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Blockchain has been heralded as the future of fintech, bringing increased security and more efficient data management to power a myriad of applications. However, its applications, and how they are regulated, can be complex.
Konata Lake and Mohammed Muraj break down what blockchain is, what it isn’t, and what they expect to see:
- Facilitation for tokenization
- Use cases in financial services
- Regulatory considerations
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Konata Lake (00:07): Mohammed, why don’t we start at the 10,000 foot level, what is blockchain?
Mohammed Muraj (00:12): Blockchain is a technology, it is not a product. And so when we look at a technology and we evaluate it, we really look at the different use cases that it has. The more applications the technology has, the more interesting and disruptive it will be. The blockchain provides a base layer on which many different applications can be built.
Mohammed Muraj (00:34): Many people think about Bitcoin. And Bitcoin is an example of using blockchain. It is a virtual currency, but it is not the only one. And depending on who you ask, you’ll get different answers, and you’d be surprised at the difference in the different types of answers we get. So, for example, if you were to ask an artist what they think of when they hear blockchain, they might think of non-fungible tokens and attaching digital art to them and extracting royalties. If you were to ask a student what they think of when they hear blockchain, they might think metaverse and gaming. If you were to ask an investment banker, they might say security chip. If you were to ask someone in the payments industry, they might think of stablecoins or central bank digital currencies. And so, as you can see, depending on who you ask, you get different answers because of all the different use cases of blockchain.
Konata Lake (01:34): Maybe you can talk a little bit about how the blockchain facilitates tokenization.
Mohammed Muraj (01:38): Tokenization is taking something that currently exists in its original form and reducing it to a token. You can take shares in an existing company. They may exist as equity certificates today, but by tokenizing it, you create a token that will embody that share and that can be transferred around and that’s tokenizing equity. And these are called security tokens.
Konata Lake (02:05): At a high level we got into what blockchain is. Now let’s touch on the regulation of, or perhaps more appropriately said, associated with blockchain.
Mohammed Muraj (02:14): Right. So like you said, blockchain is a technology. And the technology itself is usually not regulated. But the use cases of the technology are regulated. So, for example, the blockchain itself is smart contracts and code, but what you use it for is what draws in what regulations you fit into. So, for example, if you use the blockchain to trade in virtual currencies like Bitcoin, then you trigger our Money Services Business Regulations and you must register as Money Services. And there are registration requirements, there are filing requirements, there is reporting, there is “know your client”, et cetera. But all this happens because you trade in virtual currencies. Likewise, if you use blockchain to create tokens, security tokens, you will trigger securities laws. Anytime there’s a transfer of that, you have to figure out if this falls under a prospectus exemption, right? Are there any information requirements? Things like that. And so it largely depends on what the application is. So one more example, if the use is for identity, then obviously privacy considerations come into play. But you can see, you know, it’s not like you get all these considerations for every single use case. For example, if there are NFTs, it may or may not have a securities component, it may be a money services business. It may be privacy, depending on how it is used. And so you have to look at each use case individually to find out what regulatory framework applies to it.
Konata Lake (03:52): Really, really great way of thinking, when people think about how we’re going to regulate this thing. You are not actually going to regulate the blockchain, what you are going to regulate are the use cases. And so it fits within the regulatory regime we already have.
Mohammed Muraj (04:04): What the blockchain does is that it creates a situation where you get several frameworks that interact at the same time. So, for example, if you have a token on a blockchain, that could trigger securities law reviews if it fits within the current framework, but the transfer of that, the sale of that, could also trigger virtual currency regulations. And then you have situations where you get one, two, three, four different frames that apply at the same time. And this is the first time for that. And also the way in which these different frameworks must be adapted to the technology. And then, you know, they also have to evolve to accommodate the technology, and we see challenges with that.
Konata Lake (04:55): Right, our regulations are probably set up in silos, while the use of blockchain forces an interaction that may not have been thought of before.
Mohammed Muraj (05:02): Yes. So for example, before blockchain, if you had a security, it was a security from day one. But what we noticed in blockchain what it’s created as a concept is that something can start as a security token, right? But over time it evolves to not be a security because it is effectively decentralized. The concept of something starting out as a security and then not becoming a security over time is a relatively new concept. And it only came because of blockchain. Right. And so you could see that because of the technology, the framework that existed also had to evolve to accommodate it.
Konata Lake (05:40): Right. Fascinating. Great, thank you so much for joining us and I hope you enjoyed our talk in our fintech series on blockchain.
