Editor's Note: This article comes fromChain reference (ID: lianneican), Author: Internal Reference Jun, reprinted by Odaily with authorization.

Editor's Note: This article comes from

Chain reference (ID: lianneican)

Chain reference (ID: lianneican)

, Author: Internal Reference Jun, reprinted by Odaily with authorization.

The digital asset market is in its infancy, and like many emerging technologies and markets, it is difficult to predict its evolution. For many jurisdictions with a prescriptive approach to regulation, the initial costs of licensing and ongoing compliance can be significant. On the one hand, new entrants can be dissuaded by these barriers and seek less regulated jurisdictions. On the other hand, jurisdictions need to protect their reputation and market participants in order to promote their economic development.

To date, most jurisdictions have opted for a prescriptive or principles-based approach to the regulation of digital assets in order to provide greater flexibility for the digital asset market to allow it to continue to develop, and how to largely follow these principles The issue is left to participants or future interpretation, except where regulations overlap (i.e. securities, commodities and AML).

Regardless of the regulations governing digital asset businesses, forward-looking businesses should consider adopting their own principles-based codes of conduct and selectively drawing on prescriptive standards and frameworks to implement those principles. The reasons are as follows:

Attract institutional business – As mature asset classes attract more institutional investment, businesses that demonstrate proper controls will have an advantage over those that do not.

Reduced Regulatory Uncertainty – Early implementation of baseline controls can better improve a business' ability to respond to rapidly changing regulations.

Addressing market opportunities and optionality – Strong controls will expedite the implementation of support operations as the enterprise moves to new lines of business.

Improved Organizational Processes – Prescriptive regulatory guidance, when properly implemented, can enhance and improve related operational processes.

The Code of Conduct of the Digital Asset Market Association (ADAM) released in November last year has a lot to learn from crypto companies.

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• ADAM Code of Conduct

• ADAM is an alliance of leading digital asset firms committed to promoting "integrity, fairness and efficiency in the digital asset marketplace." ADAM’s Code represents their efforts to create a framework to facilitate the institutionalization of digital asset markets and provide assurances to regulators. Each ADAM member agrees to the Code of Conduct as a condition of membership.

• ADAM codes are developed according to eight main domains.

• Compliance and Risk Management

• market ethics

• conflict of interest

• market integrity

custody

Information Security and Business Continuity

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Framework and standards for implementing the ADAM specification

For digital asset companies that choose to adopt best-practice codes (such as ADAM's code), the next step is to address how to implement underlying support controls. Failure to do so creates additional risk that, in addition to potential legal ramifications, clients and regulators may view well-documented but disregarded principles as red flags.

For some, the solution may be to simply hire a large legal, accounting or consulting firm with extensive experience. But doing so, in addition to potentially reducing its sense of ownership, does not take into account other freely available resources that regulators themselves have assembled. Utilizing prescriptive regulatory rules and guidance specific to digital asset businesses (even when unregulated), and other publicly available standards and frameworks (such as NIST and ISO/IEC 27001), enable these businesses to build or improve It is controlled by selectively drawing on work already done by highly credible regulators and experts.

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Notable Jurisdictions for Digital Asset Business Standards

Bermuda has leveraged its position as a leader in reinsurance to create a regulatory framework for digital assets that provides certainty through comprehensive prescriptive guidance. In addition, the Bermuda Monetary Authority is an experienced and proficient risk management regulator. Commenting on this framework and the reputation of the island of Bermuda, Prime Minister Burt said, “Bermuda is unique from a regulatory standpoint. There are only two countries in the world with risk regulation comparable to the US and EU, and that is Switzerland and Bermuda. .”

Wyoming is the most advanced digital asset regulatory agency in the United States. It has formulated its own digital asset custody rules with reference to Bermuda’s draft Digital Asset Custody Code of Practice. So far, Muda has approved licenses for five digital asset businesses.

Malta is trying to leverage its position in the gaming industry to advance distributed ledger technology. In 2018, it adopted a digital innovation framework consisting of three laws related to distributed ledger technology. Its Virtual Financial Assets Act sets out licensing requirements and prescriptive rulemaking to mature its fast-growing digital asset or blockchain market. In a speech to the United Nations, the Maltese prime minister enthusiastically dubbed Malta the “Blockchain Island,” declaring that Malta has enacted the world’s first comprehensive blockchain legislation. In February 2020, the Malta Financial Services Authority subsequently introduced the VFA rulebook, significantly expanding the scope of regulation. Malta’s embrace of blockchain has led to a flood of businesses flocking to the “blockchain island,” many of which left because they were disappointed by Malta’s failure to manage the framework it had established. For example, of the 340 applications for a “service provider” license originally filed under the Virtual Financial Assets Act, none have been approved, most have been abandoned, and as of April 30, only 26 are still valid.

New York's virtual currency rules, enacted in 2015, provide beneficial prescriptive value for business continuity planning and disclosure of customer information. Some have criticized its licensing application burden. As of May 6, 2020, only 25 licenses had been issued.

• Each of the aforementioned jurisdictions has invested significant resources in developing prescriptive digital asset regulations. One view is that the scope of these regulations and the challenges of the licensing process may inhibit growth in a growing emerging market. Given the adjustment in expectations, this view is stronger than that of Malta in any jurisdiction today. On the other hand, the initial slowdown in license approvals may reflect a wiser approach by regulators and may ultimately prove to be the way to lay the groundwork for the digital asset market. While the truth is undoubtedly somewhere in between, these legal bodies and associated guidance provide useful criteria for forward-looking digital asset businesses considering sustainable control.

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Standards to assist in the implementation of the ADAM Code of Conduct

Below is a mapping of the Adam Code to the most helpful rules and guidance from these jurisdictions, as well as some other helpful rules and standards to help digital asset businesses develop their own self-regulatory frameworks and internal controls. Market ethics is not delineated because it is often formulated as a principle without further normative guidance (this is also confirmed in normative regulatory frameworks).

• Governance, Compliance and Risk Management

Best - Bermuda's Code of Practice. Armed with thoughtful coverage of the fundamentals of sound corporate governance tuned for digital assets, businesses may consider cutting and pasting these requirements into their policies and procedures.

Runner Up - Malta VFA Rulebook. The wide range of requirements makes these standards more expensive to implement than the Bermuda Standards and more suitable for more mature organizations.

• Wider coverage - Neither the ISO 31000 series nor the COSO ERM framework are free or resource intensive to implement.

conflict of interest

Best - Malta's VFA Rulebook. Malta's rulebook is endorsed by Bermuda's principles-based conflict rules due to its coverage of matters involving business independence, inducements and personal dealings.

More In-Depth Coverage – FINRA's Report 013 on Conflicts of Interest is the seminal reference for best practices in managing conflicts of interest in financial services firms.

• Transparency and Fairness

Best Overall - Bermuda's Client Disclosure Rules. These rules are a well-organized list of factors that affect customer relationships.

Best for Customer Risk Disclosure - New York's Virtual Currency Rules. These disclosures have long been standard and represent the bare minimum that digital asset businesses should include in their client risk disclosure documents.

Good – The public client disclosures of ITBit (Paxos) and BlockFi, two members of ADAM that are subject to the BitLicense regulatory framework in New York, are helpful references.

• market integrity

Best - CBOE Futures Exchange (CFE) Rulebook. In light of ADAM’s deliberate reference to “disruptive trading practices” (prohibited under Section 6c(a)(5) of the Commodity Exchange Act) and lack of immediate digital asset regulatory guidance, a review of applicable rules for U.S. commodity exchanges , to adapt to the digital asset market.

Best for building your own Laundry Trade Prevention System Capabilities - ICE's Trade Prevention Capabilities Policy. A useful resource for developing laundering trade system requirements.

• Good - Paxos' Market Manipulation Standard provides a lighthearted atmosphere and can be used as a starting point along with coverage in CFE's Rulebook.

custody

Best - Bermuda's Guardianship Code of Conduct. Bermuda’s Custody Code defines standards for custodians of private keys for digital assets in custodial custody, escrow transaction processing and custodial operations. As noted above, Wyoming’s digital asset custody rules largely incorporate provisions of Bermuda’s regulations.

US Regulatory Approach – Client Protection Rules and Client Funds Segregation Rules (promulgated under the Securities Exchange Act and the Commodity Exchange Act (CEA), respectively). In both respects, the CEA’s client funds segregation rules are easier to adapt to digital assets than the “customer protection rules,” which doesn’t say much. Both the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (“SEC”) have pointed to challenges in applying customer protection rules to digital assets. The SEC continues to examine how the existing framework for non-DVP custodians can be applied to digital assets.

Information Security and Business Continuity

• Best for establishing a cybersecurity program – New York Department of Financial Services (NYS DFS) cybersecurity requirements for financial services firms. These rules, which apply to financial service providers registered with the New York State Department of Financial Services, provide a comprehensive checklist for financial services firms looking to establish a cybersecurity program.

Good for Business Continuity - Virtual Currency Rules in New York. As a checklist for critical components.

key management

Business Continuity for Beginners - FINRA's business continuity planning template for small firms.

wider coverage

NIST Security and Privacy Controls for Information Systems and Organizations

key management

• Cryptographic key generation

NIST's Cybersecurity Incident Recovery Guidelines

NIST provides a wealth of comprehensive cybersecurity guidance for building and maintaining cybersecurity programs, recovering from security incidents, and protecting digital assets.

Anti-Money Laundering and Combating the Financing of Terrorism

Bermuda’s Industry Specific Guidance Notes for Digital Asset Businesses.

in conclusion

Bermuda’s well-thought-out AML guidelines are comprehensive and its prudential standards even provide templates, but they are not a substitute for the guidance of major agencies such as the Financial Crimes Enforcement Network (FinCen) related to convertible virtual currencies.