Interview by Daria Balaboshina
-You created the Blockchain Association within the Financial Commission. Why now, when the hype, associated with this industry has come and gone?
Well, specifically for that reason. When the dust settles, so to say, it becomes apparent where the industry is headed, what makes sense and what doesn’t. In the very beginning everything seemed interesting, many projects received a lot of attention, and now many of those projects are nowhere to be found in the cryptocurrency space. We understood that the time had come for the industry to take a step in the right direction. What does the Financial Commission do in principle? We accept as members companies who provide their customers with a quality and honest service and are held accountable for their actions. In this regard we felt it was the right time to launch the Blockchain Association and invite industry professionals into the Expert Committee and companies, who are ready to work openly and honestly as members.
-Why did you decide to separate this business segment into a separate body?
-Because in this case special expertise is required. Even though many cryptocurrency exchanges and platforms use technologies similar to the Forex market it is still necessary to obtain additional expertise to rate the performance of these projects and process disputes arising from transacting on Blockchain. We decided to not mix the two together and created a new, separate business segment.
-Which experts have joined the Blockchain Association?
-There are founders of crypto exchanges, attorneys, including some from Wall Street, who are well versed in regulations, legal documentation for Blockchain projects, as well as consultants, who have launched tokens and various platforms and marketers, who participated in the business development of projects. When we approve a member for the Association, we conduct a comprehensive audit of their business to understand the projects scope and size, its benefits for end users, the industry and whether they meet our standards for membership.
-The main area of focus is dispute resolution, correct?
-Yes, at this point it is. In fact, we soft-launched the dispute resolution process, so today the resolutions provided are non-binding on all parties. We provide an expert review of the situation in hand and not just for Association members. We’ve had cases where customers have submitted complaints and we have contacted representatives, let’s say, of an online wallet, which conducts transactions on a particular Blockchain and we offer them to be an independent 3rd party for resolving disputes. Because today, even if there are some regulatory norms already available in this area, they are very shallow at the moment. They are concerned more with legal frameworks and not specifically how a trading system is working, if commissions are being calculated and paid correctly, how transactions were processed, etc. By processing disputes we are also learning ourselves. This is a certain challenge for experts – to understand how to correctly resolve a dispute based on different situations. In the future we hope to take this real market experience and propose standards of conduct for this industry.
-So you have a particular set of cases, which you’ve resolved? What are they about?
-They are concerned with incorrect disclosure of information, which creates confusion for the clients; investment of funds by 3rd parties, which results in, among other things, fraudulent activity; with technology breakdowns. In other words, cases where transactions do not take place on Blockchain or a digital asset exchange. Although a digital asset exchange is essentially a trading platform and issues can arise there as well.
As soon as we launched the Association we started to receive a large number of complaints. Some things were new to us, we did not account for them. Right now, as I said, it is important to find the “golden mean” – determine how everything should work. Because in the Forex market we have a lot of experience and we know what is too long or too short, too expensive or too cheap. And here everything varies from project to project, so we need time to determine what will satisfy all participants of the dispute resolution process and begin to apply standards of conduct. And afterwards, perhaps, recommend those standards to government regulators, like we do on the Forex market.
-Are customers the majority of people who file disputes?
-Yes, both individuals and corporate clients. A client of an e-wallet is just a client, no matter if they are a person or entity. It’s important to understand their problem, understand the service provider’s willingness to resolve the matter and how it will do so. Based on this experience we will create practice areas, which will then be shared as ‘best practices’.
-Can you provide an example?
-Sure. For example, there was a delay in order execution on an exchange. The problem with pricing – is very similar to what happened in Forex many years ago, when, because of a lack of liquidity, traders were getting incorrect prices. Or, perhaps they were getting correct prices, but not ones expected by the traders themselves.
Another instance is incorrect information provided by companies which facilitate payments in cryptocurrency online and calculate commissions based on the chosen time to settle a transaction. Such things are common. It’s understandable that there is a cost to mining, but there are e-wallets who list their own rates. So you are buying cryptocurrency with fiat funds and you are provided with an exchange rate. Even though the company is providing an online wallet, it is essentially operating as a ‘market maker’. Sometimes, we find that prices provided to customers are completely unfair, in our opinion.
-Well the client can choose not to buy cryptocurrency?
-They can, but clients do not always understand that they have options. And when they find out they were overcharged while a better rate is available… It remains to be seen how these types of cases will be handled. I think it is too early to provide any kind of statistics. When there are no rules or standards it’s tough to say what is right and wrong. We can of course state our opinion: “we believe that the situation is not fair to the client, because based on our experience trading Forex the client would not be subjected to this kind of situation. While here we have some kind of Wild West that has formed…”
-So you always use an analogy to Forex?
-Well, of course we do. Because the client receives, in fact, an exchange rate. So I arrive in Moscow and see that I can sell Dollars for 45 rubles, and buy them for 69 – isn’t that the right approach? It sort of is, yes. People have a right to be provided with an exchange rate, but when the customer unknowingly presses a button and sells currency at a completely off-market rate, for example… this is happening in cryptocurrencies as well.
-So you will take on these types of disputes?
-Yes, we take them on. The question is, again, how the service was provided. You can be presented with services, but not know the small print – terms, conditions and all the costs. And if you invest large sums the terms may change. We find these kinds of cases as well. Right now I am speaking about the pricing policy of different trading systems. It’s difficult to accuse them of course. We can provide requirements on how customers should be able to get important information. That is the simplest form of dispute. There are also disputes regarding security – theft of crypto currency and the like. We, of course, can’t solve all the issues at this time, but we are finding the right ways to approach and resolve them. We have a great deal of experience that we can highlight and there is a big interest from companies to join the Association. As such, I think in the coming months we will publish requirements for applicants. For exchanges – how are funds and client information stored and how data is backed up to ensure security… This is complex business dimension which requires a great deal of focus on security. Very often digital assets are stolen – how to solve this problem remains a big question.
-Do I understand correctly that in these cases you will conduct some form of investigation?
-We don’t conduct an investigation per se, but we provide an assessment of what happened, based on the experience of our experts. If, for example, an e-wallet has a certain amount of assets in hot wallets and another in cold wallets, there are certain steps that can be taken to ensure safety of client funds.
-You decided to take on a big task – create standards for the industry.
-Yes, we want to create standards and a registry of best practices. And we would like for those standards to be met by members of our Association. Given the fact that there is a large number of crypto currency projects available while regional regulations cannot always keep up, experienced experts will be able to provide the most expertise of anyone. The quicker the industry organizes itself and publishes rules and guidelines by which to operate by, the faster we will see improvements in security and convenience. Right now there are a lot of organizations who would like to develop best practices. In that regard Finacom is just one such organization.
This idea itself is not far fetched. It came out as a result of the needs of the industry. We took on our first cryptocurrency exchange as an approved member in 2015 when the Blockchain Association did not exist. So we tried to “feel out” this niche back then. But it became apparent that this type of trading is different from traditional Forex, there are some aspects that are completely different. Even though we are, firstly handling disputes, we also spend time on trying to analyze the degree of safety of funds at our broker members. How reliable are they – this is also very important to us. With a typical Forex broker everything is quite clear: there is a company, a jurisdiction, bank accounts. Banks provide a certain safety of funds. In other words, we understand how that business works. In the crypto currency market we encountered a different problem: say a customer opens an account at a crypto exchange, sends fiat funds to their account and purchases crypto assets – the next question is – how are those digital assets stored? We came across this issue back then in 2015. We identified the most prominent exchanges, studied their internal policies and found out what steps they take to ensure safety of customer funds. After the analysis we suggested the best possible policies for our member. Now we have placed this type of work in a separate business line. In the near future we will be more stringent regarding security in the market. I hope that our standards will become a benchmark for many participants of the cryptocurrency markets.
-You mentioned the large number of received complaints. How many companies are member of the Blockchain Association today?
-Seven. We receive a lot of membership inquiries, but we do not approve everyone. We try to understand the project, how important and necessary it is, does it provide innovative ideas and good terms and conditions. We check who is behind the project (Know your Customer) and, by adding them as a member of the Association, show the public which companies have chosen to work transparently and openly.
There are so many companies in this industry. It’s hard to even imagine how many thousands of projects are launched every week.
-What else to crypto currency traders enquire about with your organization?
-Just recently we had a customer from the United States. There are many funds and advisors that manage investing in crypto currencies. They say: give me your key so that I can connect you to the trading account. People who are not knowledgeable in these areas will sometimes times provide their security key to the advisor and the advisor will literally take possession of the investor’s funds. It’s important to speak about these types of situations.
-Increase financial awareness
-Yes. The experts will take a look and say that it is obvious that you should not give your security key to anyone. But this issue is not apparent to every investor when they begin and it’s important to educate them.
-So this is a world-wide problem?
-Yes. For example, in the United States there are certain e-wallets that do not provide security keys and manage the accounts themselves. So the e-wallet works in such a way that the account is yours, but it is managed by the e-wallet. There are many things that are already taken into account in existing US regulatory frameworks. Nonetheless, there are projects that exist without being assigned to a specific jurisdiction. And only an Association like ours can provide transparency for such projects.
-Companies join as members while customers submit disputes. How do these tie into each other?
-It is a simple process. Customers submit disputes against not only our members (since there are not many yet). We do not issue binding judgments in our dispute resolutions – we do not have that authority. We provide our expert opinion on how the situation should be resolved. We contact the company against which a complaint is received and inform them of the issue. Some companies are willing to work with us, some aren’t. Going back to our experience in Forex… practically every day we receive complaints regarding brokers who are not our members. But we still reach out to the broker every time and say: “look, the customer is still seeking to find a resolution. Possibly they were not satisfied with your response to their issue”. It is often important to the client to receive an independent resolution from an expert. Several brokers became our members in such a way: they agreed to an independent analysis, witnessed our processes and decided to join our organization. We act as a sort of independent forum for traders. We are trying to bring these same principles to the Blockchain Association.
I have some big plans for this Association because there are so many projects and a demand for communication among participants. For example, our Association members include crypto exchanges and also professional consultants. They receive access to one another’s expertise and that provides for a healthy consolidation of business.
-The regulatory frameworks in the Blockchain space, as you said, are evidently lagging behind. Are the authorities not ready to assist in resolving disputes on this market? How long will we be witnessing this type of situation?
-Quite long, I’m afraid. Not nearly enough countries have come to accept the new realities.
-Not to mention implementing adequate laws…
-Of course. In order to implement adequate laws its important to first understand the situation. The leaders in this respect are Switzerland and the United States. But in the US there are two major players from whom everyone else learns – the tax authorities and the legislators. The Securities and Exchange Commission (SEC) has its own interpretation of instruments that are traded on Coinbase, while the Commodity Futures Trading Commission has theirs. Everything is in the beginning stages right now – legal norms are starting to take shape. With respect to the quality of service provided we are still very far from any standards. Let’s remember that the same happened in the Forex market. There was a lot of regulation, but standards, which deal specifically with order executions and pricing took decades to develop and implement. We should probably expect the same timeframe for the crypto currency industry. But we work directly with companies, so we react quicker than the regulators.
-How much does dispute resolution on Blockchain cost?
-We provide the service for free. Membership in the Association for companies is, of course, subject to membership fees.
-What about Forex companies that offer digital assets for trading, among others? Can they join the Financial Commission and the Blockchain Association?
-When we speak about Contracts for Difference (CFDs) on specific crypto currencies we are speaking about trading that strongly resembles trading in Euro-Dollar or oil. It’s important to understand the pricing model and order execution policy. That is not a problem for us. When we refer to the Blockchain Association, we are speaking about the full variety of services offered to traders, not just trading in one particular instrument. This falls outside the bounds of basic market trading.