José Manuel González-Páramo, BBVA’s Head of Global Economics and Public Affairs, at a meeting organized by the Institute of International Finance (IIF) in Washington, D.C. defended a regulatory framework for the financial sector that promotes the potential benefits of Distributed Ledger Technology (DLT). Blockchain, as the first fully functional DLT, was key to the discussion.
According to José Manuel González-Páramo, recent initiatives demonstrate that greater collaboration between regulators and banking supervisors and the private sector – including significant participation from the financial industry – will pave the way for the safe and profitable adoption of this technology on a mass scale.
Accordingly, he hailed the recently created International Association of Trusted Blockchain Applications (INATBA). This association, endorsed by the European Commission and of which BBVA is a founding partner, brings together 105 public and private organizations with the objective of developing a transparent, predictable, and trustworthy global framework that facilitates the adoption of blockchain and DLT and promotes the development of applications based on these technologies.
This is the second consecutive year that José Manuel González-Páramo has participated in this cryptocurrency round table organized by the Institute of International Finance (IIF), in Washington, D.C.. In 2018, BBVA's executive director presented the bank’s blockchain strategy, based on the three E’s: execution, ecosystem and experience.
This year's meeting focused on the role of regulators and banking supervisors as catalysts of innovation, as well as cryptocurrencies.
José Manuel González-Páramo, BBVA’s Head of Global Economics and Public Affairs at the meeting organized by the Institute of International Finance
Six challenges of distributed ledger technology
José Manuel González-Páramo emphasized that the regulatory environment is complex and still needs to mature. In this context, he detailed six overarching challenges facing the blockchain regulation.
- How to address anonymity, which is an inherent feature of cryptocurrencies and contributes to fraudulent and criminal activities. Initiatives like the recently enacted AMLD5, the European Union’s fifth directive relating to the prevention of money laundering, have begun to address this issue.
- Problems arising from the lack of a geographical region associated with distributed ledger technology implementations. Who is accountable if something goes wrong? In the case of intelligent or smart contracts, especially in international trade, there are additional factors to take into consideration. The parties signing the contract can be subject to different laws if they are in different regions. If a smart contract doesn't work as expected, who is responsible and under which legal jurisdiction?
- How to assign a legal value to a blockchain-powered deal. Submitting a deed that conveys ownership or verifies the existence of an asset in a blockchain-enabled operation acts as concrete proof of both ownership and existence of said asset. Will the courts of a various countries accept the validity of this kind of document?
- Solving problems associated with data privacy and consumer protection in blockchain deployments. DLT is decentralized, which means data flows freely across borders, which could breach existing local regulation such as the right to be forgotten, as established by the European Union’s the General Data Protection Regulation (GDPR).
- Recognition from regulators and banking supervisors of the legal validity of financial instruments issued using blockchain. France and Luxembourg have already approved laws addressing this issue, allowing securities to be issued by blockchain and recognizing their legal validity.
- Quantifying and classifying taxes and accounts associated with cryptocurrencies. In this case, it is critical from a prudential standpoint that these assets are recorded in the accounting ledgers. The Basel Committee on Banking Supervision is already working to address these issues..
By way of example, according to the European Banking Authority, in some cases cryptocurrencies can be considered to be financial instruments or electronic money, and are therefore subject to current regulation. However, there are other cryptocurrencies that cannot be associated with any kind of existing asset. What kind of accounting or tax regulation is needed to address this latter case?
José Manuel González-Páramo reminded the audience that as a technology, and like any other technology, blockchain cannot be regulated per se. It is the activity that is developed using the technology that can be regulated. For the financial industry, depending on the service that is provided, regulation that covers products and services delivered over this technology would have to be enacted.