Blockchain Week in Review - August 2020 #3

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Weekly Focus

  • Federal Reserve Publishes Observations From “FooWire” Project
  • Federal Reserve Governor Lael Brainard Announces Collaboration With MIT
  • SEC Appoints New Director of Enforcement
  • Companies Accepted to Hawaii Regulatory Sandbox Begin Providing Services
  • Prosecutors Unseal Charges Against Crypto Mining Ponzi Scheme
  • Monetary Authority of Singapore and Industry Groups Roll Out “Code of Practice” for Payment Service Provider Licensing
  • China Expanding its Digital Currency Testing Program

US Developments

Federal Reserve Publishes Observations From “FooWire” Project

The Federal Reserve published the results from its experimental project, “FooWire.”[1]  The project was an effort to build a simple payment system using distributed ledger technology (DLT), similar to the technical research carried out by other central banks in other countries. The project began in 2019 as an experiment to determine the potential of distributed ledger technology for payments. However, the report cautioned that “[i]t was in no way a proposed replacement for, or meant as a viable candidate for, any existing or planned Federal Reserve payment system.”

The research team built the FooWire system on Hyperledger Fabric but noted that it could have used “any number of equally capable platforms.” It was important that the platform enable a permissioned network, as this set up “mirrors what is in use today for most payment systems.” The team went on to say that permissioned networks offer greater network security than permissionless networks. The payment system itself included three hypothetical organizations: a central bank, a government agency, and a commercial bank. Via the network, member organization entities were able to transfer funds and deploy smart contracts.

The team came to several conclusions upon the end of the experiment. First, distributed ledger technology is a viable technology for certain payment uses. Second, the technology can be implemented relatively quickly. Third, writing smart contracts was relatively easy when using Hyperledger Fabric. Finally, the team noted that Hyperledger Fabric has many capabilities, some of which have associated trade-offs, an example being the heightened computing power required for increased privacy.

The full report on FooWire can be found here.

Federal Reserve Governor Lael Brainard Announces Collaboration With MIT

During “Office Hours” for the Federal Reserve Bank of San Francisco’s Innovation Office, Federal Reserve Governor Lael Brainard announced a collaboration between the Federal Reserve and the Massachusetts Institute of Technology for a “multiyear effort to build and test a hypothetical digital currency oriented to central bank uses.” The objectives for the project are to further understand the “safety and efficiency” of virtual currencies, how they impact private-sector relationships, and to give the Federal Reserve more experience in developing and maintaining a payment system.

The announcement is notable as it comes on the same day that the Federal Reserve published its report on “FooWire.” Like FooWire, Governor Brainard said that the development team would publish a full report on the experimental digital currency. Additionally, “any codebase that is developed through this effort will be offered as open-source software for anyone to use for experimentation.”

Although the announcement demonstrates a commitment to exploring the applications of digital currency, Governor Brainard tempered expectations. Any use of a central bank backed digital currency would involve a “significant policy process,” and the governor noted that there were additional legal considerations that would have to be addressed. With that being said, this experiment and accompanying report and codebase would help jump start this process by providing important background on the viability of a central bank backed digital currency.

The speech announcing the Fed’s collaboration with MIT can be found here. Additional analysis from the FinTech Week in Review may be found here.

SEC Appoints New Director of Enforcement

The Securities and Exchange Commission (SEC) announced the appointment of Marc P. Berger as deputy director of the Division of Enforcement. Mr. Berger recently served as director of the SEC’s New York Regional Office. The announcement is notable for who he replaces, Steven Peiken.

Mr. Peiken left the agency as of August 14, and he had helped to develop the SEC’s enforcement response to cryptocurrency related activities. Specifically, Mr. Peiken created the SEC’s Cyber Unit. The Unit was intended to “spearhead the divisions efforts to combat cyber-related threats and intrusions and to address violations involving digital assets and distributed ledger technology.” It is also responsible for bringing actions related to “Initial Coin Offerings” (ICOs”).

A copy of the press release for Mr. Berger’s appointment is available here. The previous press release announcing the departure of Mr. Peiken is available here.

Companies Accepted to Hawaii Regulatory Sandbox Begin Providing Services

The Hawaii Department of Commerce and Consumer Affairs, Division of Financial Institutions (DFI) and the Hawaii Technology Development Corporation (HTDC) announced that the Hawaii Digital Currency Lab is now operational. The Lab is a regulatory sandbox, where participant companies may operate without providing money transmitter services and? without the applicable license. DFI issued “no action” letters to allow participant companies to engage in these activities while also submitting to reporting and consumer protection requirements. Nineteen companies submitted applications and twelve were accepted into the program.

The Sandbox will run over the course of two years. At the end of this two-year period, participants must either apply for a license or end their activity within the State of Hawaii. DFI hopes to use the program to help further its understanding of these companies, their activities, and their impact on Hawaii’s economy. Data that DFI collects may assist in “developing local legislation around digital currency.” This marks a change for Hawaii, a state that has seen the departure of cryptocurrency related businesses due to onerous reserve requirements. Specifically, cryptocurrency related businesses must hold in reserves an amount of U.S. dollars equal to the value of the cryptocurrency that a company holds on behalf of its clients. This has proven untenable for cryptocurrency businesses, such as Coinbase.

The press release announcing the beginning of the program is available here, and further details on the program may be found here.

A more in depth discussion on regulatory sandboxes is available here.

Prosecutors Unseal Charges Against Crypto Mining Ponzi Scheme

U.S. attorneys for the Southern District of New York unsealed charges against an alleged cryptocurrency Ponzi scheme. The individuals involved in the scheme participated in a “multi-level marketing” enterprise based on cryptocurrency mining and trading. The release states that the scheme was “an internationally coordinated fraud and money laundering ring involved in defrauding individuals through investments in AirBit Club.”

The New York Field Office of Homeland Security Investigations El Dorado Task Force carried out the investigation, and the case has been assigned to U.S. District Judge George B. Daniels of the United States District Court for the Southern District of New York.

The press release from the U.S. Attorney’s Office for the Southern District of New York is available here.

International Developments

Monetary Authority of Singapore and Industry Groups Roll Out “Code of Practice” for Payment Service Provider Licensing

The ACCESS Singapore Cryptocurrency and Blockchain Industry Association released a “Code of Practice” to “facilitate application of payment service provider licenses under Singapore’s Payment Services Act.” The Code of Practice is a best practices guidebook to help license applicants complete their applications and understand their KYC and AML responsibilities. The Code of Practice is notable for several reasons. First, it provides new firms with clarity on what the Monetary Authority of Singapore expects, given the fact that the agency facilitated development of the Code of Practice in conjunction with ACCESS and the Association of Banks in Singapore. Second, it demonstrates continual buy-in from a regulator that prides itself as a “leading jurisdiction in the blockchain and fintech space.” Finally, the Code of Practice gives new businesses a better idea of the practices deployed by banks.

ACCESS’s press release announcing the Code of Practice is available here.

China Expanding its Digital Currency Testing Program

China’s Minister for Commerce announced that the People’s Bank of China (PBOC) will be expanding its digital yuan pilot program. The August 14 announcement states that the pilot program for digital currencies and payments based on the yuan would be expanding to several new cities and regions, including Beijing, Macau, and part of Hong Kong. Prior to the announcement, the program was present in four cities. PBOC’s series of pilot programs would be completed by the end of 2020.

Further discussion in our July 17, 2020 Week in Review is available here. A story by the Block discussing this development is available here.

[1] The name “FooWire” was chosen as “[p]rogrammers commonly use ‘foo’ as a placeholder term to demonstrate how something works.”

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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