We sent Bitcoin to Congress … Where did the BTC come from?
The Chamber of Digital Commerce recently launched a bold new initiative called Crypto for Congress. With support from pioneering Members of Congress and U.S. partners across the blockchain ecosystem the Chamber’s PAC is proud to have given contributions, in #bitcoin, to the campaigns of every Member of Congress.
Crypto for Congress’ mission is to raise awareness, understanding and acceptance of cryptocurrencies, digital assets and blockchain technology among our nations’ leaders in Washington. In putting together this initiative we wanted to showcase the tremendous innovation and entrepreneurship that U.S. companies are contributing to the borderless, open-source blockchain industry. One vertical in particular, cryptocurrency mining, is seeing a convincing share of global activity shift towards miners based in the United States.
The Chamber of Digital Commerce PAC worked with incredible partners in Core Scientific, Luxor Mining and Flipside Crypto to deliver the Members’ campaigns bitcoin that was verifiably #MinedInAmerica.
Core Scientific kicked off the process by generating hashpower across their facilities in Dalton, GA, Calvert City, KY, and Marble, NC. To produce the #MinedInAmerica BTC, they pointed their hashpower at a pool managed by Luxor Mining.
The hashpower that Core Scientific produced was directed at a dedicated BTC mining pool run by Luxor’s US-based team. On October 5, 2020 a clean block was mined to generate bitcoin specifically for the contributions that the Chamber’s PAC made to the 541 Members of Congress.
Once the #bitcoin block was mined, the newly minted coins were deposited into the Chamber PAC’s wallet. From there, the BTC was sent to wallet addresses that were designated for each of the Congressional campaigns.
After the bitcoin reached the campaigns wallets, Flipside Crypto’s Boston-based team verified the American provenance of the bitcoin that was sent to the campaigns. Flipside tracked all transactions from the moment they were mined by Luxor’s pool, through to when the campaigns received them. Flipside Crypto proudly certified that the Chamber PAC’s bitcoin was #MinedInAmerica !
America’s footprint in the cryptocurrency industry is growing larger by the day and we are eager to showcase U.S.-based companies that are pushing the boundaries of the digital frontier. We are proud to see the contributions that our fellow Americans are making to this globally distributed movement and hope that our effort further illuminates the promise and potential that our industry is already demonstrating right here on U.S shores.
Important Step for Industry as FinCEN Incorporates Chamber Position on Travel Rule
Agency Seeks to Clarify through Regulation that the Travel Rule Applies to Virtual Currency Industry, Implying It Did Not Apply Previously
On Friday, October 23, the Financial Crimes Enforcement Network (FinCEN) acknowledged a legal argument we made with respect to the Funds Travel Rule. We argued that this Rule, as currently written, is specific to legal tender fiat and, in order to apply it to the virtual currency industry, FinCEN must formally amend the Rule. Last week, FinCEN proposed to amend the Rule through its joint Notice of Proposed Rulemaking (NPRM) with Board of Governors of the Federal Reserve System (the Fed) to “provide clarity concerning the application of the Recordkeeping and Travel Rules.”
The Travel Rule has been a fiery topic for several years now. It is triggered when a customer wants to transfer $3,000 or more to another account at another financial institution. When that occurs, the financial institution must collect certain information from that customer, including name, account number, and information related to the transaction, among others. If the customer is a new customer and the transaction is made in person, the institution must also verify the customer’s identity and obtain a taxpayer identification number (such as a social security number). This can be a point of friction for any organization when onboarding a customer. (The receiving and intermediary financial institutions have similar obligations.) The Rule also requires that the information be transferred to the receiving institution, which creates a cybersecurity and privacy risk to the customer’s data.
Our argument was a procedural one. The Rule as written is specific to money, which is defined as “a medium of exchange currently authorized or adopted by a domestic or foreign government.” While FinCEN amended its regulations in 2011 to apply the money transmitter provisions of the Bank Secrecy Act to virtual currency, it did not do so with respect to the Travel Rule. On November 26, 2019, we wrote to FinCEN to urge them to initiate a notice and comment rulemaking process (such as this NRPM) to fix this discrepancy.
Clearly, the Travel Rule is coming worldwide. Last year, the Financial Action Task Force (FATF) adopted Recommendations related to virtual assets to make that a reality. Nevertheless, we believed the United States still needed to make the appropriate regulatory adjustments to ensure that the Travel Rule properly applied to our industry. We urged this be corrected so that industry could participate in fashioning a rule that enables compliance and promotes law enforcement objectives, while providing clarity in the application of the Rule moving forward.
In its NRPM, FinCEN highlighted our efforts, acknowledging “that at least one industry group has asserted that the Recordkeeping and Travel Rules do not apply to transactions involving CVC, in part because the group asserts that CVC is not ‘money’ as defined by the rules.” FinCEN has proposed to define the term “money” in the definitions of “payment order” and “transmittal order” (key terms in the Travel Rule) as, “(1) a medium of exchange currently authorized or adopted by a domestic or foreign government, including any digital asset that has legal tender status in any jurisdiction and (2) CVC.”
The effect of this move highlights the fact that application of the Funds Travel Rule was not clear previously – a fact that we laid out in meticulous detail with legal analysis in our November letter. We are greatly encouraged that FinCEN has taken the necessary steps to correct this and properly apply it through this process.
While this is a significant step for industry, we must recognize that many of the objectives of the Travel Rule still apply under other Bank Secrecy Act (BSA) and Office of Foreign Assets Control (OFAC) compliance regimes. Under the BSA, you must still understand your customer so that you have a baseline to monitor transactions and effectively report suspicious activity. Under OFAC, you must know who the counterparties are to your transactions so that you do not violate economic sanctions. BUT, institutions should not be required to transfer the information to other financial institutions at this time. Such a result has the practical effect of acknowledging our proposal for a safe harbor to require financial institutions to obtain and retain such information, but not transfer it until a safe and secure transfer system is functional.
In addition, the NPRM also proposes reducing from $3,000 to $250 the threshold in the BSA’s Recordkeeping and Travel Rules for banks and nonbank financial institutions for funds transfers in and out of the United States. We anticipate addressing this proposed change, which is different than the definitional amendments noted above.
Comments on the NPRM are due by Friday, November 27. The Chamber intends to submit a response through its AML Task Force.
Learning by doing is the most effective way to understand something new, especially when it comes to technology. Think of the first time you sent an instant message, downloaded your first app, or set up your first social media account.
Those simple actions turned theory into reality, and for many of us, the lightbulb went off. Engaging in a cryptocurrency transaction for the first time is the same thing: an inflection point where one discovers the tremendous potential of digital money and blockchain technology. That’s why the Chamber of Digital Commerce’s PAC contributed cryptocurrency to every Member of Congress’ campaign.
Many Americans have already had their first cryptocurrency transaction and now is the time for political leaders to do the same. A study byCoin Metrics revealed that 15% of American adults – and 27% of Millennials – own some form of cryptocurrency today. In addition, more than33% of small and medium-size businesses in America now accept cryptocurrencies as payment for goods and services.
Since Bitcoin’s inception in 2009, the idea and promise of blockchain technology has seized the imagination of engineers, scientists and technologists around the world. These nascent and evolving innovations offer immense possibilities for business, government, and consumers.
While cryptocurrency is another way to pay for something digitally, there much more beneath the surface. Blockchain technology, the essential engine underpinning cryptocurrencies, doesn’t just keep track of financial transactions. It also serves as a timestamp akin to a digital notary, enabling new forms of corporate and social organization, and enhancing transparency and security for transactions around the globe. Blockchain’s open, public ledger technology also enables transactions to be traceable for law enforcement purposes and has been successful in protecting financial systems and the public from bad actors.
As we have seen with other transformative technologies, whether high-speed broadband or mobile communications – the United States has a unique opportunity to catalyze rapid economic growth, while fostering and encouraging innovation for a new digital tool everyone participating in the global economy can use.
For that to happen consumers and policymakers alike must understand what cryptocurrency is and is not. Education is the first step for policymakers to come together to develop sound policies that ensure the benefits of the digital economy and blockchain technology are realized in the United States. The best way to do that is to set up a digital wallet and get started on your own blockchain journey.
According to Marc Andreesen, “The blockchain is the most important technology since the Internet itself,” and it is fundamentally changing every industry in our economy. Blockchain will change the way we engage in politics, campaigns and elections too.
One of the biggest challenges political campaigns face is fundraising. Most Members of Congress spendhours a day on fundraising efforts, oftentimes asking the same pool of long-time supporters for financial support. It’s a necessary, but time-consuming distraction from governing, with an imperfect and unpredictable return on investment.
Just think of the “first-to-market” benefit past candidates had who embraced websites, email, social media, and yes, online fundraising. These forward-thinkers gained a strategic advantage because of their ability to understand and leverage the new technology before their competitors.
The United States has one of the lowest rates of youth voter engagement in the world. If politicians want to appeal to younger voters, they need to speak their language and reach them in ways that resonate and are authentic. The 20 million Millennials who hold some form of cryptocurrency today are passionate about this new system of money and are likely to support candidates who embrace its possibilities.
The more choices people have to give, the more likely they are to support candidates. Digital assets are another option that a growing number of Americans have access to.
Every day, cryptocurrency takes another step toward mainstream use.Investors are allocating more of their portfolios to it,entrepreneurs are pivoting their businesses toward it, and, perhaps most importantly,young people are drawn to it. Adopting cryptocurrency signals to those who believe in it that Members of Congress are in tune with the latest, cutting-edge technology. It also highlights the ease, security and transparency blockchain technology offers.
Perhaps most importantly, for the U.S. to maintain its global leadership, we must remain at the forefront of advanced technologies. Blockchain might soon be considered “critical infrastructure” within the new digital economy. China and the E.U., each has publicly declared they want to be the global leader of developing blockchain technology and have strategic national initiatives well underway. This would be a significant challenge to both our national security and economic security to have foreign actors controlling the systems and governance that will power the digital economy.
Accepting cryptocurrency campaign contributions is one small yet impactful way Members of Congress can demonstrate their commitment to helping the U.S. maintain its technological leadership, and better understand a technology that will be crucial to their constituents.
Deliberations on the Digital Dollar: A Letter to the Digital Dollar Project Regarding its Proposal for the United States to Develop a CBDC
On Friday, the Chamber of Digital Commerce sent a letter to the Digital Dollar Project regarding its whitepaper promoting the development of a U.S. central bank-issued digital currency (CBDC).
Our letter, developed carefully by the Chamber’s diverse membership including companies that would be instrumental in designing, creating, distributing, and promoting the implementation and use of the digital dollar, underscores why the development of a U.S. CBDC must be deliberate for it to be successful, as the impact of this Project will shape the U.S. and global financial services landscape. It highlights important considerations that will be fundamental in determining the digital dollar’s success, thoughtfully examining how a U.S. CBDC will facilitate, for example, access to financial services and enhance AML compliance while balancing privacy objectives. Importantly, the letter identifies areas within the financial system that can benefit the most from this Project, noting areas that are ripe for pilot programs to test the digital dollar’s use.
The development of a tokenized digital dollar promotes the need to modernize the United States’ payments infrastructure, combining the benefits of distributed ledger technology (DLT) enabled payments, such as increased settlement speed and decreased transaction costs, with the U.S dollar, the world’s reserve currency. In addition to contemplating the potential impact of the digital dollar, we encourage the Digital Dollar Project to work with government and industry on testing CBDC prototypes in a series of pilot programs. This need is urgent given the extraordinary developments across the globe, including the imminent launch of China’s digital yuan and efforts underway within the European Union and many other central banks, and the issues noted in the whitepaper and our letter deserve careful analysis.
We are thankful to DLx Law, in particular, Lewis Cohen, Angela Angelovska-Wilson, and Greg Strong, for their insights and expertise in responding to this important and timely Project.
The United Kingdom established itself early as a forward-thinking leader in the blockchain and virtual currency space through the establishment of its regulatory sandbox, leadership in the creation of the Global Financial Innovation Network, and U.K. Cryptoassets Task Force. This next report is a follow-on to the initial report on the U.K. legal landscape that focused on identifying how digital tokens are treated under the ambit of U.K. financial laws by H.M. Revenue and Customs.
This new section of the report explains the tax considerations related to digital tokens within the larger body of laws and regulations that affect the token ecosystem.
The report reflects the tax developments in the United Kingdom as they apply to digital tokens and their evolving uses. Specifically, it examines the U.K.’s taxation of digital tokens within:
Corporate Taxation;
Value Added Taxes;
Distribution to or Acquisition by Employees; and
Stamp Duty/Stamp Duty Reserve Taxation.
Read the new U.K. report, along with the full “Understanding Digital Tokens” series including legal landscapes covering Canada, Gibraltar, Japan, the United States, here.
Japan has established itself as a forward-thinking leader in the blockchain and virtual currency space, especially during its G20 presidency earlier this year. It was also one of the first countries to legally accept bitcoin as a form of payment. After the hacks on token trading platforms, the country’s financial regulators worked with industry to create a self-regulatory organization to adopt a regulatory regime that would help the industry develop and protect consumers. This new report describes the effect some of these impactful moments have had on the Japanese token ecosystem, including the regulatory and policy implications.
The report examines Japan’s regulation of virtual currency:
Regulation of virtual currency under the Payment Services Act, Financial Instruments and Exchange Act, and other laws and regulations;
Regulations for ICOs; and
Prepaid payment instruments.
Finally, the report forecasts the outlook for virtual currency regulation in Japan and states that “Some of the advantages [of regulation] include, amongst others, increased market transparency due to clarity around consumer/investor protection requirements, the possibility of using ICOs and STOs for capital raising.”
We hope you enjoy this analysis of the legal landscape governing Japan.
Financial Action Task Force Proposes Recommendations that Impact the Global Blockchain Ecosystem
Financial Action Task Force Proposes Recommendations that Impact the Global Blockchain Ecosystem
The Financial Action Task Force is taking significant steps that could impact our industry. Here’s what you need to know.
The FATF Sets Global Anti-Money Laundering Standards.
The FATF is a multi-governmental organization that sets standards and promotes global implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the financial system. The FATF thus develops anti-money laundering policies to bring about national legislative and regulatory reforms in its member countries.
The organization maintains a series of Recommendations that are recognized as the global anti-money laundering and counter-terrorist financing standards.
The FATF monitors the progress of its members in implementing necessary measures and publicly identifies countries that fail to meet its standards. This can have significant implications for financial institutions operating in or with those countries.
The FATF’s AML Standards Were Expanded to include Virtual Assets and Virtual Asset Service Providers.
Last fall, the FATF’s Recommendations were amended to include a set of definitions for what it calls “virtual assets” and “virtual asset service providers” (VASPs). In February, the FATF adopted an “Interpretive Note” to explain the application of the Recommendations to virtual assets and VASPs. In the process, it asked for public comment on how to apply existing Recommendations regarding wire transfers to VASPs.
In setting these definitions of virtual assets and virtual service providers, the FATF expanded the universe of things subject to money laundering and terrorist financing beyond typical payments and money transfers to include:
a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations. (emphasis added).
Virtual Asset Service Providers include:
any natural or legal person who is not covered elsewhere under the Recommendations, and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:
exchange between virtual assets and fiat currencies;
exchange between one or more forms of virtual assets;
transfer of virtual assets;*
safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
* In this context of virtual assets, transfer means to conduct a transaction on behalf of another natural or legal person that moves a virtual asset from one virtual asset address or account to another.
The Chamber’s Response.
Earlier this month, the Chamber submitted a letter to the FATF expressing concerns in relation to the FATF’s proposed paragraph 7(b) of its Interpretive Note to Recommendation 15 which advocates two key principles:
1. The Definition of Virtual Asset Is Broad, Going Beyond Typical Payments or Medium of Exchange, and Must Be Limited to Payments or Medium of Exchange When Applying AML Standards to Virtual Asset Service Providers.
The FATF AML Standards are designed for financial institutions to develop an added protective layer between ordinary commerce and financial systems. As the FATF noted in its 2015 Guidance for a Risk-Based Approach to Virtual Currencies, it focuses on the “gateways” to the regulated financial system, such as convertible virtual currency exchangers. The broad definitions of virtual asset and virtual asset service provider in this context makes it unclear who is captured within the requirements.
It is more common to see descriptions of regulated financial activity involving a virtual asset limited to its function as a medium of exchange (such as in the FATF’s 2015 Guidance for a Risk-Based Approach to Virtual Currencies and FinCEN’s 2013 Guidance – Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies), and more particularly in the wire transfer context. The FATF’s own definition of a wire transfer requires that the transaction be carried out through a financial institution.
Note that the FATF’s 2015 Guidance focused on Virtual Currency Payments Products and Services (VCPPS). In just 3 years, the FATF has changed its terminology, as well as the scope, indicating that this is a quickly evolving area requiring close study to avoid another such shift.
2. It Is Inappropriate to include the Broad Scope of Virtual Assets within a Wire Transfer Framework.
Considering virtual assets within a wire transfer context misunderstands the way in which virtual currency transfers work. Transfers of virtual currency may not always involve regulated financial institutions at both ends, which is contrary to the very definition of wire transfers used by the FATF.
This interpretation would also cut off independent users from accessing regulated exchanges unless they, too, established their account at a VASP. The requirement to obtain incoming originator information or outgoing beneficiary information would effectively block out any potential participant that does not hold its account at a VASP. This could have a devastating effect on encouraging growth among this community within a regulated environment, potentially pushing it out.
Building a Coalition to Ensure Effective AML Compliance.
The proposed paragraph 7(b) of its Interpretive Note to Recommendation 15 will be finalized in June 2019.
The Chamber supports effective regulatory action to mitigate the risks presented by emerging technologies, including virtual currencies, but believes that more work needs to be done before a final interpretation and definitions can be issued to effect meaningful compliance.
As part of our efforts to promote sound anti-money laundering and counter terrorist financing (CTF) compliance regimes, the Chamber’s Chief Policy Officer, Amy Davine Kim, along with several Chamber members, will be attending the FATF’s public consultative meetings May 6-7, 2019 in Vienna, Austria.
While each business has its own specific perspectives on the details of these issues, the industry is unified in these broad principles. We are coordinating a group of industry members to help present these important factors to the FATF. Let us know if you’ll be in Vienna.
New SEC Framework Signals the SEC is Open to Recognizing that Tokens Are Not Securities, But Does Little to Advance Clarity
New SEC Framework Signals the SEC is Open to Recognizing that Tokens Are Not Securities, But Does Little to Advance Clarity
What happened
On Wednesday, April 3, the SEC released staff guidance entitled, “Framework for ‘Investment Contract’ Analysis of Digital Assets,” to discuss its application of the Howey Test to digital assets. Specifically, the guidance describes the various considerations for determining when a digital asset may constitute an “investment contract” under federal securities laws based on the actions of promoters, sponsors, or other third parties. The SEC also issued a No-Action Letter regarding TurnKey Jet, Inc.’s (“TurnKey Jet” or “TKJ”) plans to develop a program to use digital tokens to facilitate transactions.
The SEC staff stated that it will not recommend an enforcement action against the interstate air charter services company’s program as described because:
funds from digital token sales will not be used to develop its blockchain platform, network, or app;
tokens will be immediately useable upon purchase;
the tokens will only be tradeable in the TKJ wallet and not wallets external to the platform;
the price of tokens will be maintained at $1 USD and can only be resold to TurnKey Jet at a discount to their face value; and
the marketing promotion focuses on the functionality of the token over its potential increase in market value.
Why it’s important
Both of these developments are pivotal efforts that will help define how various types of tokens will be treated by U.S. regulators. Said another way, depending on how they are defined, the SEC could assert sweeping jurisdiction (read: enforcement) over the token industry. If within the SEC’s scope, tokens and token sponsors must comply with SEC registration and reporting requirements or qualify for an exemption.
Our take on this development
As explained below, our overall view of these developments is that they represent a cautious, albeit imperfect, first step. Importantly, a few kernels of evolution should be noted:
First, the fact that the SEC (staff) has issued a document acknowledging in more detail that tokens may not be securities and provides in depth criteria for determining when that may be the case, comes a long way from Chair Clayton’s statements made in February 2018 during a U.S. Senate hearing that every ICO he’s seen is a security, as well as conversations we have had with the SEC last year.
Moreover, the Framework acknowledges in writing (rather than verbally in a speech) that tokens may be a security at one point in time, and then no longer maintain those characteristics of a security as the platform evolves, a policy position that William Hinman, Director of the SEC’s Division of Corporation Finance, notably enunciated regarding ether in remarks at an industry conference on June 14, 2018.
Finally, the Framework also recognizes that virtual currencies may be viewed differently, albeit as a factor in the overall equation. That said, bitcoin and ether should be considered outside the scope of the securities laws given the SEC’s requirements that a currency be immediately used to make payments in a wide variety of contexts or act as a substitute for real currency, may be used to pay for goods or services without first having to convert it, and operate as a store of value that can be saved, retrieved, and exchanged for something of value at a later time.
Unfortunately, the good news stops there. By developing a list of over 60 criteria for analysis, the SEC staff has ensured that every token platform will trigger at least one of those criteria, if not more, thus expanding any analysis significantly.
In addition, with little explanation of which factors carry more weight and which carry less, or how those are measured, participants in token systems (and legal counsel for those participants) have an even more challenging task of determining when the relevant token reasonably may be considered a security. Thus, while the insight into the various factors that may cause a token to be viewed as a security is interesting, the sheer number of those factors without meaningful guidance as to how those will be weighted and assessed, potentially creates more ambiguity, rather than less.
Another area of concern relates to secondary market considerations. The Framework states that if “a digital asset is transferable or traded on or through a secondary market or platform, or is expected to be in the future,” then it is more likely that there is a “reasonable expectation of profit.” This analysis is concerning. Policy makers must recognize that as the token economy evolves and all manner of assets can be tokenized, the ability to trade those assets will also increase in ways we have not previously seen. A decentralized system requires a token that is able to be traded freely on secondary markets. Treating tokens as securities would scuttle this ability. Thus, the Framework seems rooted in traditional notions of securities platform trading without acknowledging this evolving reality.
After that assessment, it’s surprising to find that the TurnKey Jet No-Action Letter detracts even further from meaningful guidance. One can convincingly argue that the TurnKey token would not be considered a security under any circumstances. That said, the conditions cited for coming to the conclusion that the SEC staff will not recommend an enforcement action regarding TurnKey are not just restrictive, but go even further than the criteria in the Framework would indicate. The requirements that tokens may be “traded” only on the platform, and if redeemed, must do so at a discount, are overly constricting.
Finally, because the Framework represents the views of SEC’s FinHub staff, it is not binding on the Commission. Further, by its own terms it restates information drawn from enforcement actions, speeches, the DAO Report, and other previously made statements, thus leaving the industry searching for meaningful clarity.
All in all, we have a lot of work to do as a community to continue to demonstrate the fundamental differences among the various types and functions of tokens. Many businesses and consumers are still wary of conducting business or transactions using blockchain because of the lack of a predictable legal environment governing activities involving the technology. In the current blockchain ecosystem, the development of digital tokens that can represent numerous things, from a currency, to a commodity, a security, title to property, identity, provenance, and many others, has created the need to interpret existing laws that may no longer adequately govern the new features of this technology. As we continue to develop these technologies worldwide, we have seen that government policies have a profound effect on the development of blockchain in that location. Many countries are capitalizing on this opportunity and promoting policies that encourage adoption, while others are not as supportive. It is imperative that governments recognize publicly the benefits of this technology in order to engage businesses (and government) to enable innovation.
The Chamber of Digital Commerce and the U.S. Department of Commerce Commercial Service led a Blockchain Certified Trade Mission to Israel on April 1-3, 2019. The purpose of the mission was to promote greater collaboration and business activity between the US and Israel blockchain communities. Israel has the highest concentration of tech companies outside of Silicon Valley and its tech industry accounts for 15.7 percent of its GDP. The trip included Chamber members that have an interest in the Israeli tech community. We met with and heard from the key regulators about their activity in the blockchain space and connected with the leading Israeli blockchain startups.
Key Takeaways from the Trade Mission:
The Israeli Government Has a Coordinated Blockchain Strategy
The Bank of Israel hosted the Trade Mission for a series of meetings with government offices, including the Israel Security Authority, Capital Markets Authority, Israel Money Laundering and Terror Financing Authority, Innovation Authority, Ministry of Finance, Israel Tax Authority and the National Cyber Directorate. Each provided a succinct overview of their learnings and activities regarding blockchain technology, as well as friction points they are working to address. There are a number of notable activities underway that demonstrate an advanced regulatory perspective from Israel.
The delegation meets with the Governor of the Bank of Israel in Jerusalem.
The most important of these is the Bank of Israel’s inter-ministerial committee, which was formed in January 2018 for regulatory coordination of virtual assets. The committee is comprised of all financial services regulators. Their core activities include: 1. monitoring market developments in Israel and abroad; 2. examining the issues concerning the application of regulation to the various uses of the technology and their implication for economic activity, the financial markets and financial stability; and 3. gathering data and information for the purpose of creating a knowledge base on the issue for regulatory authorities and the public in order to formulate recommendations regarding the desired regulatory policy.
The committee recommended developing a sandbox to help companies bring their products to the financial services industry while addressing risk. It is their view innovation may serve as a protection measure to investors by increasing the quality of the market. The committee also stated that having a coordinated effort allows the regulators the opportunity to more fully assess risks of the technology.
World’s Leading Cybersecurity Provider Sees Promise in Blockchain
Israel is a world leader in cybersecurity. In 2018, Israeli startups received nearly 20 percent of all venture capital invested in cybersecurity. The Israeli government has a number of programs to support the private sector development and innovation. And the Israeli military has developed some of the most advanced cybersecurity units in the world.
The Israel Innovation Authority (IIA), a government authority, works to stimulate the Israel industry by providing funding and grants. They estimate that there are 100-150 blockchain companies in Israel and about one-third of them have been vetted by the IIA for funding. About 10-15 blockchain companies have received funding from the IIA thus far.
Delegates and guests dine with Ambassador David Melech Friedman at his residence.
The National Cyber Directorate (NCD) also sees promise in blockchain. Our group received an impressive presentation from the NCD on potential public sector blockchain use cases for the State of Israel. The NCD is interested in using blockchain as the backbone of a national time synchronization network (time-as -a-service), which is on schedule to go into production this year. Other potential blockchain applications they are looking at include a national mobile-ID and digital identity, electronic health records, and smart cities applications.
One of the most encouraging perspectives came from the Israel Security Authority (ISA). In October 2018, the ISA implemented a blockchain application and is using the technology to deliver communications to institutions it regulates. “Implementing blockchain technology in the ISA’s information systems makes it one of the global leading authorities in securing the information provided to the public and its credibility as one of the leaders in Israel’s public sector,” said Natan Hershkovitz, director of the ISA’s Information Systems Department. Representatives from ISA conveyed that they were interested in using the technology to better understand it. The ISA has issued numerous sets of guidance around digital assets and demonstrated a strong understanding of the friction points traditional securities law pose for blockchain technology.
Israel’s Blockchain Community is Thriving
Throughout the week we had the opportunity to meet with many of Israel’s leading blockchain companies. Some of the most prestigious startups and academics are working on privacy-related projects and protocols (Enigma, Starkware, Hebrew University). And many companies catering towards the enterprise sector (Multichain, QEDit, supply chain, financial services). In addition, public-private networks are developing to allow people to transact in trustless environments.
For example, Orbs is a public blockchain infrastructure for mainstream businesses, crowned a Gartner ‘Cool Vendor’ in blockchain for 2018. Built to unlock the potential of blockchain as the next evolution of open-source, Orbs provides a platform where companies can give users and partners strong guarantees of auditability, governance and forkability that will make them more competitive and attractive to their ecosystem. To accommodate business needs, Orbs is pioneering a hybrid consensus architecture, keeping businesses in control of costs, governance and guaranteed performance, while still capturing the disruption of a truly decentralized Proof-of-Stake ecosystem with a permissionless validator pool.
The Certified Trade Mission delegation, guests, and members of the Department of Commerce with Ambassador David Melech Friedman after a dinner at the Ambassador’s residence
One of the highlights of our trip was a site visit to Bancor, a decentralized liquidity network for tokens. Bringing the philosophy of Bernard Lietaer to life, Bancor’s vision is to support the development of “community currencies” or monetary systems that are developed for local communities that share a common set of values and interests. Since October 2017, Bancor Network has processed over $1.5 billion in coversions between over 9700 unique token pairs, due to its hub and spoke network architecture, utilizing the Bancor Protocol.
We also learned that Israel’s blockchain community is filled with former military coders. Many start-ups have former government agency heads of security as their CSOs. Since many citizens are required to serve (women two years, men three years and eight months), the military is part of an Israeli’s DNA and culture.
Many developed nations have taken proactive steps to create an inviting environment for businesses to innovate with blockchain technology within their jurisdictions. Will the Israeli tech scene flourish with blockchain at the helm? Israel has a unique set of resources that sets them apart from high skilled technology talent, to cutting edge cybersecurity capabilities, and robust government programs to support innovation. Israel is well positioned to be a leader in the development of blockchain technology and we are pleased to support global collaboration with the Israeli blockchain community.
To learn more about the Chamber of Digital Commerce’s Blockchain Certified Trade Missions and participate in future delegations, please contact our member services team.
The Certified Trade Mission delegation, guests, and members of the Department of Commerce with Ambassador David Melech Friedman after a dinner at the Ambassador’s residence.
The delegation meets with the Governor of the Bank of Israel in Jerusalem.
Delegates and guests dine with Ambassador David Melech Friedman at his residence.
We would like to thank the U.S. Department of Commerce Commercial Service for their support in leading the trade mission. We would also like to thank Ambassador David Friedman for hosting our delegation in Israel. Thank you Galia Benartzi, Emmanuel Benhamou, Shauli Renjwan, Yotam Avichay and all our Israeli friends who provided recommendations and introductions in making this a successful trip.
Member Experiences:
Caroline Abenante, Founder, President and Vice Chairperson, NYIAX – “The Trade Mission was extremely valuable to NYIAX and all technology companies who use or are seeking to implement blockchain. We discovered new potential partners and technology providers who can enhance our offering. Additionally, the ability to spend quality time with corporations large and small who use crypto and blockchain allowed us to have a better perspective of our offering. The trade mission was extremely valuable in understanding where we and others fit. I am personally very happy with its content, preparation and outcome.”
Jeff Brown, Chief Technology Analyst, Bonner & Partners – “The Chamber’s Trade Mission to Israel was a fantastic way to engage one of the most important technology markets in the world. It’s rare to get such well-balanced exposure to policy makers, diplomats, established projects, early-stage ventures, and prominent business leaders all within the span of one trip. The levels of engagement were high, we received great support from the U.S. Department of Commerce, and we left with new insights and an invaluable network in the Israeli blockchain community.”
Rune Christensen, Founder, MakerDAO – “It was inspiring to visit Israel and to experience first hand the pervasive startup culture, risk tolerance, and forward momentum of its blockchain community. We met and engaged with several potential partners during the trip and are leaving feeling very optimistic about the future of the industry.”
Eric Sibbitt, Partner, O’Melveny – “The trade mission was helpful in understanding the breadth and depth of the blockchain ecosystem in Israel. I was particularly impressed by the caliber of human talent and entrepreneurial spirit in Israel, which has helped empower Israel to have a disproportionate impact on global blockchain activity.”
Colleen Sullivan, CEO & Co-Founder, CMT Digital – “CMT Digital has participated in the Chamber’s and U.S. Department of Commerce’s trade missions to the UAE, Singapore and Israel. With each of these trade missions, we have been very impressed with the quality and substance of the meetings. These trips have been meaningful for CMT Digital from both a trading and venture investment standpoint. The crypto and blockchain space is truly global and through these trade missions, we have been able to expand our footprint and become aware of opportunities in regions that we may not have otherwise explored.”
