Isle of Man: Blockchain ‘Reg Tech’ Just The Beginning
A start-up driving the Isle of Man’s plans to become a dominant force in blockchain-based regulatory technology believes the trend is about to catch fire across the globe.
14TH AUG 2015 | WRITTEN BY:JOHN BASQUILL
Pythia, which is based in the Isle of Man and has offices in London, was tasked by the island’s government to develop a regulatory software that would enable know your customer (KYC) practices to be applied to a blockchain-based payment network.
Authorities have been busy tweaking existing anti-money laundering regulations to bring crypto- currency businesses under the regulatory oversight of the Financial Supervision Commission, and now the island is taking it a step further by introducing technology into regulatory functions.
Nick Williamson, Pythia founder and chief executive, said the convergence of regulation and technology is inevitable.
He said: “What we’re trying to do, in an overall sense, is mapping existing trust models to software. “That fits very well into a lot of government services.”
Although the Isle of Man is the only jurisdiction to have openly started using blockchain technology in a regulatory capacity, Williamson believes this will change “sooner rather than later”.
“We’ve talked to large Western countries — all the usual suspects,” he said.
“Those talks are still somewhat exploratory, but some of them would potentially want to move very quickly if the technologies are maturing a little bit, because they have very real needs.
“There’s also lots of interest buzzing around in lots of the sovereign island nations or smaller jurisdictions in Europe.”
The UK government released a report in March predicting the rise of "reg tech"; how technology can help regulators keep pace with the frenetic advances in digital currencies and ledgers.
A string of big names have been vocal in their support for the transformative potential of blockchain
technology, most recently BBVA Compass and ABN AMRO , following in the footsteps of theBank of England and the European Banking Association.
However, with research projects still in their infancy, details of how those financial institutions will ultimately employ the technology is scarce.
“Our view of how that might play out is a bunch of independent blockchains that can all talk together, that are all interoperable, and are each concerned with their own little granular slice of information about the outside world,” Williamson said.
“So, you can expose and consume information and functionality from other blockchains.”
According to the Isle of Man government, that outcome would present an opportunity to integrate a piece of regulatory technology — “federated KYC” — that can establish the identity of any user on a bank’s blockchain.
This would, it is hoped, aid anti-money laundering, counter-terrorist financing and international trade sanctions, as financial flows could be traced definitively to the specific individual involved.
Critics suggested that it may prove impossible to use a crypto-currency “public key”, a network ID associated with a particular user’s transactions, to ascertain identity, due to the complex structure of the Bitcoin blockchain.
But Williamson said a bank-run blockchain would operate differently to the Bitcoin network.
He suggested users would have to verify their identity at the point of joining a blockchain network, which would then be irreversibly linked to that individual or business.
The other “reg tech” project that uses Pythia’s technology is a blockchain-based register of licensed virtual currency businesses currently active on the Isle of Man, running as an experimental trial for several months.
However, the project has already faced criticism for lacking a tokenised incentive, like the in-built currency reward for those who validate Bitcoin transactions, for users to update that register.
Williamson said a regulatory or financial services blockchain would be unlikely to operate in the same way as Bitcoin’s open incentivised network.
Instead, he believes, they would set up a network with a pre-determined group of validators, most or all of whom would have to agree before new information could be added to their blockchain.
For more on blockchain technology visit the dedicated PaymentsCompliance Research Portal.