re seeing the rise of semi-private blockchains where a company’s control the nodes, the enterprise solution. From perspective of a banking institution, bitcoin blockchain has several limitations concerning privacy of transactions and data protection. So the consortium model is employed by the fintechs because it not only provides security but also makes things more efficient, scalable and compliant.
In Switzerland we became the epicentre of Initial Coin Offerings (ICO); of the six largest ICOs, four were based in Switzerland. Crowdfunded startups are attracted to Switzerland’s regulatory wriggle room and we’ve advised many ICOs since. That’s when we decided to build a marketplace for tokenized investments – in effect, an Amazon for asset-backed tokens.
We believe that crypto assets and tokenization will be the second wave of blockchain innovation in the fintech space after cryptocurrencies.
For instance, take a physical asset like a Picasso painting worth £250m. It’s a great investment opportunity because it will only appreciate but until now you’d head straight to UBS to ask to participate or fund such an investment, if you were a HNW or UHNW (Ultra High Networth Individual). Smart Valor is looking to change this. We could buy this painting, hold it in our custody and provide securities that it exists and is genuine. We’d then sell 250,000 Picasso shares worth, at initial offering, £1,000 each. These shares are tokenized so ownership is represented through a cryptographic key stored on the blockchain. The fractional ownership of that picture can be transferred by passing a private key or signing a transfer transaction with this private key. It represents on-chain settlement, and is instant and efficient, without endless intermediaries involved into this process.
Tokenization on the blockchain means you can create more efficient market infrastructure. This means that you can transfer ownership of assets or securities far quicker in the secondary markets at a fraction of the costs. This creates opportunities to create secondary markets for illiquid assets through fractional ownership and on-chain settlement; it cuts down the three day settlement and clearing process in capital markets to seconds. Furthermore, this creates better liquidity for those previously totally illiquid assets; anything from from a private equity fund to a football team can be tokenized.
On-chain settlement is the future of capital markets and we’ll see it implemented in two to three years. In fact, distributed ledger technology is posed to replace the exchange platforms of every sort of asset, both physical and immaterial. Tokenization of venture capital and private equity funds will come as the next form of securitization. Furthermore, you can think of structuring project finance by deploying smart contracts and self-executing governance.
How exactly will this change society?
This technology will empower people. Borderless capital of cryptocurrencies will weaken the capital controls that many ordinary people in many countries have been subjected to, apart from the megarich who could bank privately and use shell companies to get their money out. The safety of the financial assets was always the privilege of the rich. I’ve seen this privilege from both sides. When I was growing up in my native Ukraine, I remember hyperinflation after the Soviet Union collapse, where my mother’s monthly salary was enough to buy a loaf of bread. The government could do as they pleased with us. There was no way for us to protect our savings. On the contrary, as I later worked as Head of Sales for UBS, the largest Swiss bank, we would turn down clients who had less than $5m in liquid assets. Those people can protect their wealth from inflation and political instability. The others cannot.
Cryptocurrencies and tokenization of assets will enable the democratisation of wealth. It will enable protection of wealth to the extent where individuals in capital-controlled countries of today – China, Russia – can move capital through a cryptocurrencies chanel to invest in other countries and firms; that has been the traditional function of offshore banks. Now it is done on the back of technology. Smart Valor will build on this borderless capital and able democratization of wealth .
What will the crypto bank of the future look like?
First of all, it will not be a bank. It’s going to be a decentralised marketplace and information provider; totally disintermediated. What does decentralised mean? It means that people can directly invest their money and I believe we are already moving in that direction. I see the bank of the future will be built on a couple of technological pillars. The roadmap can read as improved KYC and identity solutions on the blockchain, tokenized investments, cryptocurrencies, AI-steered investments and many more wonders of which we do not know today.
This article originally appeared in GTNews’ sister-publication bobsguide.com.