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DC Landscape as of January 28
Looking ahead, 2025 will be a pivotal year for blockchain, digital asset, and cryptocurrency-related legislative and regulatory policy across the Federal government. With Republicans now controlling both chambers of Congress and President Trump in the White House for a second term, this ‘trifecta’ will be integral in shifting the approach the United States takes towards policies impacting blockchain, cryptocurrencies, and other emerging financial technologies. Last year, the Financial Innovation and Technology of the 21st Century Act (FIT-21) was the first ever joint House Financial Services and Agriculture bill designed to bring some structure to the cryptocurrency market. It garnered bipartisan support in the House, with 71 Democrats voting for the bill, showcasing broader Democratic support for these issues. Stablecoin legislation also drew bipartisan and bicameral interest, which will continue to be a priority this Congress. Coupled by an unparalleled number of pro-digital asset candidates winning election or reelection to Congress, lawmakers will show–and already have shown a commitment to prioritizing these issues this year moving forward. Key Figures in Congress In Congress, the House Financial Services Committee and the Senate Banking Committee, as well as the House and Senate Agriculture Committees, are at the forefront of crafting policy surrounding digital asset regulation. Newly appointed House Financial Services Committee Chairman French Hill (R-AR) is known for his supportive stance on cryptocurrency and blockchain technology. Rep. Hill played a key role in the drafting, development, and ultimate passage of FIT-21 and will continue to advocate for policies that promote innovation in the digital asset space while ensuring consumer protection and market stability. We also expect him to align digital asset policies with the broader GOP agenda under the Trump Administration. With such tight margins in the House this year, Democratic support for any framework will also be necessary, as with FIT-21. Democratic Members on the Financial Services Committee, including Reps. Josh Gottheimer (D-NJ), Jim Himes (D-CT), and Richie Torres (D-NY), have been forward leaning on these issues and worked with the Majority to add amendments to the bill during mark-up. Ranking Member Waters (D-CA) had worked closely with former Chairman McHenry (R-NC) on stablecoin legislation in the last Congress including a last-minute push at the end of last year. That work will continue this year with Rep. Waters staying stablecoin legislation remains a top priority for her. With Republicans now controlling the majority in the U.S. Senate, Senate Banking Committee Chairman Tim Scott (R-SC) has already indicated he plans to move forward on digital asset issues and has created a new subcommittee on digital assets which will be chaired by Sen. Cynthia Lummis (R-WY), a longtime cryptocurrency and digital asset supporter. Senator Sen. Elizabeth Warren (D-MA) is the new Ranking Member of the Senate Banking Committee and has been vocal about her concerns with the industry over consumer protection issues and illicit finance and the need to regulate. However, in the 119th Congress the Committee will also include several newly appointed Democrats whose approach to policies in the crypto space are expected to differ from their Ranking Member. Senator Warren has named Senator Ruben Gallego (D-AZ) to be the Ranking Member of the Digital Assets Committee, showcasing an interest in having new Members take a leadership role on an important set of issues for the Committee. The House and Senate Agriculture Committee will also continue to be active on these issues as they were in the 118th Congress. The House Agriculture Committee, led by Chairman G.T. Thompson (R-PA), returned to his position and took a leadership role in working closely with the House Financial Services Committee on FIT-21, the first ever joint HFSC and Agriculture bill. The Committee has a new Ranking Member, Rep. Angie Craig (D-MN), who won a contested race amongst House Democrats to take over this role. In the Senate, Sen. Boozman takes over as the Chairman of the Agriculture Committee and with the retirement of former Sen. Stabenow (D-MI), Sen. Amy Klobuchar (D-MN) takes over as Ranking Member. Both have stated publicly they plan to fully engage on these issues and to work closely with the House Agriculture Committee. The Trump Administration: New AI/Crypto Czar and an Executive Order on Digital Assets In the White House, President Trump is taking a significantly different approach to digital assets compared to his first Administration. He has established a new position within the White House, appointing former PayPal executive David Sacks as the “AI and Crypto Czar.” This role is designed to spearhead the administration's efforts in the rapidly evolving fields of artificial intelligence and cryptocurrency. Sacks, a prominent venture capitalist and co-founder of an AI company, is expected to bring a pro-industry stance to the position, which aligns with the administration’s broader goals of fostering innovation and reducing regulatory barriers. On January 23, 2025, President Trump issued an Executive Order (EO) focusing on digital assets, stablecoins and CBDCs, entitled “Strengthening American Leadership in Digital Financial Technology.” The EO outlines the Administration’s policies on digital assets, financial technologies, and blockchain, such as ensuring open access to public blockchain networks, fair access to banking services, and prohibits any establishment of a CBDC. Notably, the EO establishes a working group within the National Economic Council to be chaired by Sacks to propose a federal regulatory framework for digital assets focusing on market structure, oversight, consumer protection, and risk management. The appointment of Sacks coincides with other significant changes in the regulatory landscape, such as the anticipated confirmation of Paul Atkins to be Chairman of the SEC. Atkins’ predecessor, Gary Gensler, took a very aggressive ‘regulation by enforcement’ approach to emerging digital assets. This alignment suggests a concerted effort by the administration to overhaul existing policies and focus on clearer guidance to industry on how the SEC views securities in the digital assets and cryptocurrency industry. Soon after being named Acting Chair, Commissioner Mark Uyeda announced the creation of a crypto task force dedicated to developing a comprehensive and clear regulatory framework for crypto assets. Under Uyeda, the SEC has already rescinded Staff Accounting Bulletin 121, which created onerous reporting requirements on banks and crypto companies. Legislative Focus on Blockchain and Fintech The House Financial Services Committee, under Chairman Hill’s leadership, is expected to work on policies that integrate digital assets into the broader financial system, while also potentially addressing regulatory clarity and consumer protection. Both the House Financial Services Committee and the House Agriculture Committee have indicated that they will focus on updating FIT-21, working with industry and the new Trump Administration, all of which will be a primary focus in the first six months of the year. Meanwhile, the Senate Banking Committee, led by Sen. Scott, aims to champion legislative changes that support the crypto industry's growth, addressing concerns about innovation being stifled by existing regulations. Stablecoin legislation, which had bipartisan support in the House is likely to be moved more quickly early in 2025, while efforts will continue on updating FIT-21. The collaboration between Congress and Administration officials will be crucial in shaping a comprehensive approach to fintech and digital assets. While the legislative efforts will likely focus on creating a balanced regulatory environment that fosters innovation and includes consumer protection issues while ensuring the stability and security of the financial system; the Administration is likely to focus on issues such as the SEC and the CFTC working in lockstep with Congress to pass a legislative and regulatory framework for digital assets that includes consumer protections and clearer “rules of the road.” This alignment and a broader focus by more Members in a bipartisan and bicameral fashion appear to showcase an optimistic 2025 for consumers and the industry. Authors: Norma Krayem (VP & Chair, Cybersecurity, Privacy and Digital Innovation, Van Scoyoc Associates) Scott Mason (Senior Policy Advisor at Holland & Knight LLP)
and Scott Mason
A Primer: Understanding Tokenized Real-World Assets
A Primer: Understanding Tokenized Real-World Assets by: Lilya Tessler (Partner), Andrew Sioson (Partner), and Erika Cabo (Senior Managing Associate) at Sidley Austin, LLP Tokenization of real-world assets (RWAs) is revolutionizing the way we perceive and manage assets. This article aims to provide an overview of RWAs, debunk common myths, and outline the legal considerations and risks associated with tokenized RWAs. What Are Tokenized RWAs? The term “tokenized RWAs” refers to the digital representation of physical or intangible assets utilizing a token recorded on a blockchain. This innovative approach allows for the efficient recording, trading, transferring, and management of tangible assets in a digital format. A wide range of RWAs can be tokenized, including real estate, commodities, art, and intellectual property. By recording ownership of these assets using digital tokens, they can be more easily tracked and traded on blockchain platforms. This is similar to the e-commerce trend in the 1990s, when online shopping sites were developed to allow consumers to buy physical goods by seeing digital images on the internet, instead of physically going to a brick-and-mortar store in a shopping mall to see, feel, and buy the items. The primary benefits of tokenizing real-world assets include increased liquidity, fractional ownership, and enhanced transparency. Tokenization allows for the division of assets into smaller, more affordable units, making it easier for a broader range of purchasers to participate. Additionally, the use of blockchain technology ensures a transparent and immutable record of ownership and transactions. Debunking Myths: Tokenized Assets vs. TGEs and STOs Tokenization is not a new concept. Digital records have existed for years from digital shopping sites, digital concert tickets, and digital securities. Tokenization of RWAs is simply recording these digital records on a blockchain as opposed to other centralized databases. Tokenizing an asset does not change the nature of the asset and it is not to be confused with token generation events (TGEs) or security token offerings (STOs). Below are some of the common myths regarding asset tokenization that need to be clarified. Myth 1: Tokenizing an Asset Changes the Nature of the Asset Tokenizing an asset does not change the nature of the asset itself. Tokenization is the process of creating a digital representation of a physical or intangible asset using a token recorded on a blockchain. This digital token serves as a record of ownership and can be traded or transferred on blockchain networks. However, the underlying asset remains the same, whether it is real estate, art, commodities, or intellectual property. The token merely provides a more efficient and transparent way to manage and transfer ownership of the asset, without altering its fundamental characteristics or value. Myth 2: Tokenized Assets Are TGEs TGEs are a mechanism used by new blockchain protocols to distribute tokens to potential users of the network. These tokens, such as ETH (Ethereum) and AVAX (Avalanche), are designed to provide functionality within the blockchain ecosystem, enabling users to interact with the network, pay for services, or validate transactions, among other uses. TGEs are not a form of fundraising, but they are also not tokenized RWAs, because the token associated with the TGE represents utility on the network and not a digital representation of an actual asset. In contrast, tokenized RWAs are digital representations of actual, tangible, or intangible assets. The value of these tokenized RWAs is directly linked to ownership of the underlying assets, which can be verified and audited. Myth 3: Tokenized Assets Are Just Another Form of STOs STOs involve the issuance of tokens that are classified as securities and are subject to regulatory oversight. These tokens are backed by assets that generate income or have equity-like features, such as dividends, voting rights, or profit sharing. Although tokenized RWAs can be tokenized equity or fund interest, they are not limited to securities and have many more benefits when representing a wide range of other physical or intangible assets. The primary focus of tokenized RWAs is on the digital representation and fractional ownership of these assets, rather than raising capital through the issuance of securities. Legal Considerations Regulatory Compliance: Navigating the regulatory landscape is crucial for tokenized RWAs. Compliance with U.S. securities and commodities laws, anti-money laundering regulations, commercial laws, and know-your-customer requirements is essential to ensure the legality and legitimacy of tokenized assets. Ownership and Transfer of Title: The digital representation of an asset must accurately reflect the legal ownership of the holder and their enforceable right to the underlying asset. Ensuring clear and enforceable ownership rights is critical to the success of tokenized RWAs. Smart Contracts: Smart contracts are self-executing agreements encoded on the blockchain and triggered by predefined conditions. While they play a vital role in automating and streamlining the tokenization process, one must consider whether smart contracts are enforceable, comply with existing contract laws and regulations, and adequately address potential disputes and contingencies. Jurisdictional Issues: Tokenized assets can be created and traded globally, raising questions about cross-border jurisdiction and applicable laws. Being aware of the roles of regulatory bodies such as the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, European Securities and Markets Authority, Monetary Authority of Singapore, Hong Kong Monetary Authority, and others globally is of paramount importance in navigating different legal frameworks and standards for tokenization. Risk Considerations and Management Security Risks: Blockchain technology is not immune to cybersecurity risks, such as hacking, phishing, or malware attacks. Tokenized assets may be vulnerable to theft, loss, or manipulation if the private keys, wallets, or platforms that store and access them are compromised. Ensuring the security and integrity of the blockchain and the tokenized assets is paramount to protecting investors and maintaining trust in the system. Market Risks: Tokenized assets are subject to market volatility and liquidity risks, depending on the supply and demand of the tokens and the assets, as well as the performance and stability of the blockchain platforms. Considering risk mitigation strategies is essential in order to protect investments and navigate the complexities of the tokenized asset market. Conclusion Tokenized RWAs represent a significant advancement in the management and trading of physical and intangible assets. They can unlock new value, efficiency, and innovation for both asset owners and investors. However, they also pose significant legal challenges and risks that need to be addressed and managed. Seeking guidance from law firms on regulatory compliance, ownership issues, and risk management, while engaging with experienced vendors and blockchain platforms, can provide the necessary technical knowledge and support to ensure the smooth operation of tokenized RWAs. As the landscape continues to evolve, staying informed and proactive will be key to leveraging the full potential of tokenized RWAs.
and Erika Cabo
and Andrew Sioson
‘Crafting The Crypto Economy’ Series Returns With Academic and Legal Thought Leaders
Audio show ushers in a new and necessary storytelling format for navigating the world of Web3, exploring themes of privacy, regulatory compliance, niche markets makers, and decentralized exchange ecosystems in blockchain. Web3 policy-focused podcast, Owl Explains, returns for a second season of ‘Crafting The Crypto Economy’ with leading academics to tackle timely regulatory challenges and the practical blockchain applications reshaping Web3. Focusing on critical topics from Decentralized Exchanges (DEXes) regulation, blockchain privacy, and MEV mitigation, ‘Crafting The Crypto Economy’ introduces academic thoughtleaders and papers from around the world with the latest research on blockchain technology and the crypto economy. With five substantive episodes, Season 2 drops in with well-timed topics to equip policymakers and stakeholders with valuable insights on Web3 regulation and emerging challenges. The hosts of this series, Professors Andreas Park (University of Toronto) and Fahad Saleh (University of Florida) are leading authors in Blockchain Economics and Finance and are part of the Crypto and Blockchain Economics Research (CBER) Forum. The group producing the podcast, Owl Explains, is a trusted blockchain policy resource driven by the expertise of Ava Labs’ Legal team. This partnership between Owl Explains and the CBER Forum seeks to bridge the gap between academic rigor and actionable insights for policymakers. As the SEC increasingly scrutinizes decentralized finance (DeFi) platforms, Episode 1, ‘Regulation of Decentralized Exchanges,’ with Professors Campbell Harvey of Duke University and Joel Hasbrouck of NYU Stern, dives into the novel risks for traders who trade at DEXes and why standard regulatory approaches are not well-suited for addressing those risks. In Episode 2, ‘Blockchain Privacy and Regulatory Compliance,’ Professor Fabian Schär from the University of Basel discusses how blockchain users may attain privacy in their transactions while also remaining compliant. Despite the perception of anonymity, most blockchain transactions are traceable, leading to a rising demand for privacy solutions. The episode explains how blockchain identities are not anonymous and what methods may be implemented to achieve both privacy and regulatory compliance. Detailing the economic values presented in the concepts of Maximal Extractable Value (MEV) and Loss-Versus-Rebalancing (LVR), Columbia University’s Professor Ciamac Moallemi discusses associated mitigation methods such as expedited block times and auction mechanisms for extraction in ‘Mitigation Methods for MEV and LVR.’ Moving into intent-based markets (i.e., Uniswap X, CoW Swap) as a hot topic, ‘Decentralized Exchange (DEX) Aggregators and Solvers,’ with Professor Mallesh Pai of Rice University, explores the economic implications of these niche markets, potential outcomes for traders, and the impact of their underlying economic structures. The World Economic Forum predicts that 10% of global GDP will be tokenized on the blockchain by 2027. Wrapping up the Season 2, ‘Deep-dive on the Avalanche Blockchain’ features Ava Labs’ Chief Protocol Architect Stephen Buttolph to discuss how Avalanche’s blockchain can be used for the tokenization of real-world assets, specifically through the lens of Avalanche’s consensus protocol. Owl Explains and the CBER Forum are committed to helping regulators navigate the world of Web3 and break through the hype. In an always-on blockchain landscape, ‘Crafting The Crypto Economy’ breaks through the noise, leveraging curated perspectives and mental models from top minds in the space.
Building Bridges in Blockchain Policy – Our Growing US Congress Series
At Owl Explains, we believe the future of blockchain and crypto lies in the conversations happening today between industry leaders and policymakers. That’s why our Congress Series is dedicated to bringing you the sharpest voices in US policy, offering insights on the regulatory and legislative shifts shaping the blockchain landscape. From bipartisan collaboration to bold individual initiatives, our guests tackle the tough questions about self-custody, tokenization, and market structure clarity. These are the policymakers from both at the heart of the debate—ready to share their vision for the role of blockchain in America’s economic future. Meet the Voices of Change: Ep. 17: Congressman Mike Flood Kicking off with Rep. Mike Flood, this episode takes a close look at the difference in perspectives on crypto policy between the House and the Senate and how Congress can build momentum for lasting change. Ep. 32: Congressman French Hill Rep. French Hill shares his take on bipartisan efforts to move blockchain forward, touching on key themes like self-custody and market clarity. Ep. 30: Congressman Wiley Nickel As the political landscape evolves, Rep. Wiley Nickel brings fresh perspective to the table, discussing tokenized markets and their potential to boost US innovation. Ep. 35: Congressman Shri Thanedar (D-MI-13) Rep. Shri Thanedar explores blockchain’s potential to create equity and opportunity, focusing on how technology can drive meaningful policy change. Ep. 36: Congresswoman Yadira Caraveo (D-CO-08) Colorado’s Congresswoman Yadira Caraveo examines the intersection of policy and technology in her state, emphasizing the potential for decentralized systems to support local economies. Ep. 40: Congressman Dusty Johnson (R-SD) Rep. Dusty Johnson offers a refreshing take on blockchain’s role in rural America, highlighting how innovation isn’t just for Silicon Valley. Ep. 42: Congressman Warren Davidson (R-OH-08) Rep. Warren Davidson doesn’t shy away from the big issues—self-custody, tokenization, and why market structure clarity is critical for the U.S. to reclaim its crypto leadership. A Growing Series, A Growing Dialogue As the Congress Series grows, so does the urgency of the topics at hand. Whether it's legislation like the FIT21 Act, the fight to protect self-custody, or debates on token taxonomy, these episodes are more than conversations—they’re a front-row seat to the policies that will define blockchain’s future in America. Cryptocurrency and blockchain technology are rapidly transforming the global economy. As these technologies become more widely adopted, governments are increasingly grappling with how to regulate them. Crypto policy is important because it will shape the future of the crypto industry and its impact on society. The United States is at the forefront of the global crypto policy debate. At Owl Explains, we’re proud to bring together voices from both sides of the aisle to discuss solutions, challenges, and the road ahead. The series is just getting started, and there’s so much more to come. Catch up on the Congress Series today and hear directly from the policymakers shaping the future of crypto, on Spotify, Apple Podcasts, or right here in our owl website.
A Huge Thank You to Our Incredible Sponsors - Avalanche Summit LATAM 2024
As we gear up for the Avalanche Summit LATAM 2024, we want to take a moment to express our deepest gratitude to the sponsors who have made this event possible. Their support empowers us to bring together the brightest minds in the blockchain, crypto, and Web3 space for meaningful discussions, collaborations, and innovation. We are thrilled to partner with these visionary companies and organizations, each playing a vital role in pushing the boundaries of what's possible in the Web3 world. Without further ado, we’d like to introduce our valued sponsors: Platinum Owl Sidley Austin LLP Golden Owls Cleary Gottlieb Steen & Hamilton Davis Polk & Wardwell Sher Tremonte Boreal Owls Fenwick Latham & Watkins Willkie Farr & Gallagher LLP Snowy Owl HJF Law Community Partner Global Blockchain Business Council Our sponsors are more than just logos on our website—they are leading law firms, trade associations, and innovators who share our passion for decentralization, transparency, and the transformative power of blockchain technology. What's on the Agenda? The Best of Buenos Aires! Imagine this: a summit filled with cutting-edge discussions, hands-on workshops, and networking opportunities with some of the brightest minds in blockchain, all set in the dynamic, bustling city of Buenos Aires. From exploring the iconic streets of San Telmo to the modern vibe of Puerto Madero, the Avalanche Summit is going to be an event that brings together innovation and the unique spirit of Argentina, Latin America, and beyond! 🇦🇷✨ And let’s not forget the local flair! From delicious Argentine cuisine (empanadas, anyone? 🥟) to the vibrant street art that colors the city, we’re blending tech with culture in a way only Buenos Aires can. To our sponsors—thank you for believing in this vision and helping us make it happen. Your support is turning this event into a groundbreaking moment for the Web3 community in LATAM. We can’t wait to see what we’ll achieve together! So, let’s give a big round of applause to these amazing partners and look forward to meeting up in Buenos Aires, where the future of blockchain is being written, one tango step at a time! 🎵 Get your tickets for 50% off using our code OWL50.
Custom Blockchains: Shaping a Bespoke Future
The inception of blockchain technology, heralded by Satoshi Nakamoto's whitepaper on Bitcoin, ignited a revolution whose full magnitude is only now coming to light. Yet, the true marvel doesn't lie solely in the foundational concept outlined in 2008; it resides in the ongoing evolution, fueled by brilliant minds since. Today, we stand on a new frontier: customization. Picture a world where launching a tailored blockchain, precisely attuned to your requirements, is not just a possibility but a reality. Custom blockchains represent an evolution from the original Satoshi blueprint; they embody vibrant ecosystems full of innovation. This newfound flexibility empowers users to design blockchains endowed with specific features and functionalities. The result? New applications and diverse use cases. Consider the foray of Sports Illustrated into blockchain technology, where sports fans securely purchase and trade verified tickets to their favorite events, all facilitated by a custom blockchain engineered for authenticity and transparency. This reality, where tickets unlock immersive experiences and collectibles, is not a distant dream but a tangible outcome crafted by forward-thinking enterprises. Similarly, Lemonade's* disruption in the insurance industry depicts the transformative potential of custom blockchains. Through their tailored solution, they've revolutionized weather insurance for small farmers, providing a seamless and transparent shield against unpredictable climate events. This paradigm shift underscores blockchain's role as a tangible force for positive change, far beyond mere rhetoric. The collaboration between Deloitte and FEMA** on disaster recovery reimbursement offers yet another glimpse into the power of custom blockchains. By leveraging blockchain technology, they've streamlined the reimbursement process, ensuring timely and transparent aid to those affected by disasters while simplifying audits. It's a compelling illustration of blockchain's capacity to enhance efficiency and accountability in critical domains. When it comes to loyalty programs and gaming, SK Global’s custom blockchain platform is at the vanguard of innovation. Their solution enables millions of South Korean telecom customers to use loyalty points across thousands of merchants, from real-world items to digital goods, with confidence in the authenticity and scarcity of their digital assets. This convergence of ecosystems and commerce, powered by blockchain technology, illuminates a path towards a more secure and transparent future for consumers and merchants alike. Even traditional financial institutions are embarking on the era of custom blockchains, with giants like Citi and JPM exploring the potential to trade traditional financial assets on custom platforms. This transition promises enhanced efficiency, transparency, and security in the financial landscape, marking a significant stride towards mainstream blockchain adoption. Whether revolutionizing real estate transactions, enhancing supply chain visibility, or reimagining loyalty programs, the space for innovation is extensive. What if we could tailor our digital ecosystems to align with our needs and aspirations? While some headlines may dwell on the volatility of cryptocurrencies, the true narrative lies in the transformative power of blockchain technology. We’re all about more hoot and less hype and recognize the capabilities of custom blockchains as canvases where creativity flourishes and ideas find their specific homes. It's time for Washington, and the world at large, to recognize custom blockchains as catalysts for innovation, efficiency, and inclusion across industries. *Lemonade's use case: *Lemonade's use case: **Deloitte and FEMA: **Deloitte and FEMA:
Proposed US Disclosure Guidelines for a Particular Category of Tokens
In the realm of blockchain, transparency is key, which is why The Proposed U.S. Disclosure Guidelines for a Particular Category of Tokens—revealed at the Sidley-Rutgers Fintech and Blockchain Symposium—signify a crucial step towards standardization in the blockchain industry. All feedback is welcome! Many trade associations are collaborating so you can provide feedback through them. Check out the full guidelines here.
Understanding and Classifying Blockchain Tokens
As seen in The International Journal of Blockchain Law (2024) by the GBBC.
Blockchain Analysis & Investigations
Definition: The process of inspecting, identifying, clustering, modeling and visually representing data on a blockchain. Blockchain analytics can involve the use of software tools and open source information (OSINT) to analyze data on blockchain networks. These tools scrutinize transaction patterns, wallet addresses, and other data points on a blockchain to provide insights into the activities occurring on the network. Blockchain analysis is done for a variety of reasons from market analysis to investigating illicit activity. Blockchain investigations are commonly conducted to uncover illicit activities such as money laundering, fraud, and the use of cryptocurrency in criminal enterprises. Investigations leverage analytics tools to track and identify this activity on-chain. The transparent nature of the blockchain allows for investigators to follow the flow of funds on the public ledger. How it Works: Data Aggregation: collecting, compiling and summarizing information from various sources across blockchain networks Pattern Recognition: identifying and interpreting behaviors and trends within the aggregated data Forensic Analysis: systematically interpreting the aggregated data and recognized patterns to come to investigative conclusions Purposes (not an exhaustive list): AML compliance and regulatory reporting Fraud detection Security analysis Market analysis Enhance security and trust in blockchain networks Aiding law enforcement to catch 'bad actors'
Think Global, Think Market Integrity
Branch 5 of the Tree of Web3 Wisdom suggests that regulators from different jurisdictions embrace certain first principles when thinking about blockchain, tokenization, and cryptoassets. Market integrity is one such core area for regulation. The topic seems especially ripe in light of the many events in the last ten months that led to disarray in both traditional and cryptoasset markets. Gibraltar prophetically implemented its market integrity principle last spring. Perhaps more people should have paid attention. In April 2022, the Gibraltar Financial Services Commission (GFSC) issued the tenth of its regulatory principles for DLT Providers, laying out market integrity requirements. Principle no. 10 obliges a DLT Provider to conduct itself in a manner that "maintains or enhances the integrity of any markets in which it participates." The concept of market integrity is not always easy to pin down so the related GFSC guidance note sets forth the operational, technical, and organizational standards that DLT Providers are expected to meet and provides examples of good practices for implementing and complying with the market integrity regulatory principle. The Guidance Note states: "Market integrity is essential to the fair, orderly and efficient functioning of a given market as well as of the overall marketplace more generally. It encompasses a number of key responsibilities, such as monitoring for manipulative trading and other forms of market abuse, and fostering non-discriminatory market access, transparency in price formation, fair trading practices, high disclosure standards and robust consumer protection." The GFSC guidance highlights four categories of issues as important to market integrity: market manipulation, insider trading, disclosures, and trading standards. In each case, the Guidance Note gives examples and recommendations for best practices associated with them. For example, DLT providers should make disclosures regarding the markets in which they operate, the assets they trade, and other activities they conduct in those markets, to create and maintain an appropriate level of transparency. For trading standards, they should provide accurate and prompt market data to all stakeholders, such as information about bids, offers and last prices, and any other data relevant to achieving fairness and transparency; put measures in place to prevent preferential treatment for any subset of participants when placing or executing orders; and evaluate the execution quality of trades that take place within the markets that it operates and comparing it to industry best practice. For market manipulation and insider trading, DLT Providers should implement policies and procedures to root out and prevent such activities. At the same time, the GFSC acknowledges the need for some flexibility, stating that each DLT Provider’s responsibilities will depend on the nature of its business and its role and participation in a given market and in the virtual asset marketplace overall. It also acknowledges that flexibility is needed to address the different features and functions of virtual assets and the manner in which they trade. This Owl applauds the GFSC’s approach: to create a clear principle with clear guidance on how to implement it without being too prescriptive. This flexibility works because it can accommodate the variety of roles and operational features of market participants relevant to a DLT Provider’s business. This is music to this Owl’s ears and chimes perfectly with our Tree of Wisdom – specifically branch 3 (classify tokens sensibly) and branch 4 (enact context appropriate regulation). The 5th branch of our Tree of Wisdom is "think global." Our hope is that Gibraltar’s approach can serve as a template for authorities in other jurisdictions. Global market integrity must be a first principle for long term growth and maturation of the cryptoassets ecosystem, as well as in more traditional markets. We encourage a constructive interchange between industry and regulators to inform the development and implementation of market integrity rules. Just like Gibraltar did.
Decentralization: A Matter of Computer Science, Not Evasion
Decentralization is an important concept in computer science that has gained significant attention in recent years. It is defined as a system or network with no single point of failure or "central orchestrator" that is required for proper operation. Decentralized systems require independent peers to collaborate to achieve some greater goal with aligned incentives. Most decentralized systems have no single entity or authority with the power or obligation to change or update data or transactions. For a blockchain network, the key point is that a distributed network of computers not centrally controlled must reach consensus about changes to “state + future transitions of state” (adding new blocks of transactions). One of the primary virtues of decentralization lies in its ability to enhance fault tolerance and system resilience. In centralized systems, a single source of truth or point of failure can lead to negative consequences, such as when a hack or ‘fat finger error” occurs. Decentralized systems, on the other hand, distribute functions across multiple nodes, making them more capable of withstanding failures or attacks and not prone to errors. In the case of blockchains, they are robust because work is duplicated by everyone (taking away one or a group of nodes does not impact its continued functioning). Furthermore, decentralization is a powerful tool against censorship and tyrannical control. In centralized systems, a single entity can wield disproportionate power to control or manipulate data or information flows. Decentralized systems distribute power among participants, making it much harder for any single entity to exert undue influence, control data, or censor (or alter) information. When it comes to fault tolerance, centralized systems often rely on trusted third parties, which can be vulnerable to errors, security breaches or malicious activities. In decentralized systems, as illustrated in blockchain, we trust incentives to keep validators honest and the correctness of the software. The computer code is implemented and managed by a distributed network that reaches consensus. By eliminating the need for intermediaries, they reduce the potential for bad behavior and foster a more secure environment. As such, these distributed systems have the potential to scale more effectively than their centralized counterparts. Decentralization also fosters a fertile ground for innovation and competition. It lowers barriers to entry, allowing a wider range of participants to contribute to the network and its associated ecosystem. This healthy competition can lead to the development of more diverse and specialized solutions, driving overall progress for the network and the applications built on it. Contrary to some misconceptions, decentralization is not about evading laws or regulations. It is a network design element that seeks to ensure better information, greater user control and autonomy, and more access for builders. Dr. Emin Gün Sirer, founder of Ava Labs, put it this way in his testimony before the House Financial Services Committee: Let me be clear: this ability to leverage distributed or decentralized networks is a desirable goal for many reasons that have nothing to do with securities laws, financial services regulation, or the laws and rules governing other areas of commerce, recreation, and communications. Distributed networks are more resilient, secure, auditable, and available for builders. Blockchain builders did not set out to develop the technology to evade laws and rules. We set out to solve computer science problems. Decentralization is not about laws and regulations, but about unlocking the true potential of computer systems and associated technology. The internet itself is an example of a decentralized system: By distributing power, trust, and functions across a network of servers, it takes advantage of numerous benefits in terms of fault tolerance, censorship resistance, and scalability. Embracing decentralization in computer science is a strategic move towards building a more secure and inclusive Internet. Sensible, workable regulation in conjunction with innovation will help guide the transformative power of decentralization and blockchain to empower individuals and drive economic inclusion. The Tree of Web3 Wisdom is a set of principles to help guide blockchain regulation worldwide and harness the power of decentralized systems.
What is a financial product?
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