The Isle of Man is looking to catalyze the growth of the blockchain and digital asset assets. In 2020, the country published guidance on digital assets, token activity, and how they fit into Isle of Man’s regulatory frameworks.
We recently had the opportunity to speak with Steve Billinghurst, the regulatory lead at the Isle of Man’s blockchain office (Digital Isle of Man), about a myriad of topics including why enterprises are increasingly becoming interested in setting up their business in the Isle of Man, where compliance in the blockchain and digital currency industry is heading, as well as central bank digital currencies.
Here is what we learned:
How did blockchain and digital currency fall onto your radar?
Around 2013 was when the Isle of Man changed its legislature to recognize digital currency and virtual currencies as a mechanism of payment in its Proceeds of Crime legislation. Previously the legislation did not recognize it, and in doing that, cryptocurrency and Bitcoin and blockchain became a really interesting topic for the island as a whole.
I got really interested in it when I listened to a presentation by a guy called Dave Birch with Hyperion Consulting; back in 2013, he did a presentation for the U.K. chartered accountants society for all the CPA’s. He talked about the concept of Bitcoin as a new concept for money and I got really interested in it.
So ever since 2013 and within pwc, i was getting more and more connected with colleagues across the whole of the pwc network really interested in bitcoin, really interested in blockchain, interested in how auditors can audit it, interested in how businesses can implement the technology into their back office and middle office to actually streamline processes.
And then 2019 came about and the Isle of Man took its stance of creating what they call the blockchain office. The blockchain office is really a vertical market facing team or a virtual team that looks at blockchain as one of the digital technologies that is currently in force in commerce. As well as e-gaming, esports, and the internet of things, blockchain was another area we were looking at and I was taken on as the regulatory lead.
My role became very much the go-between for the businesses looking to come to the Isle of Man and relocate because of the regulatory regime that we have, and to actually help them through the maze of becoming regulatory compliant on the Isle of Man since they were delivering financial services.
Did you find that companies were moving there first and then looking for guidelines or do you think the companies gravitated to the Isle of Man because of its regulatory environment?
I’m not sure either scenario is the right scenario, thinking about a company that is in this space and in this nascent industry, we weren’t looking at businesses that were home grown, we were looking for businesses that had grown up elsewhere. When they grow up elsewhere they have other challenges rather than just finding a home, that’s a regulatory home, that’s a home for the business owners, it’s a home for the physical business itself, and we were just trying to answer one of those questions for them when it came to the regulatory landscape.
What we had in the regulatory landscape and what we still have is a very plain vanilla regulatory framework, we don’t regulate the technology, if you are running a bank, if you are running a custodial function, whether or not, you’re running a custodian function for standard units (bonds and share) or whether or not you are running it for blockchain tokens, it makes no difference.
The back office technology of distributed ledgers made no difference to our regulators—your business is a bank, or your business is a custodial business, or your business is an insurance business, the mechanisms you run that on shouldn’t and did not play a large role in the regulatory requirements and I think that holds true and that really is a strong basis for a regulatory framework—a bank is a bank is a bank—not until the bank becomes a digital bank or until it becomes a decentralized finance bank and then it’s something completely different, that’s not how we regulate our financial services here in the Isle of Man.
I think they were coming to the Isle of Man for a number of reasons but I think the regulatory certainty was definitely one of them. Some of them were looking for money, these were new entrepreneurial businesses, they were in their first stage or second stage of financing, some of them had a minimum viable product, some of them just had a good idea and a whitepaper.
However, they were businesses that thought they had found a blockchain solution and were trying to sell that blockchain solution into industries. I come from a background where i think some of the more successful blockchain solutions are going to actually come from partnership and from collaboration and “coopertition”; here you have competitors that come together in the same industry, perhaps at different stages in the value chain, but between them they are understanding the frictions of that industry end-to-end and they are trying to solve that as an industry solution rather than someone coming from the outside saying, “i know what that industry needs, it needs my solution,” that can be really difficult for blockchain businesses to sell it that way.
Out of the companies that have moved to the Isle of Man, what are the most notable projects that you have seen over there?
We are successful at encouraging cryptocurrency exchanges to come here, at the moment that seems to be our sweet spot. The interaction between the U.K. and the E.U. has created an opportunity for us—for U.K. businesses to shift from being U.K. based to being Isle of Man based, still servicing the same market but being in a different jurisdiction. That’s because we’ve had the same regulatory framework since 2015 and the U.K. is just now trying to put out new regulatory framework.
We’ve also seen an interesting cross-over between e-gaming and blockchain, so we had a bit of a sweet spot in blockchain gaming companies coming over, where blockchain is being used as the mechanism for establishing trusted random number generation, we saw some of those companies come to the Isle of Man.
Where do you see digital currency compliance going?
It is going towards making sure that the operators are collecting all the information that they need for their wallet holders and their customers so that they can supply them to their authorities. Whether or not it is FinCEN’s rules on KYC and AML CDD or whether or not it is the European rules which are picked up mainly from FATF and FATF Recommendation 16 and the travel rule.
I think in the end, everyone’s going to have to be able to demonstrate who they are in terms of the wallets that they are holding and the transactions moving through exchanges, unfortunately, that is just one of the costs of distributed technology and peer-to-peer asset transfers becoming mainstream.
What are your thoughts on central bank digital currencies?
I love them actually. I think there is definitely a place for central bank digital currencies and i think that is because of how that the market has moved with the pandemic meaning that there are less cash-transactions and people have become more aware of digital currency and electronic currency.
However, a central bank digital currency would probably require a restructuring of wholesale and retail banking in most jurisdictions as well as the way that they handle a central bank issued currency if it goes directly to individual people. I don’t think it could go directly to individual people because the balance sheet of the central bank would just be far too complicated. There are at least 7 different models of CBDC and its management.
What are you and your team working on right now, what can we expect to see from the digital Isle of Man in 2021?
We are going over our legislative framework, we are looking at a way of really pushing forward fintech innovation through regulation, and really making it a welcoming island. We have been successful in the past due to how we personally interact with businesses wanting to come here, but we would like to formalize that in a much more structured way by creating some piece of legislation or regulation that hopefully deals with a number of digital initiatives, whether that is digital identity or whether or not we update our payment services legislation.
We pushed out some guidance on tokens that has been really useful, and we will go back and look at our legislation about securities and how people certify and demonstrate the holding of a security, and the use of blockchain as one of the mechanisms rather than writing a good old fashion share certificate. So we are working on those elements as well just to make the island more friendly and more at home for digital businesses that have built around distributed ledger technology.
See also: CoinGeek Live panel, The Future of Banking, Financial Products & Blockchain
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