FinTech: Trust in the Trustless, Advancing Blockchain Regulation

‘FinTech’, which is short for Financial Technology, is overhauling the legal playing field. As an umbrella term, FinTech additionally encompasses educational technology (“Ed Tech”) and regulatory technology (“RegTech”). One of the fasting growing sections of FinTech involves banking software and crypto-currency. Crypto-currency, the most popular of which is “Bitcoin” is transferred through blockchain technology. Blockchain is the financial infrastructure through which Bitcoin, and other crypto-currencies are exchanged. As an emerging technology, blockchain has immense potential benefits such as “lower transaction costs,” “potential to combat poverty and oppression,” and “stimulus for financial innovation”1 Contrarily, there are a lot of risks which warrant regulation, such as “The Bitfinex Hack”2, double spending3, and anonymity4

Currently there is a public policy debate on how to regulate blockchain technology, and whether to allow “permissionless” blockchains, like Bitcoin or only allow private “permissioned” blockchains, like those being designed at many large banks.5 Bitcoin can be used as currency in select locations, bought and sold as a currency, and mined.6 The Bitcoin mining process records transactions on the blockchain public ledger, while also distributing Bitcoins to the miners.7

Examples of the blockchain technology can be found within FinTech alliance groups such as the R3 Consortium. The R3 Consortium is a group of over 40 banks world-wide working together to innovate the financial market.8 Currently, the R3 Consortium is targeting “secure and fast solutions for payment transactions and securities trading.”9 Simply put, blockchains are automated databases that store transactions, which is “a data-base for transactions that manages itself according to rules that have been set and is tamper proof.”10

Regulation and implementation of blockchain technology islimited, although the Financial Stability Oversight Council (FSOC) has recognized blockchain technology as a “valuable mechanism for improving market transparency.”11 Policymakers have identified any potential risks and abuses of bitcoin, including black-market transactions,12 tax evasion,13 money laundering,14 and terrorist financing.15 Policymakers arecurrently revisiting “complex, interwoven regulatory frameworks—primarily banking laws, commodities laws, and securities laws—toshoehorn the technology into existing frameworks and considerwhere new ones might be appropriate.”16 According to the IRS, virtual currencies should be treated as property for federal tax purposes.17 In short, there are still many kinks in the technology which would create large risks in mainstream financial infrastructure. Bitcoin continues to exist, with or without government adoption, and thus should continue to do so until a more reliable network can be established.