Striking the right balance with FinTech law and how we can solve many of the world’s most pressing issues with innovative FinTech
This week, the Parliament of Canada implemented the world’s first national law governing digital currency financial transactions run off the Blockchain and the world’s first treatment in law of the subject matter under national anti-money laundering law.
Bill C-31, An Act to Implement Certain Provisions of the Budget Tabled in Parliament on February 11, 2014 and Other Measures (“Bill C-31“) amends Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act, S.C. 2000, c. 17 to legislate over digital currency financial transactions as a matter of anti-money laundering law.
Venture capital in FinTech innovation to top $300 million
A large amount of venture capital has flown into FinTech startups in Canada in the past 12 months, placing Canada just behind the US for the top investment in the burgeoning digital financial technology sector, especially in Vancouver. Digital currency like Bitcoin is programmable money, and is on the cutting edge of FinTech because its base on the Blockchain, a distributed ledger technology, thus the interest and investment is understandable.
Worldwide, it is estimated that close to $300 million will be invested in digital currency-related technology in 2014, a large part aimed at Canadian start-ups.
Venture capital is a catalyst for job creation, innovation, technology advancement, international competitiveness and increased tax revenues. According to the National Venture Capital Association, venture-backed companies account for 11% of private sector employment and represent 21% of GDP.
But venture capital firms require a reasonable, efficient and predictable regulatory regime. Uncertainties caused by regulatory policy can push the risk profile of even the most exciting FinTech innovation beyond what a venture capitalist can tolerate. A promising company has a greater chance of receiving venture funding if there is transparency around the regulatory process through which it will move.
It seems unclear whether the implications of government policy for venture capital firms and their portfolio companies that have invested in FinTech innovation was considered. For one thing, although the new law may provide regulatory certainty and secure banking relationships for digital currency exchanges, some of its aspects have uncertain application such as the extra-territoriality of the law to foreign banking relationships.
If innovative FinTech is over-regulated before it has a chance to develop in this country, the venture funding (and countless jobs in FinTech innovation) will disappear south of the border to the US or to places like London.
The perils and promises of the FinTech like distributed ledger, the Blockchain and digital currencies
“Its trustlessness makes it trustworthy”
Bitcoin is the world’s first decentralized digital currency and as such it is unique and represents a significant advancement in FinTech, in its own right and because it is run on the Blockchain. For the first time, it solves the “double spend” problem and makes it possible for transactions to occur online without the need for an intermediary.
Although it may appear an oxymoron to say so, financial transactions on any distributed ledger tech, including the Blockchain, are designed to be trustless and therefore they are trustworthy. They are designed with a lack of trust in respect of all the users, which makes the system trustworthy.
It’s no secret that digital currencies have significant financial crime perils such as money laundering, tax evasion, bribery, sanctions avoidance and terrorist financing risks. And it has equally significant consumer protection risks that are largely discounted that must be addressed by governments. With all risks, they can be mitigated.
Despite the risks, FinTech like distributed tech, Bitcoin and the Blockchain hold enormous promise.
Financial freedom and escape from, inter alia, human trafficking for victims and support for aid agencies in times of crisis
In addition to some of the more obvious benefits about the distributed ledger tech being used for future contracts, and its unique feature as programmable money, based on my experience, this is what I think its other promises are:
- A reduction in financial crime by virtue of the permanent evidence of transactions on the distributed ledger and Blockchain that can be used simultaneously and cooperatively by law enforcement agencies globally;
- Elimination of some forms of fraud because of the impossibility of double spending using distributed ledger and the Blockchain for financial transactions that could save billions in environmental and securities-related fraud if used;
- Elimination of bank corruption in developing countries, for example in places like Vietnam, where I have seen citizens that are required to pay bank employees bribes, in addition to bank fees, for the privilege of using the banking system to remove or deposit money into their bank accounts or cash pay cheques;
- An inexpensive remittance system that can service millions of poor and unbanked populations, mostly in Africa and Asia, that allows them to receive value from relatives abroad to keep their families alive, and allows more fortunate Canadians to send value directly to them;
- Empowerment, and sometimes the survival, of marginalized or undocumented sectors of the population who are denied financial services because they live in refugee camps in destitution or live on the street with no government issued ID to set up bank accounts;
- Financial freedom for women, especially, who are denied banking services because of social, political, economic or geographical circumstances, for example, because they live in repressive societies where women cannot receive banking services or are victims of human trafficking whose ID is confiscated by traffickers;
- Ability to quickly and easily transfer value to hundreds of thousands of volunteers who work with international aid organizations around the world in times of crisis when traditional financial institutions are shut down (or destroyed) such as during a terrorist attack, a tsunami, or an earthquake. This is a serious concern that is ever present in the counter-terrorism field; and
- Equalization or distribution of wealth that is not dependent upon access to traditional financial services.
On the issue of unbanked populations and lack of financial inclusion, in Canada alone there are First Nations persons who are financially excluded because they lack permanent residences (are homeless or live in halfway houses) to set up bank accounts or, there are no bank branches within proximity to them.
Did Canada strike the right balance?
Canada is the first out of the gate in the world with a law for digital currency exchanges and Canada should be congratulated for acting quickly as promised and providing legal certainty.
The challenge for Canada, as with any government facing emerging FinTech, is balancing the financial crime risks posed by the technology while ensuring firstly, that the enormous venture capital funding being poured into this sector in Canada does not dry up and cause Canada to lose its leadership role in digital finance and innovation, and secondly, ensuring that the innovative potential of the FinTech can thrive in a regulated regime. It’s no easy task.
Only time will tell if Canada has achieved the right balance and one hopes that if the law is an over-reach or drives away innovation and technology investment in Canada, the government will not be adverse to amendments to achieving a better balance.