Some of our verbatims for the University of Malaya RegTech Project on Apr 26, 2019.
by Ahmad Haikal
This is the unredacted version of the interview with Edmund Yong published in Visio Bloc (May 2019:02) by RegTech Cube, the Centre of Excellence for Regulatory Technology (RegTech) at the Faculty of Law of the University of Malaya. It is a joint venture research project between the University of Malaya (UM), Quanta RegTech Capital (QRC) and Infinity Blockchain Holdings (IBH).
- Will STOs replace ICOs? What do you have to say about this?
ICOs are dead. The obituary came in towards the end of last year. ICOs will still have its hallowed place in crypto history but the industry has evolved. STOs are supposed to be the comeback sequel, but they have been overhyped and underwhelming so far at least. There is still a long way to go before STOs can enter mainstream, and one should not expect STOs to become the same frothy bubble as ICOs.
- How do you see regulators catching up with the emergence of STOs? Will it affect the development of RegTech as well?
Believe it or not, STOs are actually easier to regulate in some ways. Since STOs are by definition securities, they will need to conform to existing securities laws. Naturally the crypto industry will not happy with this approach and will argue that current laws are too restrictive and stifle innovation. They will lobby for a permissive environment for this technology to take its course.
While there are merits to this, we should look at this pragmatically. From my observation, most issuers are drawn to STOs because they want shortcuts. That is, they don’t want to go through the whole nine yards of seeking approval and would rather just mint the tokens and place them out directly to investor pools. You sort of wonder why – the cost of STO issuance is not much lower compared to conventional securities, there isn’t much market depth to speak of for STOs, and it cannot be globally distributed like ICOs. For now, the one thing that makes this innovation better than an ordinary share is speed-to-market.
Regulators will have to assess whether STOs can really make the capital formation process faster and easier, especially for the underfunded SME community, and find ways to reduce bureaucratic friction.
As for regtech, STOs will open up whole new directions, like custody and walleting solutions to help store the crypto assets; digital identification of the holder and forensics to trace the transaction trail; smart contract integrity and audits so that it cannot be compromised, and so on. You cannot really decouple fintech and regtech, both will need to move together for regulators to accept STOs.
- What do you think are the governance challenges in STOs?
Foremost on my mind is AML-CFT. Crypto may be borderless but securities are not, so AML laws could stunt this. Two things to watch out for: Japan which hosts the coming G20 will share a framework on governing crypto. FATF, which Malaysia is a member of, will also release its much-anticipated guidelines soon.
Beyond that, there is whole body of jurisprudence that is almost non-existent for STOs right now. You need new laws and judicial decisions on property, contract, taxation and so on to give the market confidence. If bitcoin is property, then what is it? How does the tort of conversion apply to intangibles like bitcoin? Will bankruptcy laws recognize bitcoin as properties? Are smart contracts validly enforceable, when there are no digital signatures involved in the transfer of assets? What is the evidentiary value of smart contracts and will courts even accept them? Taxation is a confusing mess. Is it classified as income or property? Should you tax this as a new asset class or at the primary activity level? Mining, issuing, and trading are very different animals.
Here’s a sobering case in point: It took more than 20 years for something like GDPR to regulate global data privacy after the World Wide Web started. So the laws will eventually catch up to STOs – but hopefully sooner not later.
- What do you think of the current and future development of STOs, especially in Southeast Asia?
It will not be as exciting as you think. STOs have to conflate two financial worlds, the old and new, and there is bound to be inertia and resistance. So don’t expect a peaceful co-existence at the start. I see more progress in the money services front, for payments and remittances, due to the large unbanked population in Southeast Asia, compared to the capital markets.
The region is diverse and moving on different gears. For examples: Thailand is legalizing STOs, Singapore allows for ‘reverse ICOs’, bitcoin is being commoditized in Indonesia, and Philippines has created a ‘safe harbour’. Where Malaysia goes with this will be interesting to watch. It is a late entrant and has the benefit of hindsight from its neighbours.
- How does Celebrus Advisory see itself in the field of business tokenization?
We don’t think tokenization is the end-state. It is ultimately about ownership, that is, the legal relationship between the owner and asset. Technology can create a relationship but it may not be recognized. There is a lot of sales rhetoric in this industry but no insight. This is where we come in.